AAT L3 Final Accounts Preparation 3 — Questions and Answers
Question 1: In the accounts of a sole trader, drawings are:
- An expense in the income statement
- A deduction from capital in the balance sheet (Correct answer)
- A liability of the business
- Revenue for the owner
Correct answer: A deduction from capital in the balance sheet
Drawings are amounts taken out of the business by the owner for personal use; they reduce the owner's capital in the balance sheet and are not business expenses.
Question 2: Goodwill in a partnership arises when:
- A partner introduces additional capital
- A partner joins or leaves and the partnership's value exceeds its net assets (Correct answer)
- Profits are particularly high in one year
- The business revalues its premises
Correct answer: A partner joins or leaves and the partnership's value exceeds its net assets
Goodwill in a partnership context typically needs to be valued when a partner joins or leaves, as the new arrangement should reflect the true value of the business including its reputation, customer base, and earning capacity.
Question 3: The notes to the accounts form part of the financial statements and provide:
- Additional detail and disclosures required by law and accounting standards (Correct answer)
- A summary of trading activity only
- Information for HMRC only
- Management discussion only, not part of statutory accounts
Correct answer: Additional detail and disclosures required by law and accounting standards
Notes to the accounts are a mandatory component of the financial statements; they expand on figures in the primary statements, describe accounting policies, and provide disclosures required by company law and accounting standards.
Question 4: When a partner retires and their capital account has a credit balance, the business usually:
- Writes off the balance
- Pays the amount due to the retiring partner over time or immediately
- Transfers the balance to the remaining partners' accounts without payment
- Converts it into a loan from the retiring partner by agreement (Correct answer)
Correct answer: Converts it into a loan from the retiring partner by agreement
Commonly, when a partner retires, the amount owed is agreed and may be left as a loan account bearing interest if not immediately settled, allowing the business to continue without requiring an immediate cash outflow.
Question 5: In calculating cost of sales, which of the following is added to purchases?
- Closing inventory
- Carriage outwards
- Opening inventory (Correct answer)
- Discount received
Correct answer: Opening inventory
Cost of Sales = Opening Inventory + Purchases + Carriage Inwards − Purchase Returns − Closing Inventory. Opening inventory is added because it was available for sale during the period.
Question 6: A company issues shares at a price above their nominal value. The excess is recorded as:
- Retained earnings
- Share premium account (Correct answer)
- Revaluation reserve
- Capital redemption reserve
Correct answer: Share premium account
When shares are issued at a price above their nominal (par) value, the nominal value goes to share capital and the excess is credited to the share premium account, both within equity.
AAT L3 Final Accounts Preparation 3
In the accounts of a sole trader, drawings are: