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Free CA Accounting Practice Questions & Answers
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100% free · No login to startQuestion 121
On the admission of a partner, an increase in the value of land is credited to:
Select an option first.
Correct answer: C — The Revaluation Account
Explanation: The Land Account is debited with the increase and the Revaluation Account (also called the Profit and Loss Adjustment Account) is credited. The purpose is to ensure that any gain or loss accruing BEFORE the new partner joined belongs entirely to the old partners. A Realisation Account is used only on dissolution, when assets are actually sold.
Question 122
Where there is no agreement, the executor of a deceased partner may claim, on the amount left unpaid in the firm, either interest at 6% per annum or:
Select an option first.
Correct answer: B — A share of the profits earned with the use of his share of the firm's property
Explanation: Section 37 of the Indian Partnership Act, 1932 gives the outgoing partner or his estate an OPTION between interest at 6% per annum and the share of profits attributable to the use of his share of the firm's property. The option lies with the executor, who will naturally choose whichever is greater. Verify the section against the ICAI study material for your attempt.
Question 123
Under the rule in Garner v Murray, the deficiency of an insolvent partner is borne by the solvent partners:
Select an option first.
Correct answer: D — In the ratio of their capitals standing just before dissolution
Explanation: The rule treats the deficiency as a capital loss rather than a trading loss, so the solvent partners bear it in their CAPITAL ratio, taken as it stood immediately before dissolution, and each must also bring in his own share of the realisation loss in cash. Note the practical qualification: where capitals are fluctuating, the ratio is computed on the adjusted balances - and the rule does not apply where the deed provides otherwise.
Question 124
A and B share profits 3 : 2. On admitting C, the new ratio is agreed at 5 : 3 : 2. The sacrificing ratio of A : B is:
Select an option first.
Correct answer: B — 1 : 1
Explanation: Sacrifice = old share less new share. A: 3/5 - 5/10 = 6/10 - 5/10 = 1/10. B: 2/5 - 3/10 = 4/10 - 3/10 = 1/10. The ratio is therefore 1 : 1, even though the old ratio was 3 : 2 - which is exactly why the premium for goodwill must never be shared in the old ratio without checking. Convert both ratios to a common denominator before subtracting.
Question 125
In the Profit and Loss Appropriation Account, the correct sequence is:
Select an option first.
Correct answer: D — Net profit brought down, add interest on drawings, deduct interest on capital and partners' salary, then divide the balance in the profit sharing ratio
Explanation: The account opens with the net profit transferred from the Profit and Loss Account, is credited with interest on drawings recovered from the partners, is debited with interest on capital, salary, commission and any transfer to reserve, and the residue is divided in the profit sharing ratio. Follow the sequence strictly - marks are awarded for the structure even where an arithmetical slip occurs.
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Question 126
A partner died on 31 August 2026. Sales for the year ended 31 March 2026 were Rs.60,00,000 yielding a profit of Rs.9,00,000. Sales from 1 April to 31 August 2026 were Rs.28,00,000. His share was one-fifth. His share of profit to the date of death, on the sales basis, is:
Select an option first.
Correct answer: D — Rs.84,000
Explanation: Last year's profit rate = 9,00,000 / 60,00,000 = 15% of sales. Profit for the period = 28,00,000 x 15% = Rs.4,20,000; his one-fifth share = Rs.84,000. The sales basis is preferred to the time basis where sales are seasonal, since five months of high-season trading are not one twelfth of the year - say which basis the question directs and why.
Question 127
An unrecorded asset realising Rs.35,000 on dissolution is:
Select an option first.
Correct answer: D — Credited to the Realisation Account
Explanation: Cash is debited and the Realisation Account credited with the amount actually received. The asset is not debited to Realisation first, because it carried no book value to be written off - only the proceeds enter. The mirror rule applies to an unrecorded liability, whose PAYMENT is debited to the Realisation Account without any prior credit.
