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MULTIPLE-CHOICE QUESTIONS

1. An entity has bought a 25% share in


another
entity with a view to selling that investment
within six
months. The investment has been classified
as held
for sale in accordance with IFRS 5. How
should the
investment be treated in the final year
accounts?
(a) It should be equity accounted.
(b) The assets and liabilities should be
presented
separately from other assets in the balance
sheet under IFRS 5.
(c) The investment should be dealt with
under
IAS 29.
(d) Purchase accounting should be used for
this
investment.
Answer: (b)
2. The Standard does not require the equity
method
to be applied when the associate has been
acquired
and held with a view to its disposal within a
certain
time period. What is the period within which
the associate
must be disposed of?
(a) Six months.
(b) Twelve months.
(c) Two years.
(d) In the near future.
Answer: (b)
3. How is goodwill arising on the acquisition
of an
associate dealt with in the financial
statements?
(a) It is amortized.
(b) It is impairment tested individually.
(c) It is written off against profit or loss.
(d) Goodwill is not recognized separately
within
the carrying amount of the investment.
Answer: (d)
4. An investor must apply the requirements
of IAS
39 in determining whether it is necessary to
recognize
any impairment loss in the investment in an
associate.
How is the impairment test carried out?
(a) The goodwill is separated from the rest of
the investment and is impairment tested
individually.

(b) The entire carrying amount of the


investment
is tested for impairment under IAS 36
by comparing its recoverable amount with
its carrying amount.
(c) The carrying value of the investment
should
be compared with its market value.
(d) The recoverable amounts of all
investments
in associates should be assessed together to
determine whether there has been an
impairment
on all investments.
Answer: (b)
5. What should happen when the financial
statements
of an associate are not prepared to the same
date as the investors accounts?
(a) The associate should prepare financial
statements
for the use of the investor at the same
date as those of the investor.
(b) The financial statements of the associate
prepared up to a different accounting date
will be used as normal.
(c) Any major transactions between the date
of
the financial statements of the investor and
that of the associate should be accounted
for.
(d) As long as the gap is not greater than
three
months, there is no problem.
Answer: (a)
6. If the investor ceases to have significant
influence
over an associate, how should the
investment be
treated?
(a) It should still be treated using equity
accounting.
(b) It should be treated in accordance with
IAS
39.
(c) The investment should be frozen at the
date
at which the investor ceases to have
significant
influence.
(d) The investment should be treated at
cost.
Answer: (b)
7. If there is any excess of the investors
share of
the net fair value of the associates
identifiable assets

and contingent liabilities over the cost of the


investment,
that is, negative goodwill, how should that
excess
be treated?
(a) It should be included in the carrying
amount
of the investment.
(b) It should be written off against retained
earnings.
(c) It should be included as income in the
determination
of the investors share of the associates
profit or loss for the period.
(d) It should be disclosed separately as part
of
the investors equity.
Answer: (c)
8. What accounting method should be used
for an
investment in an associate where it is
operating under
severe long-term restrictionsfor example
where the
government of a company has temporary
control over
the associate?
(a) IAS 39 should be applied.
(b) The equity method should be applied if
significant
influence can be exerted.
(c) The associate should be shown at cost.
(d) Proportionate consolidation should be
used.
Answer: (b)
9. An investor sells inventory for cash to a
25%
associate. The inventory cost the investor $6
million
and is sold to the associate for $10 million.
None of
the inventory has been sold at year-end.
How much of
the profit on the transaction would be
reported in the
group accounts?
(a) $4 million.
(b) $1 million.
(c) $3 million.
(d) Zero.
Answer: (c)
1. A joint venture is exempt from using the
equity
method or proportionate consolidation in
certain circumstances.
Which of the following circumstances is
not a legitimate reason for not using the
equity

method or proportionate consolidation?


