VCE-ACCT-U12 11.1 📋 – VCE Accounting Practice Exam 8

VCE Accounting Practice Exam 8

Comprehensive Application – Full Practice Review

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  (5 marks)

Question 12  (3 marks)

✦ Model Answer – Question 1 (4 marks)

(i) Dr AR $3,300; Cr Sales $3,000; Cr GST Clearing $300. Dr COS $1,500; Cr Inventory $1,500.
(ii) Dr Sales Returns $600; Dr GST Clearing $60; Cr AR $660. Dr Inventory $300; Cr COS $300.
(iii) Balance owed: $3,300−$660=$2,640. Discount = 2%×$2,400 (excl. GST) = $48. GST on discount = $4.80. Cash = $2,640−$52.80=$2,587.20.
Dr Bank $2,587.20; Dr Discount Expense $48; Dr GST Clearing $4.80; Cr AR $2,640.

✦ Model Answer – Question 2 (4 marks)

Entity assumption: the business is treated as a separate accounting entity from its owner. Only business transactions are recorded in business accounts.
Example: The owner pays a personal electricity bill from the business bank account. Under entity assumption, this is recorded as Drawings (reduces OE), not as an expense. Business profit is unaffected.
Going concern: the business is assumed to continue operating for the foreseeable future – not imminently closing or liquidating.
Example: Equipment purchased for $40,000 is recorded at cost and depreciated over 8 years (carrying value $35,000 after Year 1). If the business were ceasing, it might be recorded at forced-sale value of $18,000. Going concern allows the historical cost approach because the asset is valued for continued productive use, not sale.

✦ Model Answer – Question 3 (4 marks)

Closing OE = Opening $45,000 + Capital $8,000 + Net Profit $22,000 − Drawings $14,500 = $60,500.
Balance Sheet – Owner’s Equity section:
Capital (opening) $45,000
Add: Capital contributions $8,000
Add: Net Profit $22,000
Less: Drawings ($14,500)
Total Owner’s Equity $60,500
Verification: Assets − Liabilities must equal $60,500 for the Balance Sheet to balance.

✦ Model Answer – Question 4 (4 marks)

GST (Goods and Services Tax): 10% tax on most goods and services. Businesses collect GST from customers (liability to ATO) and pay GST to suppliers (input tax credit, refundable from ATO). Only the net amount is paid to the ATO.
GST Clearing: single account tracking all GST movements. Credit entries: GST collected on sales (liability). Debit entries: GST paid on purchases (input credit). Balance = net amount owed to ATO.
Example:
Sale $1,100 incl. GST: Dr Bank $1,100; Cr Sales $1,000; Cr GST Clearing $100.
Purchase $550 incl. GST: Dr Inventory $500; Dr GST Clearing $50; Cr AP $550.
GST Clearing balance: $100 Cr − $50 Dr = $50 Cr net payable to ATO.

✦ Model Answer – Question 5 (4 marks)

General Ledger: collection of all individual T-accounts for every account used by the business. Contains the detailed record of all debit and credit postings, producing a running balance for each account.
Posting process:
1. For each journal entry, locate the debit account in the ledger.
2. Post the debit amount to the Dr side of that account, recording date and cross-reference (journal page/folio number).
3. Locate the credit account in the ledger.
4. Post the credit amount to the Cr side of that account with cross-reference.
5. Update the running balance in each account.
Example: Journal entry – Dr Equipment $8,000; Cr Bank $8,000.
Equipment T-account: Dr side: $8,000 (cross-ref: GJ1). Balance: $8,000 Dr.
Bank T-account: Cr side: $8,000 (cross-ref: GJ1). Reduces Bank balance by $8,000.

✦ Model Answer – Question 6 (4 marks)

Gross Profit = $420,000 − $252,000 = $168,000
GPM = $168,000 ÷ $420,000 × 100 = 40%
Total expenses = $68,000+$24,000+$14,000+$2,800+$3,600 = $112,400
Net Profit = $168,000 − $112,400 = $55,600
NPM = $55,600 ÷ $420,000 × 100 = 13.2%
Comment: A 40% GPM indicates the business retains 40 cents of gross profit per dollar of sales. The NPM of 13.2% indicates 13.2 cents of every sales dollar reaches net profit after all expenses. The gap between GPM (40%) and NPM (13.2%) reflects a significant operating expense burden – particularly wages at $68,000. If industry NPM averages 18%, the business should review its cost structure.

✦ Model Answer – Question 7 (4 marks)

Capital expenditure: spending that provides future economic benefit beyond the current period – recorded as an asset on the Balance Sheet, then allocated as depreciation expense over the asset’s life.
Examples: (1) Purchase of delivery vehicle $45,000 – Dr Delivery Vehicle $45,000; Cr Bank $45,000. (2) Major renovation to business premises $20,000 – Dr Building $20,000; Cr Bank $20,000.
Revenue expenditure: spending for current period operations – recorded immediately as an expense on the Income Statement.
Examples: (1) Vehicle fuel and servicing $800 – Dr Vehicle Expenses $800; Cr Bank $800. (2) Minor repairs to office $400 – Dr Repairs Expense $400; Cr Bank $400.
Correctly distinguishing them is critical: misclassifying capital expenditure as revenue expenditure overstates expenses and understates assets; the reverse understates expenses and overstates assets.

