QUESTIONS & ANSWERS BANKCONTENTS QUESTIONS & ANSWERS BANK QUESTIONS PART A: OBJECTIVE TEST QUESTIONS CHAPTER 1: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING. ‘CHAPTER 2: ACCOUNTING FOR INFLATION... ‘CHAPTER 3: REGULATORY FRAMEWORK... CHAPTER 4A; PROPERTY, PLANT AND EQUIPMENT. a (CHAPTER 4B: INVESTMENT PROPERTY & NON-CURRENT ASSET HELD FOR SALE... CHAPTER 4C: GOVERNMENT GRANTS... CHAPTER 5: INTANGIBLE NON-CURRENT ASSET. CHAPTER 6: INVENTORY AND AGRICULTURAL/BIOLOGICAL ASSET. CHAPTER 7: IMPAIRMENT OF ASSETS (CHAPTER 8: FINANCIAL INSTRUMENT. (CHAPTER 9: LEASE. o ‘CHAPTER 10; PROVISION, CONTINGENT LIABILITIES AND CONTINGENT ASSETS. sn (CHAPTER 11: REVENUE smn soon (CHAPTER 12: FOREIGN CURRENCY TRANSACTIONS .rsnsnvnnnsnnnnnnn sow CHAPTER 13: TAXATION 2 CHAPTER 14: PREPARATION OF FINANCIAL STATEMENTS FOR SINGLE ENTITY. 13 CHAPTER 15: PREPARATION OF SINGLE ENTITY FINANCIAL STATEMENTS - STATEMENT OF CASH FLOW 13 ‘CHAPTER 16: INTRODUCTION TO GROUPS... 14 ‘CHAPTER 17; PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT ~STATEMENT OF FINANCIAL POSITION nnnsntnnnnnnininnnnnnininnnnninnnnnnnsnnnsn 15 CHAPTER 18A: PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME. 16 CHAPTER 188: ACCOUNTING FOR ASSOCIATES 7 CHAPTER 19: EARNING PER SHARE 19 ‘CHAPTER 20: ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATE AND ERRORS... sod (CHAPTER 21: EVENTS AFTER THE REPORTING PERIOD ser nO (CHAPTER 22: CALCULATION AND INTERPRETATION OF ACCOUNTING RATIOS AND TRENDS ..snesnom-20 (CHAPTER 23: LIMITATION OF FINANCIAL STATEMENT AND INTERPRETATION TECHNIQUES eed (CHAPTER 24: ACCOUNTING FOR SPECIALISED, NOT-FOR-PROFIT, AND PUBLIC SECTOR ENTITIES.....-21 PART B: MULTIPLE CHOICE CASES. ‘Quesmiow 1: (SeeTEMBER 2016). ‘QuesmioN 2: (SEPTEMBER 2016)... ‘Quesmion 3: (SePTeMaER 2016): QUESTION 4: (MAR-JUN 2019): .. ‘QuesmioN 5: (MaR-JuN 2019): ‘QuesmioN 6: (Maz -JUN 2019}:PART C: FINANCIAL STATEMENT PREPARATION & INTERPRETATION ‘TYPE 1: FINANCIAL STATEMENT PREPARATION nnn sont ‘T¥PE 2: PERFORMANCE APPRAISAL. 32 ‘T¥PE 3: CONSOLIDATION. 34 MOCK TEST - QUESTION. PART A. PART. PARTC. ANSWER. PART A: OBJECTIVE TEST QUESTIONS. (CHAPTER 1: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING... sn CHAPTER 2: ACCOUNTING FOR INFLATION... nO (CHAPTER 3: REGULATORY FRAMEWORK... — — — son (CHAPTER 4A: PROPERTY, PLANT AND EQUIPMENT ese sence (CHAPTER 4B: INVESTMENT PROPERTY & NON-CURRENT ASSET HELD FOR SALE wrontnnnntnennneS2 CHAPTER 4C: GOVERNMENT GRANTS 54 CHAPTER 5: INTANGIBLE NON-CURRENT ASSET. 56 CHAPTER 6: INVENTORY AND AGRICULTURAL/BIOLOGICAL ASSET. 59 (CHAPTER 7: IMPAIRMENT OF ASSETS wn 60 (CHAPTER 8: FINANCIAL INSTRUMENT... 62 (CHAPTER 9: LEASE. sen nb (CHAPTER 10: PROVISION, CONTINGENT LIABILITIES AND CONTINGENT ASSETS... ontnnnnnnenns65 (CHAPTER 11: REVENUE oe ee CHAPTER 12: FOREIGN CURRENCY TRANSACTIONS 67 CHAPTER 13: TAXATION 67 CHAPTER 14: PREPARATION OF FINANCIAL STATEMENTS FOR SINGLE ENTITY. 68 CHAPTER 15: STATEMENT OF CASH FLOW (IAS 7)... 69 CHAPTER 16: INTRODUCTION TO GROUPS... 70 ‘CHAPTER 17; PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF FINANCIAL POSITION nner sonnei seinen CHAPTER 18A: PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME. a CHAPTER 188: ACCOUNTING FOR ASSOCIATES 76 CHAPTER 19: EARNING PER SHARE 79 ‘CHAPTER 20: ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATE AND ERRORS... sn 82 (CHAPTER 21: EVENTS AFTER THE REPORTING PERIOD jer 83 ‘CHAPTER 22: CALCULATION AND INTERPRETATION OF ACCOUNTING RATIOS AND TRENDS. 8 (CHAPTER 23: LIMITATION OF FINANCIAL STATEMENT AND INTERPRETATION TECHNIQUES «00-85 (CHAPTER 24: ACCOUNTING FOR SPECIALISED, NOT-FOR-PROFIT, AND PUBLIC SECTOR ENTITIES.......85PART B: MULTIPLE CHOICE CASES. QUESTION 1: (SEPTEMBER 2016). QUESTION 2: (SEPTEMBER 2016). QUESTION 3: (SEPTEMBER 2016). QuESTION 4: (MAR-JUN 2019) ‘Question 5 (Mas-JuN 2019) QUESTION 6: (MAR -JUN 2019)....-senson PART C: FINANCIAL STATEMENT PREPARATION & INTERPRETATION .w.sssernsnnnnnseseseeseeeeee 100 ‘TVPE 1: FINANCIAL STATEMENT PREPARATION.. ‘TWPE 2: PERFORMANCE APPRAISAL... ‘Tyee 3: CONSOLIDATION, MOCK TEST - ANSWER.QUESTIONSPART IBJECTIVE TEST QUESTIONS CHAPTER 1: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING ‘Question 1.1: Which of the following would be classified as a liability? A. TH's business manufactures a product under license. In 12-months’ time the license expires and TH will have to pay $90,000 for it to be renewed. B. VIC purchased an investment 10 months ago for $100,000. The market for these investments has now fallen and VIC's investment is valued at $90,000. C. SAP has estimated the tax charge on its profits for the year just ended as $200,000. D. Duolingo is planning to invest in new machinery and has been quoted a price of $268,000. Question 1.2: Which of the following is an example of following the principle of faithful representation? ‘A, Showing lease payments as a rental expense B, Being prudent by recording the entire amount of a convertible loan asa liability C. Creating a provision for staff relocation costs as part of a planned restructuring D. Recording a sale and repurchase transaction with a bank as a loan rather than a sale eee CHAPTER 2: ACCOUNTING FOR INFLATION Question 2.1: Which of the following statements is true about historical cost financial statements in times of rising prices? A. Profits will be overstated and assets will be understated B, The asset values will be overstated C. Unrecognized gains will be recorded incorrectly D. Depreciation will be overstated Question 2.2: Drexler acquired an item of plant on 1 October 20X2 at a cost of $500,000. It has a Useful life of five years (straight-line depreciation) and an estimated residual value of 10% of its historical cost or current cost as appropriate. As at 30 September 20X4, the manufacturer of the plant still makes the same item of plant and its current price is $600,000. What is the correct carrying amount to be shown in the statement of financial position of Drexler as at 30 September 20X4 under historical cost and current cost?Historical cost Current cost $ $ ‘A. 320,000 600,000 B. 320,000 384,000 C. 300,000 600,000 D. 300,000 384,000 soe CHAPTER 3: REGULATORY FRAMEWORK Question 3.1: The process for developing an International Financial Reporting Standard involves ‘a number of stages. During the early stages of a project, the IASB will undertake consultation on the key issues. Which of the following is correct regarding the early stages of the process? A In the early stages of the project, the IASB will issue a Discussion Paper to obtain views from the public B. In the early stages of the project, the IASB will consult with the Advisory Committee and IFRS Advisory Council to seek out the key issues. C. Inthe early stages of the project, the IASB will issue a Discussion Paper then consult with the Advisory Committee D. In the early stages of the project, the IASB will issue an Exposure Draft to obtain views from the public Question 3.2: Which TWO of the following statements regarding systems of regulation of accounting are true? A. IFRS will require more detailed regulations than GAAP, B. GAAP will tend to give rise to a larger number of accounting standards than IFRS . IFRS seeks to cover every eventuality D. IFRS requires the exercise of more judgement in application than a GAAP. ‘Question 3.3: Which of the following statements is NOT true? A. In some countries, accounting standards can be a detailed set of rules which companies must follow B. Local accounting standards can be influenced by the tax regime within a country . Accounting standards on their own provide a complete system of regulation D. Accounting standards are particularly important where a company's shares are publicly traded SoeCHAPTER 4A: PROPERTY, PLANT AND EQUIPMENT Question 4A.1: Tusco Co takes 3 different current sources of borrowings for its purchase of an ‘asset of $10,000, taking 1 year to build, 5% overdraft 2,000; 8% Loan 6,000 and 10% Loan 4,000. How much interest would go to the cost of the asset? A. $850 B. $820 c. $817 D.940 Question 4A.2: Peak pls owns an aircraft that, by law, requires a major overhaul every three years. The cost ofthis overhaul this year was $60,000 and has just been completed by the end of Peak pls’s financial year end, 31 December, 2014. What will be the correct treatment for the overhaul costs? A. Expense the full amount in the 2014 Statement of profit or loss B. Provide the present value of $60,000 payable in three years’ time C. Capit D. Provide $20,000 in each of 2015 and 2016 so that there has already been provided $40,000 towards the anticipated cost in 2017 ize and depreciate over three years to December 2017 ooo CHAPTER 4B: INVESTMENT PROPERTY & NON-CURRENT ASSET HELD FOR SALE Question 4B.1: Which of the following properties owned by Scoop would be classified as an investment property? A. Aproperty that had been leased to a tenant but which is no longer required and is now being held for resale B, Land purchased for its invest ment potential. Planning permission has not been obtained for building construction of any kind C. Anew office building used as Scoop’s head office, purchased specifically in order to exploit its capital gains potential D. Astately home used for executive training Question 4B.2: KYS Co purchased a new building with a 50-year life for $5 million on 1 January 20X0. On 30 June 20X2, KYS Co rented it out to third parties on a short-term lease, KYS Co uses. the fair value model for investment properties. At 30 June 20X2 the fair value of the property was $5.5 million and at 31 December 20X2 it was $5.75 million. Whats the total net amount to be recorded in the statement of profit or loss and other comprehensive income in respect of the office for the year ended 31 December 20X2?Profit or loss (net income) Other comprehensive income ‘A. 300,000 500,000 8. 200,000 750,000 c. 400,000 800,000 500,000 850,000, Question 4B.3: IFRS 5 Non-current Assets Held for Sale and Discontinued Operations prescribes the recognition criteria for non-current assets held for sale. For an asset or a disposal group to be classified as held for sale, the sale must be highly probable. Which of the following must apply for the sale to be considered highly probable? (1) A buyer is not necessary to be located (2) The asset must be marketed at a reasonable price (3) Management must be committed to a plan to sell the asset (4) The sale must be expected to take place within the next six months A. 2and 3 B, 3and4 C Landa D. 1and2 soe CHAPTER 4C: GOVERNMENT GRANTS Question 4C.1: Which TWO of the following statements about IAS 20 Accounting for Government Grants and Disclosure of Government Assistance are true? (i) A government grant related to the purchase of an asset must be deducted from the carrying amount of the asset in the statement of financial position (ii) A government grant related to the purchase of an asset should be recognised in profit or loss over the life of the asset Free marketing advice pro of government grants jed by a government department is excluded from the definition (iv) Any required repayment of a government grant received in an earlier reporting period is treated as prior period adjustment A. (i) and (i) 8. (il) and (it) C. (il) and (iv) D. (ii) and (iv) Question 4C.2: On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to equipment which cost $90,000 and had a useful life of six years.The grant was netted off against the cost of the equipment. On 1 January 20X7, when the equipment had a carrying amount of $50,000, its use was changed so that it was no longer being used in accordance with the grant. This meant that the grant needed to be repaid in full but by 31 December 20X7, this had not yet, been done. Which journal entry is required to reflect the correct accounting treatment of the government grant and the equipment in the financial statements of Gardenbugs Co for the year ended 31 December 20X7? A. Dr PPE $10,000 C. Dr PPE $10,000 Dr Depreciation expense $20,000 Dr Depreciation expense $15,000 cr Cash $30,000 Dr Retained earnings $5,000 Cr Liability $30,000 B. Dr PPE $15,000 D. Dr PPE $20,000 Dr Depreciation expense $15,000 “Dr Depreciation expense $10,000 cr Cash $30,000 Cr Liability $30,000 ooo CHAPTER 5: INTANGIBLE NON-CURRENT ASSET Question 5.1: Which of the following could be classified as development expenditure in M's statement of financial position as at 31 March 2070 according to IAS 38 Intangible Assets? ‘A. $150,000 spent on developing a prototype and testing a new type of production system. The system is note viable and project needs further work on it. B. A payment of $250,000 to a national engineering faculty to research new environmentally friendly building techniques, C. $500,000 developing an electric car. This is near completion and the product will be launched soon. As this project is first of its kind, itis expected to make a loss. D. $70,000 developing a special type of new packaging for a new energy-efficient solar energy battery. The packaging is expected to reduce M's distribution costs by $20,000 a year. Question 5.2: Dempsey’s year end is 30 September 20X4. Dempsey commenced the development stage of a project to produce a new pharmaceutical drug on 1 January 20X4, Expenditure of ‘$40,000 per month was incurred until the project was completed on 30 June 20X4 when the drug, went into immediate production.The directors became confident of the project's success on 1 March 20X4. The drug has an estimated life span of five years; time apportionment is used by Dempsey where applicable. What amount will Dempsey charge to profit or loss for development costs, including any amortization, for the year ended 30 September 20X4? v ,000. Question 5.3: A Co had $10 million of capitalised development expenditure at cost brought forward at 1 October 20X0 in respect of products currently in production and a new project began on the same date. The research stage of the new project lasted until 31 December 20X0 and incurred $0.7 million of costs. From that date the project incurred development costs of $400,000 per month. On 1 April 20X1 the directors of A Co became confident that the project would be successful and yield a profit well in excess of costs. The project was still in development at 30 September 20X1. Capitalised development expenditure is amortised at 20% per annum using the straight-line method. ‘What amount will be charged to profit or loss for the year ended 30 September 20X8 in respect of research and development costs? ‘A. $4,140,000 B. $3,440,000 C. $3,900,000 D. $1,900,000 ‘Question 5.4: (Mar 2020) New Designs Co is considering the following potential assets for inclusion in its statement of, financial position. Indicate, at each line of options, which of the options below should be recognized as intangible assets (*). (*) In CBE exam, this question will be presented as drag and drop style. Options Intangible assets (i) Brand name developed by New (ii) $3m spent on a licence to Designs worth $10m operate a production facility for six years (iii) $2.5m spent on new equipment to _| (iv) $3m paid to acquire the brand develop a new successful product name Fast Designs(v) $2m spent on an advertising campaign expected increase revenue by $20m (vi)$1m spent on the construction of a product prototype before its launch (vii) $1.5m spent on training customer service staff expected to (viii) $2m paid as goodwill when acquiring Unique Co increase revenue by $5m ee CHAPTER 6: INVENTORY AND AGRICULTURAL/BIOLOGICAL ASSET Question 6.1: In which of the following situations is the net realisable value of a line of inventory unlikely to be lower than cost? ‘A. The colour of the dresses in inventory is a deep purple very much last year's colour. B. A customer has just started a high-court action against the entity alleging personal injury suffered as a result at using the product. C. The item is lurking in a comer of the warehouse, is covered in dust and has not been sold within the last 10 months, D. The entity has taken a policy decision not to continue to manufacture this product. Question 6.2: Wined is a viticulturalist who produces wine from grapes grown on his own Property. Which of Wined's assets is subject to IAS 41 Agriculture and biological asset? ‘A. The 4,000 tons of grapes in the holding bay waiting to be processed into wine. B, The 400 hectares of land that was acquired by Wined's great-grand-father. C. The 3,500,000 bottles of wine stored in a refrigerated warehouse holding the produce from last year's yield. D. The 300,000 grape vines that have been producing grapes for 4 generations of Wined's family. Question 6.3: Masan owned cattle recorded in the financial statements at $5,250 on 1 January 20X4, At 31 December 20X4 the cattle have a fair value of $6,500. If Masan sold the cattle, commission of 2% would be payable. What is the correct accounting treatment for the cattle at 31 December 20X4 according to 1AS 41 Agriculture? A. Hold at cost of $5,250 B, Revalue to $6,500, taking gain of $1,250 to the statement of profit or loss C. Revalue to $6,500, taking gain of $1,250 to the revaluation surplus D. Revalue to $6,370, taking gain of $1,120 to the statement of profit or loss oe 7CHAPTER 7: IMPAIRMENT OF ASSETS Question 7. IAS 36 Impairment of Assets contains a number of examples of internal and external events which may indicate the impairment of an asset. In accordance with IAS 36, which of the following would definitely NOT be an indicator of the potential impairment of an asset (or group of assets)? ‘A. An unexpected fall in the market value of one or more assets B. Adverse changes in the economic performance of one or more assets . A significant change in the technological environment in which an asset is employed making its software effectively obsolete D. The carrying amount of an entity’s net assets being below the entity's market capitalisation Question 7.2: The net assets of FLC, a cash generating unit (CGU), are: s Property, plant and equipment 300,000 Allocated goodwill 50,000 Product patent 20,000 Net current asset 30,000 400,000 ‘Asa result of adverse publicity, FLC has a recoverable amount of only $300,000. What would be the value of FLC’s property, plant and equipment after the allocation of the impairment loss? A. $253,125 B. $263,875, C. $300,000 D. $273,875 eeeCHAPTER 8: FINANCIAL INSTRUMENT Question 8.1: Which of the following is NOT classified as a financial instrument under IAS 32 Financial Instruments: Presentation? A. Share options B. Intangible assets C. Trade receivables D. Redeemable preference shares ‘Question 8.2: For which category of financial instruments are transaction costs excluded from the initial value? A. Financial liabilities at amortised cost B, Financial assets at fair value through profit or loss C. Financial assets at fair value through other comprehensive income D. Financial assets at amortised cost Question 8.3: Tusco company issues 10,000 convertible bonds at the start of 20X2. The bonds have a three-year term, and are issued at par with a face value of $150 per bond, giving total proceeds of $1,500,000. interest is payable annually in arrears at a nominal annual interest rate of 5%. Each bond is convertible at any time up to maturity into 250 ordinary shares. When the bonds are issued, the prevailing market interest rate for similar debt without conversion options is 8%, ‘What is the value of the equity component in the bond? eee CHAPTER 9: LEASE Question 9.1: Which of the following would NOT be included wit of-use asset? A. Installation cost of the asset B. Estimated cost of dismantling the asset at the end of the lease period C. Payments made to the lessor before commencement of the lease D. Total lease rentals payable under the lease agreementQuestion 9.2: IFRS 16 Leases permits certain assets to be exempt from the recognition treatment. for right-of-use assets, Which of the following assets leased to an entity would be permitted to be exempt? A. Aused motor vehicle with an original cost of $15,000 and a current fair value of $700, leased for 24 months B, Anew motor vehicle with a cost of $27,000, leased for 36 months C. Anew motor vehicle with a cost of $15,000, leased for 36 months, to be rented to customers on a daily rental basis D. Anew motor vehicle with a cost of $27,000, leased for 12 months Question 9.3: (On 1 April 20X7 NCC entered into an agreement to lease a machine with fair value of $40,000 and an estimated life of four years. NCC is required to pay for all maintenance and insurance costs relating to the asset. Annual rentals of $20,000 are payable in advance from 1 April 20X7. The machine is expected to have a nil residual value at the end of its life. The present value of lease payment is $60,000. The lessor includes a finance cost of 10% per annum when calculating annual rentals Calculate lease liability for the year ended 31 March 20X9? s eee CHAPTER 10: PROVISION, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Question 10.1: A company knows that when it ceases a certain operation in 5 year-time it will have to pay environmental cleanup costs of $10m.The provision to be made now will be the present value of $10m in 6 year-time. The relevant discount rate in this case is 896. Determines Unwinding provision for the cleanup cost at year 2? s Question 10.2: NCC is a car manufacture company. Which of the following would require a Provision for a liability to be created by NCC at its reporting date of 31 October 20X9? A. The government introduced new laws on environment protection which come into force on 15 February 20Y0. Company's directors have agreed that this will require a big chance in technology. At 31 October 20X9, board of directors was waiting on a report to identify actual technology requirements, B, At the year-end NCC is negotiating with its insurance provider about an outstanding insurance claim. On 20 November 20X9, the provider agreed to pay $2,000,000. C. NCC makes refunds to customers for any cars returned that are detected technical defects D. A customer is suing NCC for damages alleged to have been caused by NCC’s car. NCC is countering the claim and at 31 October 20x9 and NCC’s legal advisers advise that company is, very unlikely to lose this case. 10CHAPTER 11: REVENUE Question 11.1: Which TWO of the following do not consignment inventory? icate that the inventory in question is ‘A. Manufacturer can require dealer to return the inventory B. Dealer has no right of return of the inventory C. Manufacturer bears obsolescence risk D. Dealer bears slow movement risk Question 11. ‘A mobile phone company gives customers a free handset when they sign a two-year contract for provision of network services. The handset has a standalone price of $150 and the contract is for ‘$30 per month. Alllocating the transaction price to the performance obligations. eee CHAPTER 12: FOREIGN CURRENCY TRANSACTIONS Question 12.1: IAS 21 sets out how entities that carry out transactions in a foreign currency should measure the results of these transactions at the year end. Using the picklist provided, select which exchange rate should non-monetary items carried at historical cost be measured? A. Closing rate B. Average rate C. Rate at date of transaction D. Rate at beginning of the year Question 12.2: Company Tusco bought goods priced at €40,000 from NCC Co - a France company ‘on 1 November 20X9. The invoice is due for settlement in two equal instalments on 1 December 20X9 and 1 January 2070. The exchange rate moved as follows: 1 November 20X9 - 1.52 to $1. 