(a) Where the interest is held for sale under
IFRS 5.
(b) Where the exception in IAS 27 applies
regarding
an entity not being required to present
consolidated financial statements.
(c) Where the venturer is wholly owned, is
not a
publicly traded entity and does not intend to
be, the ultimate parent produces
consolidated
accounts, and the owners do not object
to the nonusage of the accounting methods.
(d) Where the joint ventures activities are
dissimilar
from those of the parent.
Answer: (d)
2. In the case of a jointly controlled
operation, a
venturer should account for its interest by
(a) Using the equity method or proportionate
consolidation.
(b) Recognizing the assets and liabilities,
expenses
and income that relate to its interest
in the joint venture.
(c) Showing its share of the assets that it
jointly
controls, any liabilities incurred jointly or
severally, and any income or expense
relating
to its interest in the joint venture.
(d) Using the purchase method of
accounting.
Answer: (b)
3. In the case of jointly controlled assets, a
venturer
should account for its interest by
(a) Using the equity method or proportionate
consolidation.
(b) Recognizing the assets and liabilities,
expenses
and income that relate to its interest
in the joint venture.
(c) Showing its share of the assets that it
jointly
controls, any liabilities incurred jointly or
severally, and any income or expense
relating
to its interest in the joint venture.
(d) Using the purchase method of
accounting.
Answer: (c)
4. In the case of jointly controlled entities, a
venturer
should account for its interest by
(a) Using the equity method or proportionate

consolidation.
(b) Recognizing the assets and liabilities,
expenses
and income that relate to its interest
in the joint venture.
(c) Showing its share of the assets that it
jointly
controls, any liabilities incurred jointly or
severally, and any income or expense
relating
to its interest in the joint venture.
(d) Using the purchase method of
accounting.
Answer: (a)
5. The exemption from applying the equity
method
or proportionate consolidation is available in
the following
circumstances:
(a) Where severe long-term restrictions
impair
the ability to transfer funds to the investor.
(b) Where the interest is acquired with a
view to
resale within twelve months.
(c) Where the activities of the venturer and
joint
venture are dissimilar.
(d) Where the venturer does not exert
significant
influence.
Answer: (b)
6. Under proportionate consolidation, the
minority
interest in the venture is
(a) Shown as a deduction from the net
assets.
(b) Shown in the equity of the venturer.
(c) Shown as part of long-term liabilities of
the
venturer.
(d) Not included in the financial statements
of
the venturer.
Answer: (d)
7. A company has a 40% share in a joint
venture
and loans the venture $2 million. What figure
will be
shown for the loan in the balance sheet of
the venturer?
(a) $2 million.
(b) $800,000
(c) $1.2 million.
(d) Zero.
Answer: (c)

1. The scope of IAS 39 includes all of the


following
items except:
(a) Financial instruments that meet the
definition
of a financial asset.
(b) Financial instruments that meet the
definition
of a financial liability.
(c) Financial instruments issued by the entity
that meet the definition of an equity
instrument.
(d) Contracts to buy or sell nonfinancial
items
that can be settled net.
Answer: (c)
2. Which of the following is not a category
of financial
assets defined in IAS 39?
(a) Financial assets at fair value through
profit
or loss.
(b) Available-for-sale financial assets.
(c) Held-for-sale investments.
(d) Loans and receivables.
Answer: (c)
3. All of the following are characteristics of
financial
assets classified as held-to-maturity
investments
except:
(a) They have fixed or determinable
payments
and a fixed maturity.
(b) The holder can recover substantially all
of
its investment (unless there has been credit
deterioration).
(c) They are quoted in an active market.
(d) The holder has a demonstrated positive
intention and ability to hold them to
maturity.
Answer: (b)
4. Which of the following items is not
precluded
from classification as a held-to-maturity
investment?
(a) An investment in an unquoted debt
instrument.
(b) An investment in a quoted equity
instrument.
(c) A quoted derivative financial asset.
(d) An investment in a quoted debt
instrument.
Answer: (d)
5. All of the following are characteristics of
financial assets classified as loan and
receivables

