CHAPTER-4 ACCRUAL AND PREPAYMENTS

MULTIPLE CHOICE QUESTION (MCQ’S)

QUESTIONS
Q.1 What is the entry (most appropriate) of accrued income?
(a) Dr. Accrued income, Cr. Income
(b) Dr. Income, Cr. Accrued income
(c) Dr. Asset, Cr. Income
(d) None of the above
Q.2 What is the entry (most appropriate) of unearned income?
(a) Dr. Unearned, Cr. Income
(b) Dr. Income, Cr. Unearned income
(c) Dr. Income, Cr. Liability
(d) Dr. Income, Cr. Asset
Q.3 What is the entry (most appropriate) of prepaid expenses?
(a) Dr. Expense, Cr. Prepaid expense
(b) Dr. Expenses, Cr. Asset
(c) Dr. Prepaid expense, Cr. Expenses
(d) Both a & b
Q.4 What is the entry (most appropriate) of accrued expenses?
(a) Dr. Expense, Cr. Liability
(b) Dr. Expenses, Cr. Accrued expenses
(c) Dr, Accrued expense, Cr. Expenses
(d) Dr, Liability, Cr. Expenses
Q.5 Mr. Asad year-end is 31 May 2021. On 1 Fab 2021 he took out a loan of Rs.700,000 with annual interest
of 13%. The interest is payable in equal instalments in arrears after each quarter from commencement
of loan How much should be charged to the statement of pro�it or loss account for the year ended 31
May 2021, and how much should be accrued on the statement of �inancial position?
Statement of pro�it or loss Statement of �inancial position
(a) Rs.33,033 Rs.22,750
(b) Rs.30,333 Rs.7,583
(c) Rs.33,033 Rs.15,167
(d) Rs.18,750 Rs.6,250
Q.6 Mr. Zohaib Rashid has a building which he rented out on 1 April 2022. Year end is 30 August 2022.
Tenant paid the rent in advance on quarterly basis form commencement of the rent agreement. Rent
for the �irst, second, third and fourth quarter is Rs. 18,000, 20,000, 22,000 and 25,000 respectively.
How much should be charged to the statement of pro�it or loss account for the year ended 30 August
2022, and how much should be unearned on the statement of �inancial position?
Statement of pro�it or loss Statement of �inancial position
(a) Rs.85,000 Rs.25,000
(b) Rs.38,000 Rs.20,000
(c) Rs.31,333 Rs 20,000
(d) Rs.31,333 Rs.6,667
Q.7 Moeen Ali preparing his �inal accounts for the year to 30 September 2021. The last payment Moeen Ali
made payment for rent is Rs. 21,500 for the three months from August 2021 to October 2021.
What adjustment does Moeen Ali need to make when preparing his �inal accounts for the year to 30
September 2021?
(a) A prepayment of Rs.14,333 (b) An accrual of Rs.14,333
(c) An accrual of Rs. 7,167 (d) A Prepayment of Rs. 7,167

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Q.8 You are given the following information:

Rs.
Unearned Rental Income a/c at 1 January 2021 22,000
Accrued Rental Income a/c at 31 December 2021 29,000
Total receipts during 2021 225,000
What is the Rental Income during 2021?
(a) Rs. 176,000 (b) Rs. 276,000
(c) Rs. 194,000 (d) Rs. 210,000
Q.9 Which of the following is true?
(a) Accrued expenses is related to past period
(b) Accrued expenses is normally related to current period
(c) Accrued expenses is normally related to future period
(d) None of above
Q.10 The income of future period which is received in current period is:
(a) Added in liabilities (b) Subtracted from current assets
(c) Subtracted from liabilities (d) Added in income
Q.11 Bablu �inalized his draft accounts and ignored a accrued expenses for Rs. 100 and prepayment of Rs.
300.
What will be the impact on pro�it for the year?
(a) Understated by Rs. 100 (b) Overstated by Rs. 100
(c) Overstated by Rs. 200 (d) Understated by Rs. 200
Q.12 Googlu �inalized his draft accounts and ignored a prepayment for Rs. 130 and accrued expenses of Rs.
270.
What will be the impact on pro�it for the year?
(a) Understated by Rs. 270 (b) Overstated by Rs. 270
(c) Overstated by Rs. 140 (d) Understated by Rs. 140
Q.13 After �inalizing the draft accounts of a business, it was identi�ied that recording of rent expense payable
for Rs. 24,000 has been ignored. Rent expense paid during the year was Rs. 49,000.
What will be the impact of recording the rent expense?
(a) Pro�it will be reduced by Rs. 24,000
(b) Pro�it will be increased by Rs. 24,000
(c) Pro�it will be reduced by Rs. 19,000
(d) Pro�it will be increased by Rs. 19,000
Q.14 What is the treatment of Pre - received income in the Statement of Financial Position of the business?
(a) Treated as a non – current asset
(b) Treated as a current asset
(c) Treated as a non – current liability
(d) Treated as a current liability
Q.15 Rent paid on 1 September 2017 for the year to 31 August 2018 was Rs. 15,000, and rent paid on 1
September 2018 for the year to 31 August 2019 was Rs. 18,000.
What �igure for rent expense should be shown in the statement of pro�it or loss for the year ended
31 December 2018?
(a) Rs. 14,000 (b) Rs. 15,000
(c) Rs. 16,000 (d) Rs. 17,000