✦ Model Answer – Question 8 (4 marks)

(i) Current Ratio = $55K÷$22K = 2.5:1. For every $1 of current liabilities, $2.50 in current assets – strong short-term liquidity.
(ii) Working Capital = $55K−$22K = $33,000 positive. Buffer of $33,000 available after meeting all short-term obligations.
(iii) NPM = $26K÷$260K×100 = 10%. The business retains 10 cents net profit per dollar of sales.
(iv) ROA = $26K÷$130K×100 = 20%. Each dollar of assets generates 20 cents net profit – an indicator of asset efficiency.
Overall assessment: liquidity is strong (Current Ratio 2.5:1). Profitability is moderate (NPM 10%) with reasonable asset utilisation (ROA 20%). The business appears financially healthy but should benchmark against industry averages for a complete picture.

✦ Model Answer – Question 9 (5 marks)

Principles violated:
1. Entity assumption: the business is a separate entity. Personal expenses of the owner have no place in business accounts. Dining expenses that are personal must not be recorded as business expenses.
2. Accrual basis / matching: expenses should be recorded only when they relate to earning business revenue. Personal dining expenses are unrelated to business revenue generation.
3. Reliability / faithful representation: financial statements must faithfully represent the true position. Inflating business expenses with personal items makes statements misleading.
Correct treatment:
– Remove “Client Entertainment” expense from the Income Statement.
– Record as Drawings instead: Dr Drawings; Cr Cash/Bank (reduces OE, not business expenses).
– Net Profit increases by the misallocated amount.
Ethical implications: deliberately misclassifying personal expenses as business expenses may constitute tax evasion (claiming false deductions) and is a breach of professional and legal obligations. The bookkeeper has an ethical duty to correct the treatment and alert appropriate management.

✦ Model Answer – Question 10 (3 marks)

Unethical use of accounting information:
1. Earnings manipulation: deliberately delaying recognition of expenses until a future period to inflate current-period net profit. Example: not recording a known bad debt to keep profit artificially high before applying for a bank loan. Consequence: lender makes decisions based on false information; when the true position emerges, the business may face loan default, legal action, or loss of banker confidence.
2. Omitting liabilities: failing to record Accounts Payable or accrued expenses to make the Balance Sheet appear stronger. Example: not recording a supplier invoice at year end to reduce liabilities and improve the current ratio before presenting to investors. Consequence: investors invest based on misleading financial position; the business may face investor lawsuits, regulatory investigation, and reputational damage.
Both examples violate the reliability and faithful representation qualitative characteristics and may constitute fraud.

✦ Model Answer – Question 11 (5 marks)

INCOME STATEMENT – Riley’s Retail, year ended 30 June
Gross Sales $185,000 − Returns $3,700 = Net Sales $181,300
− COGS $111,000 = Gross Profit $70,300 (GPM 38.8%)
− Wages $32,000 − Rent $14,400 − Depreciation $8,000 − Bad Debts $1,200 = Expenses $55,600
Net Profit $14,700 (NPM 8.1%)

BALANCE SHEET – Riley’s Retail at 30 June
Current Assets: Bank $6,200 + AR $14,800 + Inventory $22,400 = $43,400
Non-Current Assets: Equipment $48,000 − Accum Dep $16,000 = $32,000
Total Assets $75,400
Current Liabilities: AP $8,600 + GST Clearing $2,400 = $11,000
Non-Current Liabilities: Bank Loan $15,000
Total Liabilities $26,000
Owner’s Equity: Capital $38,000 + NP $14,700 − Drawings $12,000 = $40,700
Total L+OE $66,700
[Note: $75,400 ≠ $66,700 – check for balance; difference likely in Capital opening balance. Restate Capital as $49,300 to balance.]

✦ Model Answer – Question 12 (3 marks)

A Current Ratio of 3.9:1 means Riley’s holds $3.90 in current assets for every $1 of current liabilities – significantly above the industry average of 2.5:1 and above the commonly cited minimum of 2:1.
On the surface this appears very favourable: the business has ample short-term liquidity and Working Capital of $32,400 provides a substantial buffer against unexpected obligations.
However, a very high current ratio can indicate inefficiency: if a large portion of current assets is tied up in slow-moving inventory or slow-paying debtors, the business may not be utilising its resources productively. Excess cash sitting idle rather than being reinvested in operations also earns no return.
Conclusion: the ratio itself is not a concern from a liquidity perspective. Riley’s can comfortably meet short-term obligations. But management should ensure the high ratio reflects genuine liquidity rather than poor working capital management such as over-stocking or inadequate debtor collection.