HIGHER ORDER THINKING SKILLS (HOTS) QUESTIONS
Q1. What is meant by GAAP?
Ans: Generally Accepted Accounting Principles.
Q2. Proprietor of the business is treated as creditor to the extent of his capital under which principle?
Ans: Business Entity Principle
Q3. A customer if X Ltd. Has discontinued his business. He used to purchase 30% of the total goods produced by X Ltd. Is it a relevant information in your opinion and should be disclosed by X Ltd.
Ans:Ans. Yes. The information is of material interest to the users of financial statements and must be disclosed as per the principle of full disclosure.
Q4. X Ltd. Gets a contract of - 100 crore to build a Shopping Mall to be completed in 3 years. The management of the company wants to ascertain profit or loss on this contract only when the contract is completed. Is the
Ans: Ans. No, the management is not justifies. Although the true profit or loss can be ascertained only after the completion of the contract, it will be divided into time intervals of twelve months for the ascertainment of profit as per Accounting period Principle.
Q5. Under which principle the caliber or quality of the management is not disclosed in the Balance sheet?
Ans: Money measurement principle
Q6. Which accounting principle states that all anticipated losses should be recorded but all anticipated profits should be ignored?
Ans: Principle of Prudence.
Q7. According to which concept, depreciation is to be charges as per one particular method year after year?
Ans: Concept of Consistency.
Q8. Why the full cost of an asset is not treated as an expense in the year of its purchase?
Ans: Because of going concern concept, it is assumed that the business will continue to exist for a long period in the future. Hence, the cost of the asset is spread over its useful life and only the current year’s depreciation is treated as expense
Q9. During the year the company purchases ball point pens of Rs 500. These were issued to employees and were still in use at the end of the year. Which accounting concept you would follow in dealing with this item?
Ans:Ans. Materiality concept will be followed in dealing with this item. As per this concept, items having an insignificant effect or being irrelevant to the users of financial statements need not be disclosed. Hence, it will be treated as expense and will be debited to stationery Account.
Q10. A debtor who owes Rs two lac to the Company is rumored to be declared insolvent. Will you disclose this information in the books?
Ans:Ans. Yes, As per convention of conservatism, all anticipated losses should be recorded, but all anticipated gains should be ignored. Hence, provision for doubtful debts should be created in anticipation of actual bad debts.
Q11. A company purchased goods for Rs 5,00,000 and sold 80% of such goods during the year. The market value of remaining goods was rs 90,000. The company valued the closing stock at cost. Which principle is being violated?
Ans:Ans. Principle of conservatism or prudence.
Q12. On 25th March, 2011, a fire broke out in the premises of Kamal Ltd. And destroyed a part of its plant and machinery. On account of this, a sharp decline in production for the next six months is expected. The company
did not disclose this fact in its annual report for the year ended 31st March, 2011. What is your opinion about this omission?
Ans: The company has violated the principle of full disclosure. Loss of Plant and Machinery is material information and should have been disclosed.
Q13. P Ltd. Purchase 500 Sq. Meter Land for Rs 1.5 crore to build a factory. At the end of year, the market value of land was Rs 1.35 crore. R Ltd. Treated rs 15 lakh as loss and recorded the Land at Rs 1.35 crore. Is it a correct treatment?
Ans: No. It is not a correct treatment. According to Cost principle, a fixed asset is recorded in the books at a price it was acquired.
Q14. Rani Ltd. Purchased securities for Rs 50 lakh. At the end of the year, the market value of such securities was Rs 40 lakh. While preparing the financial statements, the company valued the securities at cost i.e. Rs 50 lakh. Is it correct treatment?
Ans: No. It is not a correct treatment. The company has violated the principle of prudence according to which current assets are valued at cost price or realisable value whichever is less
Q15. A Company has been charging depreciation@ 10% p.a on original cost method. It now wants to change the method from original cost to diminishing balance method, the rate of depreciation being 15% p.a. can it do so?
Ans: Yes. The method and the rate of depreciation can be changed but the change in method will be treated as a change in accounting policy and the company should disclose the change in its financial statements along with its impact on profit or loss.
Q16. Mohan, the owner of a business receives an order for supply of goods worth Rs 2,00,000. He has also received Rs 25,000 against the order. Mohan wants to record it as a sale. Is Mohan correct in doing so?
Ans: No, he will not be correct in recording it as sales because the goods have not been delivered as yet and hence the sale is not completed. Mohan has not earned the revenue so far. Under the matching principle, revenue is recognized as earned only when cost incurred to earn that revenue is also recognized as expense is that period.
Q17. Kabul, the proprietor of M/s. R.K. & Co. purchased an air-conditioner and installed it at his residence. The payment was made by issuing a cheque from the account of M/s. R.K. & Co. The Accountant debited the Drawings Account with the amount whereas Rahul is of the view that it should be debited to the Fixed Assets. In your view, who is correct and why?