Question 128
An unrecorded liability of Rs.22,000 paid on dissolution is:
Select an option first.
Correct answer: D — Debited to the Realisation Account
Explanation: The payment is a cost of winding up and is debited to the Realisation Account with a corresponding credit to Cash. It reduces the realisation profit, which is ultimately shared by the partners in their profit sharing ratio - so it does reach their Capital Accounts, but through the Realisation Account rather than directly.
Question 129
Which of the following is NOT one of the fundamental accounting assumptions under AS 1?
Select an option first.
Correct answer: D — Materiality
Explanation: AS 1 names exactly three fundamental accounting assumptions: going concern, consistency and accrual. If they are followed, no disclosure is needed; if not followed, the fact must be disclosed. Materiality is one of the CONSIDERATIONS governing the selection of accounting policies (along with prudence and substance over form), which is a different list - candidates lose marks every year by merging the two.
Question 130
Closing inventory has a cost of Rs.4,80,000 and a net realisable value of Rs.4,35,000. The proprietor insists on carrying it at cost because he expects prices to recover next year. Which convention is breached, and what is the correct carrying amount?
Select an option first.
Correct answer: B — Prudence; Rs.4,35,000
Explanation: Prudence: anticipate no profit, but provide for all known losses. AS 2 requires inventory at the LOWER of cost and net realisable value, so the stock is carried at Rs.4,35,000 and a write-down of Rs.45,000 is charged to the Profit and Loss Account this year. In a written answer, name the convention, quote the AS 2 rule, show the Rs.45,000 write-down and state its effect on profit - the marks sit in the working, not the conclusion.
Question 131
A business purchases goods for Rs.70,000 on credit. The immediate effect on the accounting equation is:
Select an option first.
Correct answer: D — Assets and liabilities both increase by Rs.70,000
Explanation: Stock rises by Rs.70,000 and creditors rise by Rs.70,000, so both sides of Assets = Liabilities + Capital grow equally and the equation holds. Capital is untouched because no profit or loss has yet arisen - it will only change when the goods are sold at a price above or below cost. Trace the two aspects separately before choosing; the dual aspect is the whole of the answer.
Question 132
Rent of Rs.24,000 is paid in cash. The effect on the accounting equation is:
Select an option first.
Correct answer: D — Assets decrease by Rs.24,000 and capital decreases by Rs.24,000
Explanation: An expense consumes a resource and belongs to the owner's account, so cash falls by Rs.24,000 and capital falls by the same amount through the profit figure. This is precisely why expenses are debited: they reduce capital, and capital is a credit-balance account. Compare with settling a creditor, which reduces an asset and a liability and leaves capital alone.
Question 133
Rent paid during the year ended 31 March 2026 was Rs.1,20,000, which includes Rs.30,000 paid in advance for April to June 2026. Under the accrual concept, the charge to the Profit and Loss Account for the year is:
Select an option first.
Correct answer: B — Rs.90,000
Explanation: Accrual matches expense to the period it relates to, not the period of payment: 1,20,000 - 30,000 = Rs.90,000. The Rs.30,000 is prepaid rent, a current asset in the Balance Sheet as at 31 March 2026. Show both effects - the P&L charge AND the Balance Sheet asset - because an adjustment question always carries marks on both sides.
Question 134
The chief advantage of the double entry system over single entry is that it:
Select an option first.
Correct answer: A — Provides a complete record from which a Trial Balance and reliable financial statements can be prepared
Explanation: Recording both aspects of every transaction produces a full set of real, personal and nominal accounts, which allows arithmetical accuracy to be checked through a Trial Balance and a true Profit and Loss Account and Balance Sheet to be drawn up. It does not eliminate error - errors of principle, omission and compensation all survive a balanced Trial Balance.
Question 135
A second-hand machine is bought for Rs.8,00,000. The following are also incurred: Rs.60,000 to transport and install it, Rs.45,000 on overhauling it before it is first used, and Rs.25,000 on annual maintenance after production begins. The amount to be capitalised is:
Select an option first.