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Q.16 On 29 March 2022, Amanat Chan used bank to pay the rent on her business premises for the three
months to August 2022 in advance.
On 29 March, how is Amanat Chan's accounting equation affected by this transaction.
Assets Liabilities Capital
(a) Unchanged Unchanged Unchanged
(b) Unchanged Reduced Reduced
(c) Reduced Unchanged Unchanged
(d) Reduced Unchanged Reduced
Q.17 During the year Rs. 5,000 rent was received. At the beginning of the year, the tenant owed Rs. 1,000, at
the end of the year the tenant owed Rs. 500. What is the rent received �igure for the year’s income
statement?
(a) Rs. 4,000 (b) Rs. 4,500
(c) Rs. 5,000 (d) Rs. 5,500
Q.18 Staff salary remaining unpaid as at the year-end should be accounted for as:
(a) Prepaid salary (debit) and Staff salary expense (credit)
(b) Staff salary expense (debit) and Cash (credit)
(c) Accrued Salary (debit) and Staff salary expense (credit)
(d) Staff salary expense (debit) and accrued salary (credit)
Q.19 During the year, Rs.4,500 was paid to the electricity board. At the beginning of the year, Rs.2,000 was
owed, and at the end of the year Rs.2,500 was owed?
What is the charge for electricity in the year's income statement?
(a) Rs.5,000 (b) Rs.4,000
(c) Rs.4,500 (d) Rs.6,000
Q.20 A business has a beginning utilities accrual of Rs. 50,000, an ending accrual of Rs. 60,000, and during
the year, it pays for utilities of Rs. 80,000. What is the amount of utilities expense?
(a) Rs. 70,000 (b) Rs. 80,000
(c) Rs. 90,000 (d) Rs. 140,000
Q.21 Expenses relevant to the accounting period which remain unpaid by period end should be:
(a) Included with expenses paid and shown as an asset at the period end
(b) Ignored until they are paid for in the next period
(c) Deducted from amount already paid and shown as a liability at the period end
(d) Include in with the expenses and shown as a liability at the period end
Q.22 Jasia has taken a loan of Rs. 250,000 from HBL as on 1st March 2018 for the construction of her of�ice
building. The construction is completed as on June 30, 2018. She rented a portion of her of�ice for Rs.
4,500 per month on July 1. Interest is accrued and paid annually @ 15% per annum on December each
year.
What amount of interest expenses and rent income should be shown in the statement of Pro�it or Loss
of Jasia’s business prepared on December 31, 2018?
(a) Interest expense Rs. 54,000, Rental income Rs. 37,500
(b) Interest expenses. 37,500, Rental income Rs. 54,000
(c) Interest expense Rs. 31,250, Rental income Rs. 27,000
(d) Interest expenses. 37,500, Rental income Rs. 4,500

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Q.23 A business was started on January 1, 2008 in a building which is on a 25 year lease. The rent of the
building is payable quarterly in advance. Payments of rent was made during the year as follows:
January 1, 2008 Rs. 7,500
March 29, 2008 Rs. 7,500
June 28, 2008 Rs. 7,500
September 30, 2008 Rs. 7,500
December 30, 2008 Rs. 7,500
What will be the rent expense charged to statement of pro�it or loss for the year ended December 31,
2008?
(a) Rs. 4,000 (b) 30,000
(c) Rs. 5,000 (d) Rs. 5,500
Q.24 An accrual is:
(a) An expense relating to next year but not paid in current year
(b) An expense relating to the current year and paid within current year
(c) An expense relating to the current year but not paid in current year
(d) An expense relating to next year and already paid in current year
Q.25 Which of the following statement is correct; Accruals & Prepayments is necessary
(a) To match income & expense (b) To match asset & liabilities
(c) Both a & b (d) None of the above
Q.26 The accruals concept...
(a) Applies to revenues and expenses only.
(b) Applies to assets and liabilities only.
(c) Applies to revenues, expenses, assets and liabilities
(d) Is not a fundamental accounting concept.
Q.27 Which of the four fundamental accounting concepts (listed below) is sometimes referred to as the
matching concept....
(a) The accruals concept. (b) The prudence concept.
(c) The going concern concept. (d) The consistency concept.
Q.28 Deferred Revenue means:
(a) Amount received in advance but not earned.
(b) Amount due, but not received.
(c) Amount disputed by a customer.
Q.29 A business has paid an annual salary of Rs. 24,000 in advance to one of its employee on 31 August 2007.
What is the amount of prepaid salaries at the end of year on December 31, 2007?
(a) Rs. 8,000 (b) Rs. 16,000
(c) Rs. 10,000 (d) Rs, 20,000
Q.30 Rent paid during the year is Rs.23,000. The ledger of rent payable shows opening balance of R&10.000.
Rent expense for the year is Ra50,000. What will be the amount of | rent payable at the end of year?
(a) Rs.37,000 (b) Rs.47.000
(c) Rs.57,000 (d) Rs.27.000
Q.31 Accrued expense is a (n)
(a) Asset account (b) Liability account
(c) Income account (d) Contra asset account