1 December 20X9 - 1.50 to $1 31 December 20X9 - 1.54 to $1 What will be the net exchange gain or loss to be reported in the fina Co at 31 December 20X8? statements of Tusco eee 1CHAPTER 13: TAXATION Question 13.1: Statements of The statements of financial position of Tut Co include the following extracts: ancial position as at 30 November 20x8 ($m) 20X7($m) Deferredtax 400 120 Current tax 150 180 The tax charge in the statement of profit or loss for the year ended 30 November 20X8 is $270 million. What amount of tax was paid during the year to 30 November 202? 8. m Question 13.2: Tamsin Co’s accounting record shown the following: $ Income tax payable for the year 60,000 Over provision in relation to the previous year 4,500 Opening provision for deferred tax 2,600 Closing provision for deferred tax 3,200 What is the income tax expense that will be shown in the statement of profit or loss for the year? ‘A. $54,900 8, $67,700 C. $65,100 D. $56,100 Question 13.3: Custard Co purchased an asset costing $1,500. At the end of 20X8 the carrying amount is $1,000. The cumulative depreciation for tax purposes is $900 and the current tax rate is 25%. Calculate the deferred tax liability for the asset. soe 12CHAPTER 14: PREPARATION OF FINANCIAL STATEMENTS FOR SINGLE ENTITY Question 14.1: Which of the following would NOT be shown in the profit or loss section of the statement of profit or loss and other comprehensive income? ‘A. Adecrease in valuation on an investment property B. Profit on sale of an investment . Arevaluation loss of machine D. A revaluation gain of PPE Question 14.2: Which of the following could NOT appear as separate items in the statement of changes in equity required by 1AS | Presentation of Financial Statements as part of a company’s financial statements? ‘A. Gain on revaluation of land. B. Loss on sale of investments. C. Prior year adjustments, D. Proceeds of an issue of ordinary shares. eee CHAPTER 15: PREPARATION OF SINGLE ENTITY FINANCIAL STATEMENTS - STATEMENT OF CASH FLOW Question 15.1: IAS 7 Statement of Cash Flows sets out the three main headings to be used in a statement of cash flows. Which TWO of the items below would be included under the heading ‘Cash flows from investing activities’ according to IAS 7? A. Tax paid B, Purchase of investments C. Dividend paid D. Interest received Question 15.2: The statement of financial position of Company X at 31 December 20X9 showed PPE with a carrying amount of $2,000,000. At 31 December 2070 it had increased to $3,000,000. During the year to 31 December 20Y0, a plant with a carrying amount of $250,000 was sold at a loss of $100,000; depreciation of $300,000 was charged and $150,000 was added to the revaluation surplus in PPE. What amount should appear under the statement of cash flows of ‘Company X for the year ended 31 December 20Y0 as cash paid to acquire PPE? 13A. $1,370,000 B. $1,440,000 Cc. $1,400,000 D. $1,350,000 Question 15. uring the year to 31 July 20X6, Spans made a profit of $75,000 after accounting for depreciation of $5,000. During the year non-current assets were purchased for $32,000, receivables increased by $4,000, inventories decreased by $7,200 and trade payables increase by $1,400. ‘What was the increase in cash and bank balances during the year? se Question 15.4: Lane Co had the following balances in its statement of financial position as at 30 June 20X1 and 20X2: 20x2 20X1 Share capital $340,000 $300,000 Share premium $105,000 $95,000 10% debentures $170,000 $190,000 How much will appear in the statement of cash flows for the year ended 30 June 20X2 under the heading ‘cash flows from financing activities’? 000 eee CHAPTER 16: INTRODUCTION TO GROUPS Question 16.1: Which of the following situations is unlikely to represent control over an investee? ‘A. Owning 51% and being able to elect 5 of the 8 directors B. Owning 51%, but the constitution requires that decisions need the unanimous consent of shareholders C. Having currently exercisable options which would take the shareholding of the company to 55% D. Owning 45% of the shares, but having the majority of voting rights within the company 14Question 16.2: Which of the following is NOT a condition which must be met for the parent to be exempt from producing consolidated financial statements? ‘A. The activities of the subsidiary are significantly different to the rest of the group and to consolidate them would prejudice the overall group position. B, The ultimate parent company produces consolidated financial statements that comply with IFRS Standards and are publicly available. C. The parent's debt or equity instruments are not traded in a public market. D. The parent itself is a wholly-owned subsidiary or a partially-owned subsidiary whose owners do not object to the parent not producing consolidated financial statements. soe CHAPTER 17: PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF FINANCIAL POSITION Question 17.1: Company Tusco acquired 80% of the 1,000,000 equity shares of TNC, its only subsidiary, on 1 April 20X9 when the retained earnings of TNC Co were $400,000. The carrying amounts of TNC Co's net assets at the date of acquisition were equal to their fair values. Tusco measures non-controlling interest at fair value, based on share price. The market value of TNC shares at the date of acquisition was $2. At 31 March 20Y0 the retained earnings of TNC Co were $800,000. ‘At what amount should the non-controlling interest appear in the consolidated statement of financial position of Tusco at 31 March 20Y0? Question 17.2: Company X acquired 100% of company Y on 1 January 20X8, paying $8 million cash, including $500,000 professional fees. X also agreed to pay $12 million on 1 January 20Y0. X has a cost of capital of 10%, Identify the components to be included within the calculation of goodwill for the acquisition of company Y for the year ended 31 December 20X8 Question 17.3: Which of the following statements about intra-group profits in consolidated financial statements is/are correct? (i) The profit made by a parent on the sale of goods to a subsidiary is only realized when subsidiary sells the goods to a third party (ii) Eliminating intra-group unrealized profit never affects non-controlling interests (ii) The profit element of goods supplied by the parent to an associate and held in year-end inventory must be eliminated in partly A. (i) only, B. (i), (i), . (i)and (it) D. (ii) and (ii) only 15CHAPTER 18A: PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Question 18A.1: Pright Co has owned 80% of company Sors for many years. It also holds a $6 million 10% loan note from company Sors Co. One of Sors's non-current assets has suffered an impairment of $70,000 during the year. There is a balance in the revaluation surplus of Sors Co of $40,000 in respect of this asset. The impairment loss has not yet been recorded. The entity financial statements of Sors Co show a profit for the year of $1.5 million. What is the amount attributable to the non-controlling interests in the consolidated statement of profit or loss? . Question 18A.2: On 30 June 20X9, the Max group disposed of its 70% holding in the ordinary shares of Min for $20 million in cash. The non-controlling interest at the acquisition date was measured at its fair value of $3.5 million. Min’s net assets at the acquisition and the disposal date were $7 million and $12 million respectively. Goodwill arising on the acquisition of Min of $2.5, rmillion had been fully impaired by the disposal date. Using the drop-down box, select what is the profit arising on the disposal of Min that will be recorded in the consolidated statement of profit or loss for the year ended 31 December 20X9? | Pick list $12.25 million $17.25 million $14.5 million $11.5 million Question 18A.3: Company X acquired 75% of company Y on 1 April 20X9. In September 20X9 company X sold $50,000 worth of goods to Y. Company X applies a 25% mark-up to all its sales. 15% of these goods were still held in inventory by company Y at the end of the year. An extract from the draft statements of profit or loss of X and Y at 31 December 20X9 is: XCo(S) Yco(S) Revenue 1,058,000 455,500 Cost of sales (507,200) (222,600) Gross profit 550,800, 232,900 ‘What will be shown as gross profit in the consolidated statement of profit or loss of company X for the year ended 31 December 20X9? se 16‘Question 184. Pater Co acquired 80% of the issued equity share capital of Sono Co on 1 May 20X1, when the balance on Sono Co's retained earnings was $520,000. |: (Sep/Dec 2020) (On 15 November 20X8, Sono Co made $240,000 sales of goods to Pater Co, on which Sono Co made a mark-up (on cost) of 20%. Pater Co subsequently sold one-quarter of these goods to external parties prior to 31 December 20X8. ‘At 31 December 208, the retained earnings of Pater Co and Sono Co were $4m and $3.4m respectively. What retained earnings should be reported in Pater Co's consolidated statement of financial position as at 31 December 20X8 (to the nearest $'000)? $ ,000. eee CHAPTER 188: ACCOUNTING FOR ASSOCIATES ‘Question 188.1: On 1 October 20X8 Company X purchased 40 million of company ¥ 100 million shares in exchange for 75 million of its own shares. The fair value of X’s shares at the date of this share exchange was $2 each. Y's profit is subject to seasonal variation. Profit of company Y for the year ended 31 March 20X9 was $110 million. $35 million of this profit was made from 1 April 20X8 to 30 September 20X8. X has one subsidiary and no other investments apart from company y, What amount will be shown as ‘investment in associate’ in the consolidated statement of financial position of X as at 31 March 209? ‘A. $145 million B. $150 million €. $180 million D. $125 million Question 188.2: Company X bought 40% of company ¥ on 1 October 20X9. Profit of Y for the year is $5,000,000. Y paid a dividend to X of $600,000 on 1 December 20X8. At the year end, the investment in ¥ was judged to have been impaired by $200,000. What will be the share of profit from associate shown in the consolidated statement of profit or loss for the year ended 31 December 20X9? ‘A. $450,000 8. $400,000 c. $300,000 D. $200,000 7Question 18B.3: (Sep/Dec 2020) Identify (by matching) TWO associate companies of Zuckal Co (one from each group of three) {in real CBE exam, this question could be presented as a drag and drop). ‘Acquisition of 10% of Artles Co. Zuckal has no representation on the board of Artles. All decisions are at board level. ‘Acquisition of 40% of Bandoka Co. Due to an agreement with other stakeholders, Zuckal Associate 1 effectively holds 52% of the voting rights. ‘Acquisition of 50% of Castur Co. Zuckal has appointed two of the five board members. Acquisition of 21% of Dunnatonn Co. However, the other 79% of Dunnatonn is owned by Yentee Co, a company with no links to Zuckal. ‘Acquisition of 70% of Eahnn Co. Zuckal has been able to direct the operating policies of Eahnn Co for many years, and has exercised that right. Associate 2 Acquisition of 15% of Fumitt Co. Zuckal can appoint one of Fumitt’s five board members. No party can appoint more than two. eee 18CHAPTER 19: EARNING PER SHARE Question 19.1: At 1 January 20X9 Company X had 5 million $1 equity shares in issue. On 1 June 20X39 it made a 1 for 5 rights issue at a price of $1. The market price of the shares on the last day of quotation with rights was $1.50. Total earnings for the year ended 31 December 20X9 was $8 million. What were the earnings per share for the year? A. $1.35 B. $1.36 c. $1.39 D. $1.4 ‘Question 19.2: In 20X7 Farrah Co had earnings of $150,000 and 110,000 ordinary $1 shares. It also had in issue $30,000 15% convertible loan stock which is convertible in two years’ time at the rate of 3 ordinary shares for every $5 of stock, The rate of tax is 20%. What was the diluted earnings per share for the year? A. $115 B. $1.2 C. $1.25 D. $1.10 ‘Question 19.3: Company Tusco had 10 million ordinary shares in issue throughout the year ended 30 July 20X9. On 1 August 20X8 it had issued $2 million of 8% convertible loan stock, each $5 of loan stock convertible into 4 ordinary shares on 1 July 20X6 at the option of the holder. Tusco Co had profit for the year ended 30 July 20X3 of $2,500,000. It pays tax on profits at 25%. What was diluted earnings per share for the year? A, $0,185 B. $0.25 c. $0.23 D. $0.20 eee CHAPTER 20: ACCOUNTING POLICIES, CHANGE IN ACCOUNTING ESTIMATE AND ERRORS ‘Question 20.1: Which of the following is a change in accounting policy? ‘A. Acchange in the method of depreciation from reducing balance basis to straight line B. A Changes in the amount of expected warranty obligations C. Achange in presentation of statement of cash flow from direct to indirect D. A change in the useful life of a PPE Question 20.2: Which of the following is change of accounting estimate? ‘A. Acchange in the method of recognition of inventory from perpetual to periodic B.A change in the method of measurement of PPE from cost model to revaluation model C. Achange in the method of measurement of inventory from FIFO to AVCO D. A change in the provisions for bad debts wee 19CHAPTER 21: EVENTS AFTER THE REPORTING PERIOD Question 21. Using the requirements set out in IAS 10 Events after the Reporting Period, which of the following would be classified as an adjusting event after the reporting period in financial statements ended 31 March 20X9 that were approved by the directors on 31 August 20X9? ‘A. A dismissal of financial director proposed by a director on 31 January 20X9 and agreed by the Board on 10 July 20x9. B. A strike by the workforce which started on 2 April 20X9 and stopped all production for 2 months before being settled. C. The receipt of cash on April 20X9 from a claim on an insurance policy for damage caused by a fire in a warehouse on 1 January 20X9. The claim was made in January 20X9 but the amount of the claim had not been recognized at 31 March 20X9 as it was uncertain that any money would be received. D. At 31 March 20X9, a big customer with a balance outstanding at the year-end is bankrupt Question 21. Each of the following events occurred after the reporting date of 31 March 2015, but before the financial statements were authorized for issue. Which would be treated as a NON-adjusting event under IAS 10 Events After the Reporting Period? ‘A.A public announcement in April 2015 of a formal plan to discontinue an operation which had been approved by the board in February 2015 B, The settlement of an insurance claim for a loss sustained in December 2014 C. Evidence that $20,000 of goods which were listed as part of the inventory in the statement of, financial position as at 31 March 2015 had been stolen D. A sale of goods in April 2015 which had been held in inventory at 31 March 2015. The sale was made at a price below its carrying amount at 31 March 2015 eee CHAPTER 22: CALCULATION AND INTERPRETATION OF ACCOUNTING RATIOS AND TRENDS Question 22.1: Reducing what the elements will increase the length of a company's operating cycle? A. Receivables collection period B. Inventory holding period C. Payables payment period D. Time taken to produce goods 20Question 22. $200,000. Which of the following transactions would decrease Tusco’s gearing compared to what it would have been had the transaction taken place? (Each transaction should be considered separately) {t 31 April 20X9, Tusco had shareholders’ funds (equity) of $300,000 and debt of AA. During the year a property was revalued downwards by $20,000 B. A bonus issue of equity shares of 2 for 5 was made during the year using other components of equity C. A provision for estimated damages was increased during the year from $20,000 to $30,000 based on most recent legal advice D. An asset with afar value of $55,000 was acquired under a finance lease on 31 October 20x9 fee (CHAPTER 23: LIMITATION OF FINANCIAL STATEMENT AND INTERPRETATION TECHNIQUES Question 23.1: Which of the following statements is NOT window dressing? A. Record an unusually low bad debt provision. B. Offer early shipment discounts to get revenues in current year. C. Withhold supplier payments, so that they are recorded in a later period. D. Using FIFO (and to some degree the weighted average method) inventory being used might be valued as the earliest purchases. Question 23.2: Which of the following statements is NOT a cause of limitation of financial statements? ‘A. Parent companies may find reasons for not consolidating with heavily-indebted subsidiaries B, Transfer assets from parent to subsidiaries at price higher than fair value . Company X provided medical mask exclusively D. Disposal of subsidiary or division eee CHAPTER 24: ACCOUNTING FOR SPECIALISED, NOT-FOR-PROFIT, AND PUBLIC SECTOR ENTITIES Question 24.1: Which of the following IFRS requirements would NOT be relevant to a not-for- profit entity? A. Preparation of a statement of financial position. B. Amendment of adjusting events after the reporting date. C. Disclosure of dividends per share. D. Disclosure of non-adjusting events after the reporting date. 21Question 24.2: Which of the following ratios is likely to be most relevant for a local charity? A. Profit margin B. Debt ratio C. Earnings per share D. Return on capital employed Soe PART B: MULTIPLE CHOICE CASES Question 1: (September 2016) ‘Aphrodite Co has a year end of 31 December and operates a factory which makes computer chips for mobile phones. It purchased a machine on 1 July 20X3 for $80,000 which had a useful life of ten years and is depreciated on the straight-line basis, time apportioned in the years of acquisition and disposal. The machine was revalued to $81,000 on 1 July 20X4. There was no change to its Useful life at that date, ‘A fire at the factory on 1 October 20X6 damaged the machine leaving it with a lower operating capacity. The accountant considers that Aphrodite Co will need to recognize an impairment loss in relation to this damage. The accountant has ascertained the following information at 1 October 20X6: (1) The carrying amount of the machine is $60,750. (2) An equivalent new machine would cost $90,000. (3) The machine could be sold in its current condition for a gross amount of $45,000. Dismantling costs would amount to $2,000. (4) In its current condition, the machine could operate for three more years which gives it a value in use figure of $38,685. 1.1. In accordance IAS 16 Property, Plant and Equipment, what is the depreciation charged to Aphrodite Co's profit or loss in respect of the machine for the year ended 31 December 20x4? A. $9,000 8. $8,000 C. $8,263 D. $8,500 1.2. 1AS36 Impairment of Assets contains a number of examples of internal and external events which may indicate the impairment of an asset. In accordance with IAS 36, which of the following would definitely NOT be an indicator of the potential impairment of an asset (or group of assets)? A. Anunexpected fall in the market value of one or more assets B. A. Adverse changes in the economic performance of one or more assets. A significant change in the technological environment in which an asset is employed making its software effectively obsolete D. The carrying amount of an entity’s net assets being below the entity’s market capitalization 2213 14 15 ‘What is the total impairment loss associated with Aphrodite Co’s machine at 1 October 20x6? A. Snil B. $17,750 $22,065 D. $15,750 The accountant has decided that it is too difficult to reliably attribute cash flows to this ‘one machine and that it would be more accurate to calculate the impairment on the basis of the factory as a cash-generating unit. In accordance with IAS 36, which of the following is TRUE regarding cash generating units? ‘A. Accash-generating unit to which goodwill has been allocated should be tested for impairment every five years. A cash-generating unit must be a subsidiary of the parent. C._ There is no need to consistently identify cash-generating units based on the same types of asset from period to period. D. A cash-generating unit is the smallest identifiable group of assets for which independent cash flows can be identified, On 1 July 20X7, it is discovered that the damage to the machine is worse than originally thought. The machine is now considered to be worthless and the recoverable amount of the factory as a cash-generating unit is estimated to be $950,000. At 1 July 20X7, the cash-generating unit comprises the following assets: $'000 Building 500 Plant and equipment (including the damaged machine ata 33 carrying amount of $35,000) Goodwill 85 Net current assets (at recoverable amount) 250 1,170 In accordance with IAS 36, what will be the carrying amount of Aphrodite Co’s plant and ‘equipment when the impairment loss has been allocated to the cash-generating unit? A. $262,500 8. $300,000 c. $237,288 D. $280,838 23Question 2: (September 2016) Mighty IT Co provides hardware, software and IT services to small business customers. Mighty IT Co has developed an accounting software package. The company offers a supply and installation service for $1,000 and a separate two-year technical support service for $500. Alternatively, it also offers a combined goods and services contract which includes both of these elements for $1,200. Payment for the combined contract is due one month after the date of installation, In December 20X5, Mighty IT Co revalued its corporate headquarters. Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2-5m. Mighty IT Co also revalued a sales office on the same date. The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects reduced its value to $400,000. No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes. Mighty It Co’s income tax rate is 30%. 2.1 In accordance with IFRS 15 Revenue from Contracts with Customers, when should Mighty IT Co recognize revenue from the combined goods and services contract? A. Supply and install: on installation Technical support: er two years 8. Supply and install: when payment is made Technical support: over two years C. Supply and install: on installation Technical support: on installation D. Supply and install: when payment is made Technical support: hen payment is made 2.2. For each combined contract sold, what is the amount of revenue which Mighty IT Co should be recognized in respect of the supply and installation service in accordance with IFRS 15? A. $700 B. $800 c. $1,000 D. $1,200 2.3. Mighty IT Co sells a combined contract on 1 January 20X6, the first day of its financial year. In accordance with IFRS 15, what is the total amount for deferred income which will be reported in Mighty IT Co’s statement of financial position as at 31 December 20X6? ‘A. $400 B. $250 $313 D. $200 242.4 Inaccordance with IAS 12 Income Taxes, what is the impact of the property revaluations ‘on the income tax expense of Mighty IT Co for the year ended 31 December 20X5? A. Income tax expense increases by $180,000 8. Income tax expense increases by $120,000 C. Income tax expense decreases by $30,000 D._Noimpact on income tax expense 2.5. In January 20XG, the accountant at Mighty IT Co produced the company's draft financial statements for the year ended 31 December 20X5. He then realised that he had omitted to consider deferred tax on development costs. In 20X5, development costs of $200,000 had been incurred and capitalised. Development costs are deductible in full for tax purposes in the year they are incurred. The development is still in process at 31 December 20X5. What adjustment is required to the income tax expense in Mighty IT Co’s statement of profit or loss for the year ended 31 December 20XS to account for deferred tax on the development costs? A. Increase of $200,000 B. Increase of $200,000 C. Decrease of $60,000 D. Decrease of $200,000 co Que: (On 1 January 20XS, Blocks Co entered into new lease agreements as follows: n 3: (September 2016): Agreement one This finance lease relates to a new piece of machinery. The fair value of the machine is $220,000. The agreement requires Blocks Co to pay a deposit of $20,000 on 1 January 20XS followed by five equal annual instalments of $55,000, starting on 31 December 20X5. The implicit rate of interest is 165%. Agreement two This three-year lease relates to a fleet of vans. The fair value of the vans is $120,000 and they have an estimated useful life of five years. The ‘agreement requires Blocks Co to make no payment in year one and $48,000 in years two and three ‘Agreement three This sale and leaseback relate to a cutting machine purchased by Blocks Co on 1 January 20X4 for $300,000. The carrying amount of the machine as at 31 December 20X4 was $250,000. On 1 January 20XS, it was sold to Cogs Co for $370,000 and Blocks Co will ease the machine back for five years, the remainder of its useful life, at $80,000 per annum. 25Ba 32 33 3.4 35 According to IFRS 16 Leases, which of the following is generally considered to be a characteristic of an operating, rather than a finance, lease? ‘A. Ownership of the assets is passed to the lessee by the end of the lease term B. The lessor is responsible for the general maintenance and repair of the assets C. The present value of the lease payments is approximately equal to the fair value of the asset D. The lease term is for a major part of the useful life of the asset For agreement one, what is the finance cost charged to profit or loss for the year ended 31 December 20X6? A. $23,300 B. $12,451 $19,607 D. $16,891 ‘The following calculations have been prepared for agreement one: Year Interest ($) Annual payment ($) Balance ($) 31 December 20X7 15,484 (55,000) 93,391 31 December 20%8 10,880 (55,000) 49,271 31 December 20X9 5,729 (55,000) o How will the finance lease obligation be shown in the statement of financial position as at 31 December 20%7? A, $44,120 as a non-current liability and $49,271 as a current liability B. $49,271 as a non-current liability and $44,120 as a current liability . $93,391 as a non-current liability D. $93,391 asa current liability For agreement two, what would be the correct statement of profit or loss entries for the year ended 31 December 20X5? ‘A. Depreciation of $24,000 and no lease rental expense B. No depreciation and lease rental expense of $32,000 C. Depreciation of $24,000 and lease rental expense of $32,000 D. No depreciation and lease rental expense of $48,000 For agreement three, what profit should be recognised for the year ended 31 December 20XS as a result of the sale and leaseback? A. $24,000 B. $120,000 c. $70,000 D. $20,000 soe 26Question 4: (Mar-Jun 2019): During the year ended 31 December 20X8, Linetti Co built an extension to its head office. The costs associated with the construction of the head office extension are as follows: $m Land acquisition 10.0 Fees for environmental certifications and building permits 05 Architect and engineer fees 1.0 Construction material and labour costs (including unused materials) 66 ‘At 30 September 20X8, the date when the head office extension became available for use, the cost of unused materials on site amounted to $0.5m. At that date, the total borrowing costs incurred on a loan which was used to specifically finance the head office extension amounted to $0-8m. Linetti Co also acquired 100% of a subsidiary, Scully Co, on 1 January 20X8. The carrying amount of the assets of Scully Co in the consolidated financial statements of the Linetti group at 31 December 20X8, immediately before an impairment review, were as follows: $m Goodwill 14 Brand name 20 Property, plant and equipment 60 Current assets (at recoverable amount) 24 The recoverable amount of Scully Co was estimated at $9.6m at 31 December 20X8 and the impairment of the investment in Scully Co was deemed to be $2.2m. 4.1 For the year ended 31 December 20X8, how much should be capitalized in respect of the construction of the extension to the head office building? A. $18-4m B. $17-6m C. $18-9m D. $18-1m 4.2 Linetti Co incurred further expenditure on the head office extension after it had been completed. Which of the following would qualify as capital expenditure? ‘A. Property insurance premiums incurred B. Installation of new office fixtures and fittings C. Marketing costs telling the public that the head office extension is operational D. Maintenance and relocation of computers and related office equipment 74.3 At 31 December 20X9, the directors of Linetti Co decide to adopt the revaluation model of IAS 16 Property, Plant and Equipment for Linetti Co's property. In accordance with IAS 16, which of the following statements is FALSE? A. In subsequent years, the depreciation will be based on the revalued amount of the head office building as opposed to its cost B. Any revaluation gain on the head office building is recognised in other comprehensive income and any revaluation loss is recognised in profit or loss Each component part of the head office building is revalued separately D. The residual value and the useful life of the head office building must be reviewed each year 4.4 Assuming Scully Co represents a cash generating unit, what is the carrying amount of the brand at 31 December 20X8 following the impairment review? A. $1.2 B, $1-45m © $1-73m D. $18m 4.5 Which, if any, of the following statements regarding impairment reviews is/are correct? (2) At the end of each reporting period, an entity should assess if there is any indication that assets have been impaired (2) Annual impairment reviews are required on all intangible assets with indefinite lives A. Lonly 8. 2only ¢. Both 1and2 D. Neither 1 nor 2 ‘Question 5: (Mar-Jun 2019): ‘The following is an extract from Diaz Co's trial balance as at 31 December 20X8: Debit ($m) Credit (Sm) Inventory at 31 December 20X8 8.6 Trade receivables 6.2 5% loan notes 9.0 ‘The inventory count was completed on 31 December 20X8, but two issues have been noted. First, products with a sales value of $0-6m had been incorrectly excluded from the count. Second, items costing $0:2m which had been included in the count were damaged and could only be sold for 50% of the normal selling price. Diaz Co makes a mark-up of 50% on both of these items Diaz Co entered into a factoring agreement with Finaid Co on 31 December 20X8, In accordance with the agreement, Diaz Co sold trade receivables with a carrying amount of $6-2m to Finaid Co for $6m. Under the terms of the factoring agreement, after six months Finaid Co will return any 28unpaid receivables to Diaz Co for collection. Finaid Co will also charge Diaz Co a fee of 5% of any uncollected balances at the end of each month. The 5% loan notes were issued for $9m on 1 July 20X8, Diaz Co incurred issue costs of $0-5m associated with this, which have been expensed within finance costs. The loan note interest is payable each 30 June and the loan note is repayable at a premium, giving them an effective interest rate of 8%. 