Edexcel IGCSE Accounting: Capital and revenue expenditure and depreciation (4AC1) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

This set covers sections 2.4 (Capital expenditure and revenue expenditure) and 2.5 (Depreciation) of Topic 2, Introduction to bookkeeping, in the Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016. The specification has no tiers. All businesses and figures are invented, and amounts are in dollars.

Links: Edexcel IGCSE Accounting hub, printable checklist, study guide, revision notes, free 10-minute diagnostics.

Questions

1. State two causes of depreciation. [2]

2. Ravenscar Signs had the following payments. State whether each is capital expenditure or revenue expenditure.

(a) Purchase of a vinyl cutter, 6,900. (b) Wages of the cutter operator, 2,100. (c) Delivery of the cutter to the workshop, 180. (d) Replacement ink cartridges, 340. (e) Fitting new wiring so the cutter can be used, 420. [5]

3. Ravenscar Signs bought a laminating machine for 2,800 and debited the amount to its repairs expense account. Explain two effects of this error on the financial statements for the year. [4]

4. A machine costs 56,000. It is expected to last 8 years and then have a residual value of 8,000. Depreciation is charged on the straight line basis.

(a) Work out the yearly depreciation charge. [2] (b) Work out the machine’s carrying value after three years. [1]

5. Equipment is bought for 25,000. The business writes it down by 30% of its carrying value each year. Find the charge for each of the first three years and the carrying value when year 3 ends. [4]

6. (a) Distinguish between the straight line and reducing balance methods of depreciation. [2] (b) Suggest why a business might choose reducing balance for a delivery van. [2]

7. Corbridge Cycles buys equipment for 15,000 on 1 January of Year 1 and more equipment for 4,000 on 1 January of Year 2, paying from the bank each time. It depreciates equipment at 20% a year on cost, with a full year’s charge on assets held at the year end and no residual value.

(a) Prepare the equipment at cost account for Years 1 and 2, balancing it at the end of Year 2. [2] (b) Prepare the provision for depreciation of equipment account for Years 1 and 2. [3] (c) Show how equipment appears in the statement of financial position as Year 2 closes. [2]

8. Pennine Pottery buys a vehicle for 27,000 on 1 January of Year 1. It is depreciated at 20% a year on cost, with no residual value. The vehicle is sold on 31 December of Year 3, after that year’s charge, for 9,300.

(a) Work out the depreciation built up by the date of sale. [2] (b) Draw up the disposal account. [4] (c) Say where the resulting profit or loss is reported. [1]

9. Pennine Pottery buys a machine for 48,000 and depreciates it at 25% a year using reducing balance. It sells the machine at the end of Year 3, after that year’s charge, for 22,000. Calculate the profit or loss on disposal and state how it appears in the income statement. [5]

10. Ravenscar Signs reports profit for the year of 27,500 and machinery at a carrying value of 14,600 after depreciation. Machinery is depreciated at 20% a year on cost, with a full year’s charge. Two errors are found:

• Delivery and installation costs of 1,800 on a new machine were debited to expenses, not to machinery.
• A repair costing 950 was debited to the machinery account, and depreciation was charged on it.

(a) Find the profit for the year after correcting both errors. [5] (b) Find machinery’s carrying value after correction. [2]

11. The owner of Tamsin Bakes says: “Depreciation is pointless because no cash leaves the business when it is charged.” Explain two reasons why depreciation is still charged. [4]

Answers

1. Two causes, from: wear and tear; obsolescence; passage of time (for example a lease); inadequacy or change in demand. One cause [1], a second cause [1]. [2] Examiner insight: Give two separate causes. Wording that repeats one idea twice, such as “it gets old” and “it ages”, usually earns the credit for only one cause.

2. (a) Capital [1]. (b) Revenue [1]. (c) Capital [1], because delivery is part of the cost of getting the asset to its place of use. (d) Revenue [1]. (e) Capital [1], because installation is part of the cost of the asset. [5] Examiner insight: Delivery and installation of a new asset are common traps. Write capital and add a few words of reason so your classification is clear.

3. Profit for the year is understated [1] because the full 2,800 is charged as an expense, instead of only a year’s depreciation [1]. Non-current assets are understated in the statement of financial position [1] because the machine is not recorded as an asset [1]. [4] Examiner insight: An effect and its reason together make a complete point. “Profit is wrong” without a direction (understated or overstated) leaves the point unfinished.

4. (a) (56,000 − 8,000) ÷ 8 [1] = 6,000 [1]. (b) 56,000 − (3 × 6,000) = 38,000 [1]. [3] Examiner insight: Show the subtraction of residual value in the working. A correct final figure with no method shown is harder to reward if an arithmetic slip creeps in.

5. Year 1: 25,000 × 30% = 7,500 [1]. Year 2: (25,000 − 7,500) × 30% = 17,500 × 30% = 5,250 [1]. Year 3: (17,500 − 5,250) × 30% = 12,250 × 30% = 3,675 [1]. Carrying value = 12,250 − 3,675 = 8,575 [1]. [4] Examiner insight: Applying the percentage to the original cost each year is the usual slip. A small table of opening value, charge and closing value keeps the base clear.