except:
(a) They have fixed or determinable
payments.
(b) The holder can recover substantially all
of
its investment (unless there has been credit
deterioration).
(c) They are not quoted in an active market.
(d) The holder has a demonstrated positive
intention and ability to hold them to
maturity.
Answer: (d)
6. What is the principle for recognition of a
financial
asset or a financial liability in IAS 39?
(a) A financial asset is recognized when, and
only when, it is probable that future
economic
benefits will flow to the entity and the
cost or value of the instrument can be
measured
reliably.
(b) A financial asset is recognized when, and
only when, the entity obtains control of the
instrument and has the ability to dispose of
the financial asset independent of the
actions
of others.
(c) A financial asset is recognized when, and
only when, the entity obtains the risks and
rewards of ownership of the financial asset
and has the ability to dispose the financial
asset.
(d) A financial asset is recognized when, and
only when, the entity becomes a party to the
contractual provisions of the instrument.
Answer: (d)
7. In which of the following circumstances is
derecognition
of a financial asset not appropriate?
(a) The contractual rights to the cash flows
of
the financial assets have expired.
(b) The financial asset has been transferred
and
substantially all the risks and rewards of
ownership of the transferred asset have also
been transferred.
(c) The financial asset has been transferred
and
the entity has retained substantially all the
risks and rewards of ownership of the
transferred
asset.
(d) The financial asset has been transferred
and
the entity has neither retained nor
transferred

substantially all the risks and rewards of


ownership of the transferred asset. In
addition,
the entity has lost control of the transferred
asset.
Answer: (c)
8. Which of the following transfers of
financial
assets qualifies for derecognition?
(a) A sale of a financial asset where the
entity
retains an option to buy the asset back at its
current fair value on the repurchase date.
(b) A sale of a financial asset where the
entity
agrees to repurchase the asset in one year
for
a fixed price plus interest.
(c) A sale of a portfolio of short-term
accounts
receivables where the entity guarantees to
compensate the buyer for any losses in the
portfolio.
(d) A loan of a security to another entity (i.e.,
a
securities lending transaction).
Answer: (a)
9. Which of the following is not a relevant
consideration
when evaluating whether to derecognize a
financial
liability?
(a) Whether the obligation has been
discharged.
(b) Whether the obligation has been
canceled.
(c) Whether the obligation has expired.
(d) Whether substantially all the risks and
rewards
of the obligation have been transferred.
Answer: (d)
10. At what amount is a financial asset or
financial
liability measured on initial recognition?
(a) The consideration paid or received for
the financial
asset or financial liability.
(b) Acquisition cost. Acquisition cost is the
consideration
paid or received plus any directly
attributable transaction costs to the
acquisition
or issuance of the financial asset or financial
liability.
(c) Fair value. For items that are not
measured

at fair value through profit or loss,


transaction
costs are also included in the initial
measurement.
(d) Zero.
Answer: (c)
11. In addition to financial assets at fair
value
through profit or loss, which of the following
categories
of financial assets is measured at fair value
in the
balance sheet?
(a) Available-for-sale financial assets.
(b) Held-to-maturity investments.
(c) Loans and receivables.
(d) Investments in unquoted equity
instruments.
Answer: (a)
12. What is the best evidence of the fair
value of a
financial instrument?
(a) Its cost, including transaction costs
directly
attributable to the purchase, origination, or
issuance of the financial instrument.
(b) Its estimated value determined using
discounted
cash flow techniques, option pricing
models, or other valuation techniques.
(c) Its quoted price, if an active market
exists
for the financial instrument.
(d) The present value of the contractual cash
flows less impairment.
Answer: (c)
13. Is there any exception to the
requirement to
measure at fair value financial assets
classified as at
fair value through profit or loss or available
for sale?
(a) No. Such assets are always measured at
fair
value.
(b) Yes. If the fair value of such assets
increases
above cost, the resulting unrealized holding
gains are not recognized but deferred until
realized.
(c) Yes. If the entity has the positive
intention
and ability to hold assets classified in those
categories to maturity, they are measured at
amortized cost.
(d) Yes. Investments in unquoted equity
instruments
that cannot be reliably measured at

fair value (or derivatives that are linked to


and must be settled in such unquoted equity
instruments) are measured at cost.
Answer: (d)
14. What is the effective interest rate of a
bond or
other debt instrument measured at
amortized cost?
(a) The stated coupon rate of the debt
instrument.
(b) The interest rate currently charged by
the
entity or by others for similar debt
instruments
(i.e., similar remaining maturity, cash
flow pattern, currency, credit risk, collateral,
and interest basis).
(c) The interest rate that exactly discounts
estimated
future cash payments or receipts
through the expected life of the debt
instrument
or, when appropriate, a shorter period
to the net carrying amount of the
instrument.
(d) The basic, risk-free interest rate that is
derived
from observable government bond
prices.
Answer: (c)
15. Which of the following is not objective
evidence
of impairment of a financial asset?
(a) Significant financial difficulty of the issuer
or obligor.
(b) A decline in the fair value of the asset
below
its previous carrying amount.
(c) A breach of contract, such as a default or
delinquency
in interest or principal payments.
(d) Observable data indicating that there is a
measurable decrease in the estimated future
cash flows from a group of financial assets
although the decrease cannot yet be
associated
with any individual financial asset.
Answer: (b)
16. Under IAS 39, all of the following are
characteristics
of a derivative except:
(a) It is acquired or incurred by the entity for
the purpose of generating a profit from
short-term fluctuations in market factors.
(b) Its value changes in response to the
change
in a specified underlying (e.g., interest rate,
financial instrument price, commodity price,