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Q.32 What is the impact of prepayments if not recorded in the �inancial statement
Expenses Net Pro�it Assets
(a) Understated Overstated Understated
(b) Overstated Understated Overstated
(c) Overstated Understated Understated
(d) Understated Understated Overstated
Q.33 Prepaid expenses are those expenses which have been paid for future period and are treated as;
(a) Expenses (b) Liability
(c) Income (d) Assets
Q.34 Insurance paid during the year isRs.10,000. The ledger of insurance payable shows opening balance of
Rs.2,000. Rent payable at year-end year is Rs.11,000. What will be that amount of insurance expense
for the year?
(a) Rs.21,000 (b) Rs. 18,000
(c) RS.20,000 (d) R. 19,000
Q.35 A business pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent
was increased from Rs.150,000 per year to Rs.180,000 per year as from 1 October 2007.
What rent expense and accrual should be included in the company’s �inancial statements for the year
ended 31 January 2008?
Rent expense Rs. Accrual Rs.
(a) 110,000 10,000
(b) 80,000 30,000
(c) 160,000 15,000
(d) 100,000 10.000
Q.36 A company receives rent from a large number of properties The total rent received in the year ended
31 march 2008 was Rs. 520,000.
The following were the amounts of rent in advance and in arrears at 31 march 2007 and 2008:
March 31 2007 March 31 2008
Rent received in advance 30,000 35,400
Rent in arrears (all subsequently received) 25,000 21,000
What amount of rental income should appear in the company’s income statement for the year ended
31 March 2008?
(a) 510,600 (b) 500,000
(c) 508,500 (d) 490,700
Q.37 Solid industry prepares its �inancial statements at the end of year on 30 April each year. The industry
pays rent for its building quarterly in advance on 1 January, 1 April, 1 July and 1 October each year.
The annual rent was Rs.90,000 per year until 30 June 2007. It was increased from that date to
Rs.120,000 per year.
What rent expense and end of year prepayment should be included in the �inancial statements for the
year ended 30 April 2008?
Expense Prepayment
(a) Rs. 115,000 Rs.20,000
(b) Rs. 115,000 Rs. 10,000
(c) Rs. 108,000 Rs.20,000
(d) Rs. 10,000 Rs.20,000

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Q.38 What is the impact of prepayments on expenses, net pro�it and assets of a business?
Expenses Net Pro�it Assets
(a) Increase Increase Increase
(b) Decrease Increase Decrease
(c) Decrease Increase Increase
(d) Increase Decrease Increase
Q.39 What is the impact of unearned income if it is not recorded in �inancial statements
Income Net Pro�it Liability
(a) Overstated Overstated Understated
(b) Overstated Understated Understated
(c) Understated Understated Overstated
(d) Overstated Understated Overstated
Q.40 In the year to 31 December 2008 peter received 50,800 rental income. The amounts of rent received in
advance and due in arrears were as follows:
31st Dec 2008 31st Dec 2007
Rent received in advance 4,000 3,000
Rent due in arrears 2,500 1,700
What �igure for rental income should be recorded in the income statements for the year ended 31
December 2008?
(a) 50,800 (b) 50,600
(c) 54,500 (d) 56,000
Q.41 In case of accrued income if closing balance is greater than opening balance than which statement is
correct
(a) Receipt exceed income (b) Income exceed receipt
(c) Income and receipt both equal (d) Non of the above
Q.42 Helix corporation has sublet part of its of�ice and in the year ended 30 November 2008 the rent
receivable was:
Until 30 June 2008 9,000 per year
From 1 July 2008 12,000 per year
Rent was received quarterly in advance on 1 January, April; July. And, October each year. What amounts
should appear in the company �inancial statements for the year ended 30 November 2008?
Income statement Statement of �inancial position
(a) 10,800 1,000 as current liability
(b) 10,900 1,000 as current liability
(c) 10,250 1,000 as current liability
(d) 9,900 2,000 as current liability
Q.43 A business was started on January 1, 2008 in a building which is on a 25 years lease. The rent to
building is 30,000 per year and is payable quarterly in advance. Payments of rent was made during the
year as follows:
January 1,2008 7,500
March 29, 2008 7,500
June 28, 2008 7,500
September30, 2008 7,500
December 30, 2008 7,500
What will be that rent expenses charged to income statement for the year ended December 31 2008?
(a) 37,500 (b) 30,000
(c) 22,500 (d) 15,000