Correct answer: A — Rs.9,05,000
Explanation: Capitalise every cost incurred to bring the asset to its location and condition for intended use: 8,00,000 + 60,000 transport and installation + 45,000 pre-use overhaul = Rs.9,05,000. The Rs.25,000 annual maintenance is incurred AFTER the asset is ready for use and only maintains its performance, so it is revenue. The examiner's test is not 'is it a big amount' but 'does it get the asset ready, or merely keep it running'.
Question 136
Rs.60,000 was spent on whitewashing the factory building and Rs.4,50,000 on adding a new floor to it. These should be treated as:
Select an option first.
Correct answer: B — Rs.60,000 revenue and Rs.4,50,000 capital
Explanation: Whitewashing merely MAINTAINS the building in its existing condition, so it is revenue. The new floor ENHANCES the building beyond its previously assessed standard of performance by adding usable space, so it is capital. The test is enhancement versus maintenance, never the size of the amount - a large repair bill is still revenue.
Question 137
Legal fees of Rs.1,10,000 paid in connection with the purchase of land are:
Select an option first.
Correct answer: C — Capital expenditure, added to the cost of the land
Explanation: Costs that are necessary to ACQUIRE an asset and obtain clear title form part of its cost - legal fees, brokerage, stamp duty and registration alike. They are capitalised and, in the case of land, are not depreciated because land has an indefinite useful life. A written answer should state the acquisition test and then apply it, rather than asserting the classification.
Question 138
Which of the following is a capital receipt?
Select an option first.
Correct answer: D — Amount received on the issue of debentures
Explanation: A capital receipt either creates a liability or reduces an asset; it is not earned from normal trading operations. Debenture proceeds create a long-term liability and so are shown in the Balance Sheet, never in the Profit and Loss Account. The other three arise from ordinary operations and are revenue receipts credited to the Profit and Loss Account.
Question 139
A change in an accounting policy having a material effect must be:
Select an option first.
Correct answer: D — Disclosed, along with the amount of the impact where it is ascertainable
Explanation: AS 1 permits a change only where it is required by statute or an accounting standard, or where it results in a more appropriate presentation - and then the change and, where ascertainable, its rupee effect must be disclosed. Where the effect cannot be ascertained, that fact itself is disclosed. Disclosure is what preserves comparability once consistency has been departed from.
Question 140
A firm switches its inventory cost formula between FIFO and weighted average every alternate year so as to report whichever profit suits it. This offends:
Select an option first.
Correct answer: B — The consistency assumption
Explanation: Consistency requires the same accounting policies from period to period so that results can be compared over time. Switching at will makes the trend meaningless and, being motivated by the desired result rather than by more appropriate presentation, is not a permitted change under AS 1. Consistency does not freeze a policy for ever - it requires that any change be justified and disclosed.
Question 141
Heavy advertising of Rs.20,00,000 incurred to launch a new product, whose benefit is expected over several years, is traditionally classified as:
Select an option first.
Correct answer: B — Deferred revenue expenditure
Explanation: Deferred revenue expenditure is revenue in nature but unusually heavy, with benefit expected to run beyond the current year, so it is written off over a few years. Add this caveat in a written answer: AS 26 now requires advertising and promotional costs to be EXPENSED as incurred, since no intangible asset is created, so the concept survives mainly for exam classification and for items such as discount on the issue of debentures. Verify the treatment against the ICAI study material for your attempt.
Question 142
A firm has resolved to shut down and sell off its business within three months. Its fixed assets should now be shown at:
Select an option first.
Correct answer: A — Net realisable value, because the going concern assumption no longer holds
Explanation: Historical cost and normal depreciation are justified ONLY because the entity is assumed to continue in operation. Once closure is decided, that assumption fails and assets must be restated at the amounts expected on sale. In a written answer, state the assumption, state that it has been vitiated, and only then give the revised basis - reversing that order loses the reasoning mark.