foreign exchange rate, etc.).


(c) It requires no initial investment or an
initial
net investment that is smaller than would be
required for other types of contracts that
would be expected to have a similar
response
to changes in market factors.
(d) It is settled at a future date.
Answer: (a)
17. Under IAS 39, is a derivative (e.g., an
equity
conversion option) that is embedded in
another contract
(e.g., a convertible bond) accounted for
separately
from that other contract?
(a) Yes. IAS 39 requires all derivatives (both
freestanding and embedded) to be
accounted
for as derivatives.
(b) No. IAS 39 precludes entities from
splitting
financial instruments and accounting for the
components separately.
(c) It depends. IAS 39 requires embedded
derivatives to be accounted for separately as
derivatives if, and only if, the entity has
embedded
the derivative in order to avoid derivatives
accounting and has no substantive
business purpose for embedding the
derivative.
(d) It depends. IAS 39 requires embedded
derivatives to be accounted for separately if,
and only if, the economic characteristics and
risks of the embedded derivative and the
host contract are not closely related and the
combined contract is not measured at fair
value with changes in fair value recognized
in profit or loss.
Answer: (d)
18. Which of the following is not a condition
for
hedge accounting?
(a) Formal designation and documentation of
the hedging relationship and the entitys risk
management objective and strategy for
undertaking
the hedge at inception of the
hedging relationship.
(b) The hedge is expected to be highly
effective
in achieving offsetting changes in fair value
or cash flows attributable to the hedged risk,
the effectiveness of the hedge can be
reliably

measured, and the hedge is assessed on


an ongoing basis and determined actually to
have been effective.
(c) For cash flow hedges, a forecast
transaction
must be highly probable and must present
an
exposure to variations in cash flows that
could ultimately affect profit or loss.
(d) The hedge is expected to reduce the
entitys
net exposure to the hedged risk, and the
hedge is determined actually to have
reduced
the net entity-wide exposure to the
hedged risk.
Answer: (d)
19. What is the accounting treatment of the
hedging
instrument and the hedged item under fair
value
hedge accounting?
(a) The hedging instrument is measured at
fair
value, and the hedged item is measured at
fair value with respect to the hedged risk.
Changes in fair value are recognized in
profit or loss.
(b) The hedging instrument is measured at
fair
value, and the hedged item is measured at
fair value with respect to the hedged risk.
Changes in fair value are recognized directly
in equity to the extent the hedge is effective.
(c) The hedging instrument is measured at
fair
value with changes in fair value recognized
directly in equity to the extent the hedge is
effective. The accounting for the hedged
item is not adjusted.
(d) The hedging instrument is accounted for
in
accordance with the accounting
requirements
for the hedged item (i.e., at fair value,
cost or amortized cost, as applicable), if the
hedge is effective.
Answer: (a)
20. What is the accounting treatment of the
hedging
instrument and the hedged item under cash
flow
hedge accounting?
(a) The hedged item and hedging instrument
are
both measured at fair value with respect to
the hedged risk, and changes in fair value
are recognized in profit or loss.

(b) The hedged item and hedging instrument


are
both measured at fair value with respect to
the hedged risk, and changes in fair value
are recognized directly in equity.
(c) The hedging instrument is measured at
fair
value, with changes in fair value recognized
directly in equity to the extent the hedge is
effective. The accounting for the hedged

item is not adjusted.


(d) The hedging instrument is accounted for
in
accordance with the accounting
requirements
for the hedged item (i.e., at fair value,
cost or amortized cost, as applicable), if the
hedge is effective.
Answer: (c)