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Q.44 Soco-tech ltd had deposited 600,000 into a �ixed deposit bank account on may 1, 2008. Interest is
accrued quarterly on march 31, June 30, September 30 and December 31 each year. Interest will be
paid only on maturity. Monthly interest amount is 4,000. What amount of interest will be interest
receivable should be shown in statement of �inancial position prepared as on October 31, 2008?
(a) 40,000 (b) 34,000
(c) 24,000 (d) 42,000
Q.45 Which of the following is correct for accrued expenses?
Expenses Net pro�it Liabilities
(a) Increase Increase Increase
(b) Decrease Increase Increase
(c) Decrease Decrease Decrease
(d) Increase Decrease Increase
Q.46 In case of unearned income if opening balance is less than closing balance then which statement is
correct?
(a) Receipt exceed income (b) Income exceed receipt
(c) Income and receipt both equal (d) None of the above
Q.47 Prudence concept does not apply in which TWO of the following?
(a) Understate assets (b) Overstate assets
(c) Understate Liabilities (d) Overstate liabilities
Q.48 Double entry accounting system can be applied in
(a) Cash Accounting
(b) Accrual Accounting
(c) Both Cash and Accrual Accounting
(d) None of Cash and Accrual Accounting
Q.49 The matching Principal:
(a) Determine whether an item is an asset or a liability
(b) Addresses the relationship b/w the accounting data base and the balance sheet
(c) Requires that the account of assets equals the amount of liabilities in the balance sheet
(d) Determines that expenses related to revenue are to be reported in the period when the
revenue is recognized
Q.50 What is the effect on pro�it for the year and net assets when accrued income is not recorded?
Pro�it for the year Assets Overstated
(a) Overstated Overstated
(b) Overstated Understated
(c) Understated Overstated
(d) Understated Understated
Q.51 Accrual basis of accounting records revenue when they are:
(a) Readily available for use (b) Contracted
(c) Collected (d) Earned
Q.52 Which of the following statements are correct?
(i) An accrual is expense relating to next year but paid in the current year.
(ii) A prepaid is an expense relating to current year but not paid in current year
(a) Both statements are correct (b) Only statement (i) is correct
(c) Only statement (ii) is correct (d) Both statements are not correct

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Q.53 Why it is necessary to account for accrued expenses?

Select the most appropriate answer
(a) So that current liabilities are not overstated
(b) So that pro�it is not understated
(c) So that current assets are not overstated
(d) So that pro�it is not overstated
Q.54 Which of the following entries should be made for prepaid expense at year end?
(a) Debit: Expense ale Credit: Accrued expenses
(b) Debit: Accrued expenses Credit: Expense account
(c) Debit: Prepaid expenses Credit: Expense account
(d) Debit: Expense account Credit: Prepaid expenses
Q.55 Mr. X a tenant pays annual rent of Rs.120,000. Payment is made quarterly in advance on 1 January, 1
April, 1 July and 1 October. Which of the following should be included in his accounts for the year ended
31 October 2001?
(a) Rs.20,000 Prepayment (b) Rs.20,000 accrual
(c) Rs. 10,000 Prepayment (d) Rs. 10,000 accrual
Q.56 Total rent of Rs. 150,000 were received during the year ended 31 December 2019. In this respect,
opening and closing balances are as under:
31 Dec 2019 31 Dec 2018
Rupees
Unearned rent 16,000 10,000
Rent receivable 13,000 17,000
What should be the rent income for the year ended 31 December 2019?
(a) Rs.144,000 (b) Rs.140,000
(c) Rs. 152,000 (d) Rs.156,000
Q.57 In the year to 31 December 2018, Saira received Rs. 50,800 rental income. The amounts of rent
received in advance and due in arrears were as follows:
31st Dec 2018 31st Dec 2017
Rs. Rs.
Rent received in advance 4,000 3,000
Rent due in arrears (accrued) 2,500 1,700
What �igure for rental income should be recorded in the statement of pro�it or loss for the year ended
31 December 2018?
(a) Rs. 50,800 (b) Rs. 50,600
(c) Rs. 54,500 (d) Rs. 56,000
Q.58 On 1 March 2017, Zahra pays an insurance premium of Rs. 2,400 for the period to 28 February 2018.
What is the charge to the statement of pro�it or loss for the year ended 31 October 2017 and
prepayment in the Statement of Financial Position as at that date?
(a) Charge for SPL Rs. 800 and Prepayment Rs. Rs. 1,600
(b) Charge for SPL Rs. 1,600 and Prepayment Rs. 800
(c) Charge for SPL Rs. 2,400 and Prepayment 0
(d) Charge for SPL 0 and Prepayment Rs. 2,400