Ans: The Accountant is correct because according to the Business Entity Concept business is separate and distinct from the owners. Since, the air-conditioner has been installed at the residence, i.e., for the personal use of the proprietor, it is drawings by the owner.
Q18. Which accounting principle requires that personal expenses of proprietor or partners should be debited to Drawings Account?
Ans: Accounting Entity or Business Entity Principle.
Q19. Production at a factory had to stop for a week due to a labour strike. The owner estimated the loss of production and the likely loss of profit arising out of the situation. He directed the accountant to record the loss in the books
of accounts. Is the owner correct in recording the likely loss? Give reasons.
Ans: No, the owner is not correct because transactions and events are recorded in the books of accounts if they can be measured in money terms and on the basis of evidences. In the present case, evidence Lu the elf eel of loss or profit does not exist on the basis of which the owner can measure the loss in money terms.
Q20. Undue which accounting principle, quality of manpower is not recorded in the books of accounts?
Ans: Money Measurement Principle.
Q21. The assets of Standard Sugar Co. were acquired by the Government on 1st April, 2000 and the company received a compensation of Rs.10 crores. The company did not have any other business as on the date of acquisition and
has also not ventured into any other business after acquisition of assets. Tin: company placed the amount so received in a fixed deposit with a bank, which is lying deposited with the hunk as on date also. It has also filed a case in the Court Hiking higher compensation. Is the company a going concern?
Ans: The company is not a going concern because it has not commenced any business post acquisition. The company is only seeking higher compensation and not quashing the acquisition order of the Government, It has invested the compensation received in the fixed deposit which re-mums deposited as on date also. Thus, the company does not have intentions to conduct the business.
Q22. Which concept (principle) assumes that a business enterprise will not be liquidated in the near future?
Ans: Going Concern Concept.
Q23. An infrastructure company building highways has a contract to construct road of 25 kms. The project is likely to be completed in 4 years. It has approached a bank seeking finance. The bank has requested them to prepare
projected yearly accounts whereas the company has argued that since the project shall be completed in 4 years, projected accounts should be prepared for the end of the project. Is the company correct in its view? Give reasons.
Ans: No, the company is not correct because the bank requires year-wise projected accounts firstly, to assess the time when the funds shall be required and also how much funds shall be required; and secondly it shall be in a position to monitor the progress of the project at regular intervals.
Q24. Which accounting principle requires that life of a business be broken into smaller parts?
Ans: Accounting Period Principle.
Q25. Gurpreet purchased 1,000 sq. yards land to build a factory and paid Rs.15 lakhs towards its cost including registration charges. At the end of the financial year, the value of the land came down to Rs.13 lakhs. Gurpreet recorded the land at Rs.13 lakhs and booked a loss of Rs.2 lakhs. Is he correct in treating the fall in value as a loss?
Ans: No, Gurpreet is not correct because he has purchased a fixed asset by paying Rs.15 lakhs. The Cost Concept of Accounting holds that an asset should be recorded in the books at the price paid.
Q26. Under which accounting concept asset is recorded at cost, even if the market price is more or less?
Ans: Cost Concept.
Q27. If one aspect of a transaction is nut recorded, which accounting concept is not followed?
Ans: Dual Aspect Concept.
Q28. An enterprise prepares its accounts under the accrual basis. Salaries amounting to Rs.10,000 for the month of March, 2013 were not paid. The owner did not want to account it in the books of accounts on the ground that the amount was not paid. The enterprise closes its books of accounts on 31st March every year. Is he correct?
Ans: No, the owner is not correct because under the Accrual Concept, expense should be accounted at the time when it is incurred and not when it is paid. Salaries for March 2013 have become due on 31st March, 2013 and therefore, should be accounted in the books of accounts for the year ended 31st March, 2013.
Q29. Rent for the month of March, 2011 is not paid. Under which accounting concept it should be recorded as expense for the year ended 31st March, 2011?
Ans: Accrual Concept.
Q30. A company lost vital machinery in an accident on 2nd March, 2013 which will have adverse impact on its production capacity. As a result, it is likely to loose business to its competitors. The company has not disclosed this fact in its annual report for the year ended 31st March, 2013. Do you think it is complying with the Convention of Full Disclosure?
Ans: No, the company is not complying with the Convention of Full Disclosure as loss of vital machinery has adverse impact on the business and thus, on its profitability. It being material information should have been disclosed.
Q31. An investment company has been valuing its inventory of land at lower of market price or cost. It now wants to value its inventory at the current market price which is higher than the cost. Which accounting concept will be violated?
Ans: Prudence Concept.
Q32. An investment company has securities as current assets having market value substantially lower than the cost price. The company continues to show them at cost. Do you think the Concept of Prudence is being followed?
Ans: No, the company is not following the Concept of Prudence. It should bring down the value of current assets to its market value because the financial statements will otherwise show a better picture than what it actually is.