VCE-ACCT-U12 8.1 📋 – VCE Accounting Practice Exam 5

VCE Accounting Practice Exam 5

Balance-Day Adjustments and Depreciation

Question 1  (4 marks)

Question 2  (4 marks)

Question 3  (4 marks)

Question 4  (4 marks)

Question 5  (4 marks)

Question 6  (4 marks)

Question 7  (4 marks)

Question 8  (4 marks)

Question 9  (5 marks)

Question 10  (3 marks)

Question 11  (4 marks)

Question 12  (4 marks)

✦ Model Answer – Question 1 (4 marks)

Accrual basis: revenue recorded when earned, expenses when incurred – regardless of when cash is received or paid. This ensures financial statements reflect economic activity in the correct period.
Balance-day adjustments are necessary because some revenues and expenses span multiple periods or involve timing differences between economic activity and cash flow. Without adjustments: prepaid expenses would remain as assets beyond the period they benefit; accrued expenses would be omitted; depreciation would not reflect asset consumption. Adjustments ensure the Income Statement shows the correct profit for the period and the Balance Sheet correctly values assets and liabilities at period end.

✦ Model Answer – Question 2 (4 marks)

Prepaid expense: expense paid in advance; the future benefit is an asset at balance day. Example: Insurance paid 1 Jan $2,400 for 12 months. At 31 Mar (3 months used):
Dr Insurance Expense $600; Cr Prepaid Insurance $600.
Accrued expense: expense incurred during the period but not yet paid; creates a liability at balance day. Example: Wages $1,200 earned by staff on 30 Jun but not paid until 2 Jul:
Dr Wages $1,200; Cr Accrued Wages Payable $1,200.

✦ Model Answer – Question 3 (4 marks)

Straight-line: (Cost − Residual) ÷ Life = ($48,000 − $8,000) ÷ 5 = $8,000/year.
Year 1: $8,000 | Year 2: $8,000 (constant each year).
Reducing balance at 25%:
Year 1: $48,000 × 25% = $12,000. Carrying value = $36,000.
Year 2: $36,000 × 25% = $9,000. Carrying value = $27,000.
Straight-line produces a constant charge – suitable for assets with uniform use. Reducing balance produces higher charges in early years – suitable for assets that lose value rapidly (e.g., vehicles, technology).

✦ Model Answer – Question 4 (4 marks)

(i) Dr Accrued Rent Receivable $900; Cr Rent Revenue $900
(ii) Dr Supplies Expense $2,400; Cr Supplies on Hand $2,400 (used = $3,200 − $800)
(iii) Dep = ($24,000−$4,000)÷10 = $2,000: Dr Depreciation Expense $2,000; Cr Accumulated Depreciation $2,000
(iv) Dr Interest Expense $450; Cr Accrued Interest Payable $450

✦ Model Answer – Question 5 (4 marks)

Insurance: paid 1 Oct for 12 months. By 30 Jun = 9 months used. Monthly = $3,600÷12 = $300. Used = $300×9 = $2,700.
Dr Insurance Expense $2,700; Cr Prepaid Insurance $2,700.
Wages: Mon 29 + Tue 30 = 2 days × $400 = $800 accrued.
Dr Wages Expense $800; Cr Accrued Wages Payable $800.

✦ Model Answer – Question 6 (4 marks)

Non-current assets are presented at carrying value = Cost − Accumulated Depreciation.
Example: Equipment purchased 1 Jan 2023 for $30,000. Straight-line dep $5,000/year. At 30 Jun 2024 (18 months):
Accum. Dep = $5,000 × 1.5 = $7,500.
Balance Sheet presentation:
Equipment (at cost) $30,000
Less Accumulated Depreciation ($7,500)
Carrying Value $22,500
The carrying value represents the unexpired cost still to be allocated as depreciation over the remaining useful life.