Question 143
Land bought in 1998 for Rs.5,00,000 has a present market value of Rs.4 crore, yet the Balance Sheet still shows Rs.5,00,000. This is because of:
Select an option first.
Correct answer: A — The historical cost concept
Explanation: Assets are recorded at the price actually paid, because that figure is objective and verifiable, whereas market value is an estimate that changes daily. The trade-off is relevance: the Balance Sheet becomes reliable but understates asset values during inflation. Stating that limitation, rather than merely naming the concept, is what distinguishes a good written answer.
Question 144
A stapler costing Rs.250 with a useful life of five years is charged in full to the Profit and Loss Account in the year of purchase. This is justified by:
Select an option first.
Correct answer: B — Materiality
Explanation: Strictly the stapler is a fixed asset that should be capitalised and depreciated, but the amount is too small to influence any user's decision, and the cost of tracking it would exceed the benefit. Materiality permits the departure. Note that materiality is a CONSIDERATION governing the selection of accounting policies, not one of the three fundamental accounting assumptions.
Question 145
A company's most valuable resource is its highly skilled workforce, yet no value for it appears in the Balance Sheet. This is a direct consequence of the:
Select an option first.
Correct answer: A — Money measurement concept
Explanation: Only items capable of being expressed in money terms are recorded. Employee skill, management quality and customer loyalty are real economic resources but cannot be measured reliably in rupees, so they stay out of the books. This is the standard limitation to cite whenever a question asks what financial statements FAIL to show.
Question 146
The principal purpose of Accounting Standards is to:
Select an option first.
Correct answer: D — Narrow the range of alternative accounting treatments and improve comparability
Explanation: Standards reduce the diversity of treatments for like transactions and require disclosure of the policies actually adopted, so that statements of different enterprises - and of the same enterprise over time - can be compared. They neither determine taxable income, which follows tax law, nor dispense with audit; the auditor in fact reports on compliance with them.
Question 147
Information provided too late to influence a decision fails the characteristic of:
Select an option first.
Correct answer: B — Relevance, of which timeliness is an element
Explanation: Relevant information has the capacity to influence a decision, and information that arrives after the decision is made cannot do so however accurate it is. This creates the classic timeliness-versus-reliability trade-off: reporting early may mean reporting on estimates, while waiting for certainty may mean reporting on events no one can act on.
Question 148
A firm receives a confirmed order worth Rs.30,00,000 on 28 March 2026, and despatches the goods on 8 April 2026. Revenue is recognised in the year ended:
Select an option first.
Correct answer: C — 31 March 2027
Explanation: Revenue is recognised when the sale is COMPLETE - when property in the goods passes and the risks and rewards transfer - not when the order is received nor when cash is collected. Despatch falls on 8 April, so the revenue belongs to the year ended 31 March 2027. An order in hand is disclosed, if at all, as a note; it is not a sale.
Question 149
Under the single entry system, profit for the year is computed as:
Select an option first.
Correct answer: B — Closing capital plus drawings minus additional capital introduced minus opening capital
Explanation: Capital grows through profit and fresh introductions and shrinks through drawings, so profit is recovered by reversing the two distortions: add back drawings and deduct capital introduced, then compare with opening capital. A single entry system has no nominal accounts, which is why option D is impossible and why this method - the statement of affairs approach - is used at all.
Question 150
Goods sold under a hire purchase agreement remain the legal property of the seller until the final instalment, yet the buyer records them as his asset. This applies:
Select an option first.
Correct answer: B — Substance over form
Explanation: The buyer has the risks and rewards of ownership - use, maintenance and the loss if the asset is damaged - so the ECONOMIC substance is that he owns it, even though legal title has not passed. Accounting follows substance so that the statements show the reality of the transaction. Depreciation is therefore charged by the buyer, not the seller.
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