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Q.59 Zahra determines at year end that Salaries paid during the year include Rs. 10,000 in advance. What is
the correct year end adjustment for advance salary to be made?
(a) Dr Salaries Rs. 10,000 Cr Advance salaries Rs. 10,000
(b) Dr Salaries Rs. 10,000 Cr Accrued salaries Rs. 10,000
(c) Dr Advance salaries Rs. 10,000 Cr Salaries expense Rs. 10,000
(d) No entry required
Q.60 On year end a business has outstanding electricity bills of Rs. 15,000. During the year electricity bills
paid are Rs. 190,000. What adjustment will be required to utilities expense account regarding the
outstanding bills?
(a) Cr, Rs. 15,000 (b) Dr, Rs. 15,000
(c) No impact (d) Dr, Rs. 190,000
Q.61 Atif �inalized his draft accounts and ignored a prepayment for Rs. 100 and accrued expense Rs. 300.
What will be the impact on pro�it for the year?
(a) Understated by Rs. 100 (b) Overstated by Rs. 100
(c) Overstated by Rs. 200 (d) Understated by Rs. 200
Q.62 On �inalizing the draft accounts Minhas identi�ied that he has Rs. 1,000 rental income receivable. Rental
income received and recorded during the year is Rs. 11,000.
What is the correct entry to record the accrued income?
(a) Dr Rental income Rs. 1,000 Cr Accrued income Rs. 1,000
(b) Dr Cash Rs. 12,000 Cr Rental income Rs. 12,000
(c) Dr Cash Rs. 11,000 Cr Rental income Rs. 11,000
(d) Dr Accrued income Rs. 1,000 Cr Rental income Rs. 1,000
Q.63 After �inalizing the draft accounts of a business it was identi�ied that salary expense payable for Rs.
9,000 has been ignored. Salary expense paid during the year was Rs. 110,000.
What will be the impact of recording the salaries payable?
(a) Pro�it will be reduced by Rs. 9,000
(b) Pro�it will be increased by Rs. 9,000
(c) Pro�it will be reduced by Rs. 110,000
(d) Pro�it will be increased by Rs. 110,000
Q.64 Jasia has taken a loan of Rs. 250,000 from HBL as on 1st March 2018 for the construction of her of�ice
building. The construction is completed as on June 30, 2018. She rented a portion of her of�ice for Rs.
4,500 per month on July 1. Interest is accrued and paid annually @ 15% per annum on December each
year.
What amount of interest expenses and rent income should be shown in the statement of Pro�it or Loss
of Jasia’s business prepared on December 31, 2018?
(a) Interest expense Rs. 54,000, Rental income Rs. 37,500
(b) Interest expenses. 37,500, Rental income Rs. 54,000
(c) Interest expense Rs. 31,250, Rental income Rs. 27,000
(d) Interest expenses. 37,500, Rental income Rs. 4,500
Q.65 The annual rent expense for TTT for the period 1 July 2018 to 30 June 2019 is Rs. 35,000, which is 25%
more than the previous year. Rent expense is paid on 1 July.
What is the charge of rent expense in the statement of pro�it or loss for the year ended 31 December
2018?
(a) Rs. 28,000 (b) Rs. 31,500
(c) Rs. 35,000 (d) Rs. 7,000

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Q.66 Which of the following statements is incorrect?

(a) Income received in advance is a current liability
(b) Accrued income is a current asset
(c) Prepaid insurance is a current liability
(d) Salaries payable is a current liability
Q.67 After �inalizing the draft accounts Arsalan identi�ied that he has treated prepaid insurance of Rs. 1,000
as accrued expense.
What will be the impact of correction?
(a) Pro�it will be increased by Rs. 2,000
(b) Pro�it will be increased by Rs. 1,000
(c) Pro�it will be reduced by Rs. 1,000
(d) Pro�it will be reduced by Rs. 2,000
Q.68 A business pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent
was increased from Rs. 150,000 per year to Rs. 180,000 per year as from 1 October 2007.
What rent expense and accrual should be included in the company’s �inancial statements for the year
ended 31 January 2008?
Rent expense Rs. Accruals Rs.
(a) 110,000 10,000
(b) 80,000 15,000
(c) 160,000 15,000
(d) 100,000 10,000
Q.69 Helix Corporation has sublet part of its of�ice and in the year ended 30 November 2008 the rent
receivable was:
Until 30 June 2008 Rs. 9,000 per year
From 1 July 2008 Rs. 12,000 per year
Rent was received quarterly in advance on 1 January, April, July, and October each year.
What amounts should appear in the company’s �inancial statements for the year ended 30 November
2008?
Rental income Statement of Financial Position
(a) Rs. 10,800 Rs. 1,000 in sundry payables
(b) Rs. 10,900 Rs. 1,000 in sundry payables
(c) Rs. 10,250 Rs. 1,000 in sundry receivables
(d) Rs. 9,900 Rs. 2,000 in sundry receivables
Q.70 Sitara Industries has taken a loan from Crescent Bank. Interest on the loan is payable every quarter i.e.
on March 31, June 30, September 30 and December 31. Face amount of the loan is 500,000 and the rate
of interest is 10% per annum. Due to �inancial problems, two instalments were not paid on September
30 and December 31.
What is the amount of the interest liability to be shown in the Statement of Financial Position prepared
as on December 31?
(a) Rs.4 4,000 (b) Rs. 25,000
(c) Rs.4 5,000 (d) Rs. 55,500