✦ Model Answer – Question 7 (4 marks)

Year 1: $40,000 × 20% = $8,000. CV = $32,000.
Year 2: $32,000 × 20% = $6,400. CV = $25,600.
Year 3: $25,600 × 20% = $5,120. CV = $20,480.
Carrying value declines each year at a decreasing rate. The annual depreciation charge falls because it is applied to the reduced carrying value, not the original cost. This produces a closer match between the asset’s economic use and the expense recognised when assets lose more value in earlier years.

✦ Model Answer – Question 8 (4 marks)

Accumulated Depreciation: a contra-asset account that accumulates total depreciation charged on an asset since acquisition. It reduces the carrying value without altering the original cost figure.
Shown separately to provide users with useful information:
1. Historical cost: users can see what was originally paid.
2. Accumulated dep: users can see how much has been consumed/charged.
3. Carrying value: users can calculate the remaining economic value to the business.
4. Age indicator: large accumulated dep relative to cost suggests the asset is nearing end of useful life.
Combining them into one figure would lose this transparency.

✦ Model Answer – Question 9 (5 marks)

Straight-line: allocates equal depreciation each year. Formula: (Cost − Residual) ÷ Life. Produces consistent annual charge.
Appropriate when: asset provides uniform benefit each year (e.g., factory machinery with consistent output, office equipment used evenly).
Reducing balance: applies fixed percentage to carrying value. Higher charge in early years, lower in later years.
Appropriate when: asset loses economic value more rapidly early in life (e.g., motor vehicles, technology, computers).
Conservatism: Reducing balance is more conservative in early years – it recognises a larger expense and lower asset value sooner, reducing the risk of overstating the asset. This aligns with the conservatism principle: when uncertain about how an asset loses value, it is preferable to allocate more expense earlier rather than later.

✦ Model Answer – Question 10 (3 marks)

Straight-line total: ($35,000−$5,000)÷5×5 = $30,000 total.
Reducing balance total (5 years at 30%):
Year 1: $10,500 | CV $24,500
Year 2: $7,350 | CV $17,150
Year 3: $5,145 | CV $12,005
Year 4: $3,602 | CV $8,404
Year 5: $2,521 | CV $5,882
Total = $29,118.
Straight-line produces higher total depreciation ($30,000) when a residual value applies, because the reducing balance method never fully depreciates to the residual – the carrying value approaches but does not reach it under the reducing balance formula without a switch in the final year.

✦ Model Answer – Question 11 (4 marks)

Accrual basis: revenues and expenses recorded when earned/incurred, not when cash moves. Accounting period: financial life divided into discrete reporting periods.
Together, these require adjustments at period end to ensure revenues and expenses are assigned to the correct period regardless of cash timing.
Illustration 1 – Prepaid expense: a business pays $12,000 rent on 1 Jan for 12 months. At 31 Mar (quarter end), only 3 months ($3,000) has been used. Without adjustment, $12,000 asset remains and $0 rent expense is recorded – understating expenses and overstating assets for Q1. Adjustment: Dr Rent Expense $3,000; Cr Prepaid Rent $3,000.
Illustration 2 – Accrued wages: wages of $2,400 earned in the last week of June but paid on 3 July. Without adjustment, wages expense is understated by $2,400 and net profit overstated. Adjustment: Dr Wages $2,400; Cr Accrued Wages Payable $2,400.

✦ Model Answer – Question 12 (4 marks)

(a) Depreciation omitted: (i) Expenses understated by $4,000. (ii) Net profit overstated by $4,000. (iii) Asset (equipment CV/Accum Dep) overstated by $4,000.
(b) Accrued wages omitted: (i) Expenses understated by $1,500. (ii) Net profit overstated by $1,500. (iii) Liability (Accrued Wages Payable) understated by $1,500.
(c) Prepaid insurance not expensed: (i) Expenses understated by $900. (ii) Net profit overstated by $900. (iii) Asset (Prepaid Insurance) overstated by $900 – it should be $0.
All three omissions result in overstated net profit and a misleading financial position.