ICAP PRC-1 Adjustments in the recorded information: practice questions with answers

Question 1

In the year ended 30 June 2025, Shaheen Crockery, a Peshawar retailer, wrote off a balance of Rs 38,000 owed by a customer. In March 2026 the customer unexpectedly paid the full Rs 38,000 by bank transfer. What is the net effect of recording this receipt on Shaheen Crockery's profit for the year ended 30 June 2026 and on its trade receivables at 30 June 2026?

1. A Profit is not changed; trade receivables fall by Rs 38,000
2. B Profit increases by Rs 38,000; trade receivables are not changed
3. C Profit increases by Rs 38,000; trade receivables rise by Rs 38,000
4. D Profit is not changed; opening capital rises by Rs 38,000

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Answer: B. When a debt written off in an earlier period is recovered, the cash is recognised in profit or loss when received: Dr Bank Rs 38,000, Cr Irrecoverable debts recovered (or a reduction of the irrecoverable debts expense) Rs 38,000. Some businesses first reinstate the debt (Dr Trade receivables, Cr Irrecoverable debts recovered) and then record the receipt (Dr Bank, Cr Trade receivables); the net effect is the same.

So profit for the year ended 30 June 2026 increases by Rs 38,000 and closing trade receivables are unchanged.

Question 2

Zarrar Paints, a Rawalpindi sole trader, had an allowance for doubtful receivables of Rs 92,000 at 1 January 2025. At 31 December 2025 the required allowance is Rs 68,000. There were no irrecoverable debts in the year. Which journal entry adjusts the allowance at 31 December 2025?

1. A Dr Allowance for doubtful receivables Rs 24,000; Cr Irrecoverable debts expense Rs 24,000
2. B Dr Irrecoverable debts expense Rs 68,000; Cr Allowance for doubtful receivables Rs 68,000
3. C Dr Irrecoverable debts expense Rs 24,000; Cr Allowance for doubtful receivables Rs 24,000
4. D Dr Allowance for doubtful receivables Rs 24,000; Cr Trade receivables Rs 24,000

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Answer: A. Movement = required Rs 68,000 - opening Rs 92,000 = a decrease of Rs 24,000.

Journal: Dr Allowance for doubtful receivables Rs 24,000, Cr Irrecoverable debts expense (or a separate income line) Rs 24,000. Profit increases by Rs 24,000 and the allowance shown against receivables becomes Rs 68,000.

Question 3

The bookkeeper of Hunza Handicrafts, a Gilgit sole trader, forgot to accrue staff wages of Rs 85,000 for the last week of June 2026, which were paid on 3 July 2026. What is the effect of this omission on the financial statements for the year ended 30 June 2026?

1. A Profit is overstated by Rs 85,000 and current liabilities are understated by Rs 85,000
2. B Profit is understated by Rs 85,000 and current liabilities are overstated by Rs 85,000
3. C Profit is overstated by Rs 85,000 and current assets are overstated by Rs 85,000
4. D Profit is not affected and current liabilities are understated by Rs 85,000

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Answer: A. Under the accruals basis the wages for the last week of June are an expense of the year ended 30 June 2026 even though they were paid in July. The missing entry is Dr Wages expense Rs 85,000, Cr Accruals Rs 85,000. Without it, expenses are understated (profit overstated by Rs 85,000) and current liabilities are understated by Rs 85,000.

Question 4

Zeeshan Textiles, a Karachi sole trader, issued an invoice to a customer for Rs 72,000. The sales clerk entered it in the sales day book as Rs 27,000, and that figure was posted to the sales account and to the customer's account. What type of error is this?

1. A An error of commission
2. B An error of original entry
3. C An error of principle
4. D A compensating error

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Answer: B. The amount was wrong at the point of original recording (the day book), and both the debit and the credit were posted from that wrong figure. This is an error of original entry: the trial balance still agrees, but sales and receivables are each understated by Rs 72,000 - Rs 27,000 = Rs 45,000. Correction: Dr Trade receivables Rs 45,000, Cr Sales Rs 45,000.

Question 5

Raza Ceramics, a Gujrat sole trader, banked a cheque for Rs 48,000 received from a credit customer and recorded it in the cash book. The bank statement shows that the cheque was later dishonoured. The customer is expected to pay again. Which entry should be made?

1. A Debit the cash book and credit the customer's receivables account with Rs 48,000
2. B Credit the cash book and debit irrecoverable debts expense with Rs 48,000
3. C Make no entry and show Rs 48,000 in the bank reconciliation statement
4. D Credit the cash book and debit the customer's receivables account with Rs 48,000

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Answer: D. When a cheque is dishonoured, the earlier receipt is reversed: Cr Bank (cash book) Rs 48,000, Dr Trade receivables (the customer's account) Rs 48,000. The customer owes the money again; it would be written off only if it became irrecoverable.

Question 6

The bank statement of Ravi Electricals, a Lahore sole trader, includes a deposit of Rs 70,000 that belongs to a different customer of the bank. Ravi Electricals' reconciliation starts with the balance per bank statement and ends with the corrected cash book balance. How should the deposit be dealt with?

1. A Debit the cash book with Rs 70,000 and credit sundry income with Rs 70,000
2. B Credit the cash book with Rs 70,000 and debit suspense with Rs 70,000
3. C Make no cash book entry, and deduct Rs 70,000 from the balance per bank statement in the reconciliation
4. D Make no cash book entry, and add Rs 70,000 to the balance per bank statement in the reconciliation

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Answer: C. Bank errors are corrected by the bank, not in the cash book. In a reconciliation that starts with the balance per bank statement, a deposit wrongly credited by the bank is deducted (Rs 70,000) to arrive at the corrected cash book balance.