6. (a) Straight line charges an equal amount every year [1]; reducing balance charges a percentage of the carrying value, so successive charges get smaller [1]. (b) A van is likely to lose more value or usefulness in its early years [1], so a higher early charge reflects its use [1]. An alternative answer is that repair costs rise as the van ages, so falling depreciation balances the rising repairs. [4] Examiner insight: Part (b) says “suggest”, so a sensible reasoned idea linked to vehicles is what is wanted, not a definition of the method.

7. (a) Debit side: Y1 Bank 15,000 [1]; Y2 Bank 4,000, balance c/d 19,000 at end of Year 2 (credit side) [1]. (b) Year 1 charge 15,000 × 20% = 3,000, credited, with balance c/d 3,000 [1]. Year 2: balance b/d 3,000 and depreciation (15,000 + 4,000) × 20% = 3,800 credited [1], balance c/d 6,800 (debit side) [1]. (c) Equipment at cost 19,000 less accumulated depreciation 6,800 [1] gives carrying value 12,200 [1]. [7] Examiner insight: Label each entry with the account it comes from or goes to and show the balance carried down. The year 2 charge applies to everything held at the year end, including equipment bought on 1 January.

8. (a) 27,000 × 20% = 5,400 a year [1]; 5,400 × 3 = 16,200 [1]. (b) Debit side: vehicle at cost 27,000 [1]. Credit side: provision for depreciation 16,200 [1]; bank 9,300 [1]; balancing figure, loss on disposal 1,500 [1]. Both sides total 27,000. (c) In the income statement, as an expense [1]. [7] Examiner insight: Check the working by calculating carrying value (27,000 − 16,200 = 10,800) and comparing it with the 9,300 received. Proceeds lower than carrying value means a loss, which is a useful check on the sides of the account.

9. Year 1: 48,000 × 25% = 12,000 [1]. Year 2: 36,000 × 25% = 9,000, year 3: 27,000 × 25% = 6,750 [1]. Accumulated depreciation 27,750, carrying value 48,000 − 27,750 = 20,250 [1]. Profit = 22,000 − 20,250 = 1,750 profit [1]. It is added in the income statement as income [1]. [5] Examiner insight: State whether the answer is a profit or a loss and where it goes. A figure with no label leaves the last part of the question unanswered.

10. Item 1: correct depreciation on 1,800 is 1,800 × 20% = 360 [1]; expenses were overstated by 1,800 and depreciation understated by 360, so profit was understated by 1,440 [1]. Item 2: depreciation wrongly charged on 950 is 190 [1]; expenses were understated by 950 and depreciation overstated by 190, so profit was overstated by 760 [1]. Corrected profit = 27,500 + 1,440 − 760 = 28,180 [1]. (b) Carrying value: 14,600 − 760 + 1,440 [1] = 15,280 [1]. [7] Examiner insight: Treat each error separately and remember its depreciation. Moving the full amount between expenses and machinery without adjusting for the depreciation is the most common way to lose credit.

11. Reason 1: depreciation spreads the cost of the asset over the years in which it is used [1], so profit each year is matched with the benefit of the asset and not distorted by one large purchase [1]. Reason 2: the statement of financial position then shows non-current assets at a more realistic carrying value [1], rather than at cost long after the asset has lost value [1]. [4] Examiner insight: Respond to the owner’s point directly: say that the cash left when the asset was bought and depreciation allocates that cost, so the lack of a cash payment does not make it unnecessary.

Where marks are usually lost

• Calling delivery, installation or legal fees on a purchase revenue expenditure.
• Saying profit is “wrong” without stating overstated or understated.
• Ignoring the depreciation effect when an item is moved between expenses and an asset account.
• Applying the reducing balance percentage to cost in later years.
• Subtracting residual value before applying a reducing balance percentage.
• Leaving out the carried down and brought down balances in the provision account.
• Missing accumulated depreciation from the disposal account.
• Giving the profit or loss on disposal without a label or without saying where it is shown.
• Stating depreciation is about replacing the asset or setting cash aside.

Next steps

• Review the revision notes and the study guide.
• Check your coverage on the printable checklist and the course hub.
• Try all free 10-minute diagnostics.
• Book a free trial class.

Frequently asked questions

Which figure is the reducing balance percentage applied to in later years? After the first year, the percentage is applied to the carrying value at the start of the year, not to the original cost. Applying it to cost every year, or deducting residual value first, are common errors in Edexcel IGCSE Accounting (4AC1) questions.

How do you explain the effect of a classification error on profit? State whether profit is overstated or understated and by how much, rather than just saying it is wrong. Remember the depreciation effect: moving an item between expenses and an asset account also changes the depreciation charge.

What entries are made in a disposal account? Debit the disposal account with the asset’s cost, credit it with the accumulated depreciation and credit it with the sale proceeds. The balancing figure is the profit or loss on disposal, which should be labelled and taken to the income statement.

Does depreciation set cash aside to replace an asset? No. Depreciation allocates the cost of a non-current asset over the years it is used; the cash left the business when the asset was bought. Describing it as saving money for a replacement loses marks.

Official syllabus

Pearson Edexcel International GCSE in Accounting (4AC1) specification, Issue 1, October 2016, published by Pearson Education Limited – Topic 2, Introduction to bookkeeping, sections 2.4 and 2.5.