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Q.71 A business had deposited Rs. 500,000 into an annual �ixed deposit on May 1, 2018. Interest is accrued
quarterly on March 31, June 30, September 30 and December 31 each year. Interest will be paid only
on maturity. Monthly interest amount is Rs. 3,000.
What amount of interest receivable should be shown in the Statement of Financial Position prepared
as on December 31, 2018?
(a) Rs.4 4,000 (b) Rs. 24,000
(c) Rs.4 5,000 (d) Rs. 55,500
Q.72 A business has paid an annual salary of Rs. 36,000 in advance to one of its employees on 31 August
2017.
What is the amount of prepaid salaries at the end of the year on 31 December 2017?
(a) Rs.4 4,000 (b) Rs. 24,000
(c) Rs.4 5,000 (d) Rs. 55,500
Q.73 An accrual is:
(a) An expense relating to next year but not paid in current year
(b) An expense relating to the current year and paid within current year
(c) An expense relating to the current year but not paid in current year
(d) An expense relating to next year and already paid in current year
Q.74 Earned but not yet received income is treated as
(a) Asset (b) Liability
(c) Capital (d) Loss
Q.75 Unearned income is classi�ied as
(a) Assets (b) Liability
(c) Equity (d) Loss
Q.76 A prepayment can be de�ined as:
(a) Payments for expenses for that are not yet incurred and classi�ied as non-current asset
(b) Expenses incurred but not yet paid and classi�ied as current asset
(c) Payments for expenses for that are not yet incurred and classi�ied as current asset
(d) None
Q.77 Expenses relevant to the accounting period which remain unpaid by period end should be:
(a) Included with expenses paid and shown as an asset at the period end
(b) Ignored until they are paid for in the next period
(c) Deducted from amount already paid and shown as a liability at the period end
(d) Include in with the expenses and shown as a liability at the period end
Q.78 Which of the following is not true?
(a) An accrual is an amount owing at the end of a period; a prepayment is an amount paid in advance
(b) An accrual is a liability; a prepayment is an asset
(c) An accrual is a liability; a prepayment is always a non-current asset
(d) An accrual is a current liability; a prepayment is a current asset
Q.79 Staff salary remaining unpaid as at the year-end should be accounted for as:
(a) Prepaid salary (debit) and Staff salary expense (credit)
(b) Staff salary expense (debit) and Cash (credit)
(c) Accrued Salary (debit) and Staff salary expense (credit)
(d) Staff salary expense (debit) and accrued salary (credit)

H. M. UMER 11
 CHAPTER-4 ACCRUAL AND PREPAYMENTS

Q.80 During the year, a business paid an electricity bill for Rs. 900,000 for the 3 months to November. The
year end of the business is 30 September, what accrual or prepayment is needed at the year end?
(a) Prepaid electricity = Rs. 600,000
(b) Accrued electricity = Rs. 600,000
(c) Prepaid electricity = Rs. 300,000
(d) Accrued electricity = Rs. 300,000
Q.81 A business has a beginning utilities accrual of Rs. 50,000, an ending accrual of Rs. 60,000, and during
the year, it pays for utilities of Rs. 80,000. What is the amount of utilities expense?
(a) Rs. 70,000 (b) Rs. 80,000
(c) Rs. 90,000 (d) Rs. 140,000
Q.82 On 31 October 2019, a business pays annual insurance premium of Rs. 600,000. What is the
prepayment at the end of the year (31 December 2019)?
(a) Nil (b) Rs. 100,000
(c) Rs. 300,000 (d) Rs. 500,000
Q.83 XYZ Ltd. receives interest of Rs. 100,000 on bank deposit for the month of December 2011 on 3rd
January 2012. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry for such transaction?
(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(b) Cash (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000
(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000
Q.84 XYZ Ltd. receives interest of Rs. 100,000 on bank deposit for the month of December 2011 on 3rd
January 2012. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry when subsequently on 3rd January, payment for interest is
received?
(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(b) Bank (debit) = Rs.100,000 and Interest receivable (credit) = Rs.100,000
(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000
(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000
Q.85 ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December in respect of of�ice
rent for the following year.
What would be the accounting entry in the following year?
(a) Accrued rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
(b) Advanced rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
(c) Accrued rent (debit) = Rs.1 million and prepaid rent (credit) = Rs.1 million
(d) None
Q.86 F Limited year-end is 30 September. On 1 January 2016 the organization took out a loan of Rs. 100,000
with annual interest of 12%. The interest is payable in equal instalments on the �irst day of April, July,
October and January in arrears.
How much should be charged to P&L for the year ended 30 September 2016, and how much should be
accrued on the statement of �inancial position?
Pro�it or loss Statement of �inancial position
(a) Rs. 12,000 Rs. 3,000 accrual
(b) Rs. 9,000 Rs. 3,000 accrual
(c) Rs. 9,000 Nil
(d) Rs. 6,000 Rs. 3,000 prepayment

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 CHAPTER-4 ACCRUAL AND PREPAYMENTS

Q.87 The draft year end accounts were prepared without adjusting prepayment for rent of Rs. 970.
When the adjustment is made, which of the following would be effect thereof?
(a) Pro�it increased by Rs. 970 and Liability increased by Rs. 970
(b) Pro�it decreased by Rs. 970 and Liability increased by Rs. 970
(c) Pro�it increased by Rs. 970 and assets increased by Rs. 970
(d) Pro�it increased by Rs. 970 and assets decreased by Rs. 970
Q.88 An entity prepared the draft end year accounts, but did not adjust these for a prepayment of Rs. 1,500
and an accrual of Rs. 400.
How will pro�it and net assets be affected by including the prepayment and accrual?
NET PROFIT WILL NET ASSETS WILL
(a) Increase by Rs. 1,100 Reduce by Rs. 1,100
(b) Reduce by Rs. 1,900 Increase by Rs. 1,900
(c) Increase by Rs. 1,100 Increase by Rs. 1,100
(d) Reduce by Rs. 1,900 Reduce by Rs. 1,900
Q.89 A company has sublet part of its of�ices and in the year ended 30 November 2013 the rent receivable
was:
Until 30 June 2013 Rs. 8,400 per year
From 1 July 2013 Rs. 12,000 per year
Rent was paid quarterly in advance on 1 January, April, July and October each year.
What amounts should appear in the company’s �inancial statements for the year ended 30 November
2013?
Rent Receivable (Rs.) SOFP (Rs.)
(a) 9,900 2,000 in sundry payables
(b) 9,900 1,000 in sundry payables
(c) 10,200 1,000 in sundry payables
(d) 9,900 2,000 in sundry receivables
Q.90 Which of the following statements is not true?
(a) Accruals decrease pro�it (b) Accrued income decreases pro�it
(c) A prepayment is an asset (d) All of the above statements are true
Q.91 A tenant pays annual rent of Rs. 6,000. Payment is made quarterly in advance on 1 January, 1 April, 1
July and 1 October. Which of the following should be included in his accounts for the year ended 31
October 2001?
(a) Rs. 500 Accrual (b) Rs. 500 Prepayment
(c) Rs. 1,000 Accrual (d) Rs. 1,000 Prepayment
Q.92 What is the effect of Financial Statement after adjustment of prepaid expenses?
(a) Current asset increase while expense decrease
(b) Both Current asset and expense decrease
(c) Current asset increase & expense decrease
(d) Current asset increase while expense decrease
Q.93 What is the effect of Financial Statement after adjustment of accrued expenses?
(a) Current liability and expense both increase
(b) Current liability and expense both decrease
(c) Current liability increase & expense decrease
(d) Non-Current liability and expense both increase

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 CHAPTER-4 ACCRUAL AND PREPAYMENTS

Q.94 What is the effect of Financial Statement after adjustment of accrued income?
(a) Both Current asset and income decrease
(b) Both Current asset and income increase
(c) Both Non-current asset and income increase
(d) Current asset decrease while income increase
Q.95 What is the effect of Financial Statement after adjustment of un-earned income?
(a) Both Current liability and income decrease
(b) Both Non-current liability and income increase
(c) Current liability increase while income decrease
(d) Both Current liability and income decrease
Q.96 In case of accrued income, if opening balance is more than closing balance then?
(a) Income exceeds receipt (b) Receipt exceed income
(c) Both are equal (d) None of the above
Q.97 In case of accrued expense, if closing balance is more than opening balance then?
(a) Expense exceed payment (b) Payment exceed expense
(c) Both are equal (d) None of the above
Q.98 In case of unearned income, if opening balance is more than closing balance then?
(a) Income exceed receipt (b) Receipt exceed income
(c) Both are equal (d) None of the above
Q.99 In case of prepaid expense, if closing balance is more than opening balance then?
(a) Payment exceed expense (b) Expense exceed payment
(c) Both are equal (d) None of the above
Q.100 Which one of the following statements is correct?
(a) Accrued expense decrease pro�it (b) Accrued income decreases pro�it
(c) A prepayment is a liability (d) An accrued expense is an asset

H. M. UMER 14
CHAPTER-4 ACCRUAL AND PREPAYMENTS

MULTIPLE CHOICE QUESTION (MCQ’S)

ANSWERS
A.1 (a) Dr. Accrued income, Cr. Income
A.2 (b) Dr. Income, Cr. Unearned income
A.3 (c) Dr. Prepaid expense, Cr. Expenses
A.4 (b) Dr. Expenses, Cr. Accrued expenses
A.5 (b) Rs.30,333 Rs.7,583
A.6 (d) Rs.31,333 Rs.6,667
A.7 (d) A Prepayment of Rs. 7,167
A.8 (b) Rs. 276,000
A.9 (b) Accrued expenses is normally related to current period
A.10 (a) Added in liabilities
A.11 (d) Understated by Rs. 200
A.12 (c) Overstated by Rs. 140
A.13 (a) Pro�it will be reduced by Rs. 24,000
A.14 (d) Treated as a current liability
A.15 (c) Rs. 16,000
A.16 (a) Unchanged Unchanged Unchanged
A.17 (b) Rs. 4,500
A.18 (d) Staff salary expense (debit) and accrued salary (credit)
A.19 (a) Rs.5,000
A.20 (c) Rs. 90,000
A.21 (d) Include in with the expenses and shown as a liability at the period end
A.22 (c) Interest expense Rs. 31,250, Rental income Rs. 27,000
A.23 (b) Rs. 30,000
A.24 (c) An expense relating to the current year but not paid in current year
A.25 (a) To match income & expense
A.26 (c) Applies to revenues, expenses, assets and liabilities
A.27 (a) The accruals concept.
A.28 (a) Amount received in advance but not earned.
A.29 (b) Rs. 16,000
A.30 (a) Rs.37,000
A.31 (b) Liability account
A.32 (c) Overstated Understated Understated
A.33 (d) Assets
A.34 (d) R. 19,000
A.35 (c) 160,000 15,000
A.36 (a) 510,600
A.37 (a) Rs. 115,000 Rs.20,000

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A.38 (c) Decrease Increase Increase

A.39 (a) Overstated Overstated Understated
A.40 (b) 50,600
A.41 (b) Income exceed receipt
A.42 (c) 10,250 1,000 as current liability
A.43 (b) 30,000
A.44 (c) 24,000
A.45 (d) Increase Decrease Increase
A.46 (a) Receipt exceed income
A.47 (a) Understate assets
A.48 (c) Both Cash and Accrual Accounting
A.49 (d) Determines that expenses related to revenue are to be reported in the period when the
revenue is recognized
A.50 (d) Understated Understated
A.51 (d) Earned
A.52 (d) Both statements are not correct
A.53 (d) So that pro�it is not overstated
A.54 (c) Debit: Prepaid expenses Credit: Expense account
A.55 (a) Rs.20,000 Prepayment
A.56 (b) Rs.140,000
A.57 (b) Rs. 50,600
A.58 (b) Charge for SPL Rs. 1,600 and Prepayment Rs. 800
A.59 (c) Dr Advance salaries Rs. 10,000 Cr Salaries expense Rs. 10,000
A.60 (b) Dr, Rs. 15,000
A.61 (c) Overstated by Rs. 200
A.62 (d) Dr Accrued income Rs. 1,000 Cr Rental income Rs. 1,000
A.63 (a) Pro�it will be reduced by Rs. 9,000
A.64 (c) Interest expense Rs. 31,250, Rental income Rs. 27,000
A.65 (b) Rs. 31,500
A.66 (c) Prepaid insurance is a current liability
A.67 (a) Pro�it will be increased by Rs. 2,000
A.68 (c) 160,000 15,000
A.69 (c) Rs. 10,250 Rs. 1,000 in sundry receivables
A.70 (b) Rs.25,000
A.71 (b) Rs.24,000
A.72 (b) Rs. 24,000
A.73 (c) An expense relating to the current year but not paid in current year
A.74 (a) Asset
A.75 (b) Liability
A.76 (c) Payments for expenses for that are not yet incurred and classi�ied as current asset

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CHAPTER-4 ACCRUAL AND PREPAYMENTS

A.77 (d) Include in with the expenses and shown as a liability at the period end
A.78 (c) An accrual is a liability; a prepayment is always a non-current asset
A.79 (d) Staff salary expense (debit) and accrued salary (credit)
A.80 (a) Prepaid electricity = Rs. 600,000
A.81 (c) Rs. 90,000
A.82 (d) Rs. 500,000
A.83 (d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000
A.84 (b) Bank (debit) = Rs.100,000 and Interest receivable (credit) = Rs.100,000
A.85 (b) Advanced rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
A.86 (b) Rs. 9,000 Rs. 3,000 accrual
A.87 (c) Pro�it increased by Rs. 970 and assets increased by Rs. 970
A.88 (c) Increase by Rs. 1,100 Increase by Rs. 1,100
A.89 (b) 9,900 1,000 in sundry payables
A.90 (b) Accrued income decreases pro�it
A.91 (d) Rs. 1,000 Prepayment
A.92 (a) Current asset increase while expense decrease
A.93 (a) Current liability and expense both increase
A.94 (b) Both Current asset and income increase
A.95 (c) Current liability increase while income decrease
A.96 (b) Receipt exceed income
A.97 (a) Expense exceed payment
A.98 (a) Income exceed receipt
A.99 (a) Payment exceed expense
A.100 (a) Accrued expense decrease pro�it

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H. M. UMER 17