5.1 Inaccordance with IAS 32 Financial Instruments: Presentation, which of the items in the trial balance would be classified as financial instruments? A. Closing inventory and trade B. 5% loan notes only. receivables only. ©. Trade receivables and 5% loan notes _D. Closing inventory, trade receivables only. and 5% loan notes. 5.2 What is the correct carrying amount of inventory to be recognised in Diaz Cos financial statements as at 31 December 20X8? A. $8:95m B. $9-0m C. $8-9m D. $9-:15m 5.3 In an attempt to improve reported profit, the directors of Diaz Co want to change the valuation method of inventory from first in first out (FIFO) to an average cost method. Which, if any, of the following statements regarding the potential change in inventory valuation is/are correct? (1) The change will represent a change in accounting estimate (2) The financial statements will be adjusted prospectively A.1only B.2only €. Both 1 and 2 D. Neither 1 nor 2 5.4 Which of the following statements regarding the factoring arrangement is NOT true? ‘A. $6m received should be recorded in the liabilities of Diaz Co at 31 December 20X8 B. $0.2m should be expensed in Diaz Co's statement of profit or loss for the year ended 31 December 20x8 C. Atotal of the 5% monthly fee should be expensed in Diaz Co's statement of profit or loss for the year ended 31 December 20X9 D. The receivables will remain as an asset in the financial statements of Diaz Co at 31 December 2X8 5.5 In respect of the 5% loan notes, how much should be expensed within Diaz Co's statement of profit or loss for the year ended 31 December 20X8? A. $0-68m B.$0-45m C. $0-72m D. $0-34m_ 29Question 6: (Mar -Jun 2019): Jeffers Co prepares financial statements for the year ended 31 December 20X8. The financial statements are expected to be authorized for issue on 15 March 20X9. The following three events have occurred in January 20X9: (2) Health and safety fine Abealth and safety investigation of an incident which occurred in 20X8 was concluded in January 20X89, resulting in a $1.5m fine for Jeffers Co. A provision for $1m had been recognized in Jeffers Co's financial statements for the year ended 31 December 20X8. (2) Customer ceased trading Notice was received on 10 January 20X9 that a customer owing $1.2m at 31 December 20X8 had ceased trading. Itis unlikely that the debt will be recovered in full. (3) Acquisition of a competitor The acquisition of a competitor was finalized on 10 January 20X9, being the date Jeffers Co obtained control over the competitor. Negotiations in respect of the acquisition commenced in May 20x8. In addition to this, there is an outstanding court case at 31 December 20X8 relating to faulty goods supplied by Jeffers Co. Legal advice states that there is a small chance that they will have to pay out $6m, but the most likely outcome is believed to be a payout of $5m. Either way, Jeffers Co will have to pay legal fees of $0.2m. All payments are expected to be made on 31 December 20X9. Jeffers Co has a cost of capital of 10% (discount factor 0.909). Jeffers Co believes the fault lies with the supplier, and is pursuing a counter-claim. Legal advice states that it is possible, but not likely, that this action will succeed, 6.1 Which, if any, of the following statements regarding IAS Events after the Reporting Period 10 is/are correct? (1) ‘Events after the reporting period’ are deemed to be all events from the date the financial statements are authorized for issue up until the date of the annual meeting with the shareholders (2) Non-adjusting events do not need to be reflected in any part of an entity's financial statements or annual report A. Lonly B. 2only C. Both 1 and 2 D. Neither 1 nor 2 6.2 Which of the three events which occurred in January 20X9 would be classified as adjusting events in accordance with IAS 10? (1) Health and safety fine (2) Customer ceased trading (3) Acquisition of a competitor A. 1and2 only B. land3only —C, 2and3only D1, Zand 3 306.3 What amount should be recorded as a provision in respect of the outstanding court case against Jeffers Co as at 31 December 20X8 (to the nearest hundred thousand)? A. $5.6m B. $5.5m c. $4.7m D. $4.5m 6.4 At 31 December 20X8, which of the following represents the correct accounting treatment of the counter-claim made by Jeffers Co against the supplier? A. Nothing is recognised or disclosed in the financial statements B. Disclose as a contingent asset Recognize a receivable from the supplier D. Net the possible counter-claim proceeds from the supplier against the provision for legal claim 6.5 In February 20X9, a major fire broke out in Jeffers Co's property and warehouse. Jeffers Co has no insurance, and now the management of the company believes it is unable to continue trading. How should this be reflected in Jeffers Co’s financial statements for the year ended 31 December 20X8? ‘A. No adjustment should be made to the figures in the financial statements, however, this, event must be disclosed in the notes B, The financial statements can no longer be prepared on a going concern basis C. No disclosure is required in the financial statements; however, this event must be reflected in the financial statements for the year ended 31 December 20X9 D. The financial statements should continue to be prepared using the going concern basis, with an impairment loss recognized against the non-current assets 31PART C: FINANCIAL STATEMENT PREPARATION & INTERPRETATION. Type 1: Financial statement preparation (Please attempt the mock test for this question type) Type 2: Performance appraisal Question 1: Bun Co (Sep-Dec 2019) Bun Co is a bakery which also owns two shops/cafés. Over the last two years, the company has, experienced declining profitability due to increased competition and so the directors wish to investigate if this is a sector-wide problem. Consequently, they have acquired equivalent ratios for the sector, some of which have been reproduced below. Sector averages for the year ended 30 June 20X7: ROCE 18.6% Operating profit margin 8.6% Net asset turnover, 2.01 Inventory holding period 4 days Debt to equity 80% ‘The following information has been extracted from the draft financial statements of Bun Co for the year ended 31 December 20X7: Statement of profit or loss for the year ended $000 Revenue 100,800 cos (70,000) Gross profit 30,800 Operating expenses (17,640) Profit from operation ~~ 13,160 32‘Statement of financial position as at 31 December 20X7: $‘o00 NCA 55,000 Inventory 3,960 Equity: Equity shares of $1 each 17,000 Revaluation surplus 5,400 Retained earnings (RE) 10,480 32,880 Non-current liabilities: 10% bank loan 14,400 Other relevant information to Bun Co: (1) In 20X6, Bun Co acquired a popular brand name. At 31 December 20X7, the brand represented 20% of non-current assets. The remaining 80% of non-current assets comprises of the property from which Bun Co operates its bakery and shops. This property is owned by Bun Co and has no directly associated finance. The property was revalued in 20X4. (2) In the year ended 31 December 20X7, Bun Co began offering discounted meal deals to customers. Bun Co hoped this strategy would help to reduce perishable inventory and reduce inventory holding periods. (3) In January 20X8, it was decided to discount some slow-moving seasonal inventory which had a selling price of $1.5m. Under normal circumstances, these products have a gross profit margin of 20%, The inventory was sold in February 20X8 for 50% of what it had cost Bun Co to produce. The financial statements for the year ended 31 December 20X7 were authorized for issue on 15 March 20X8. Required (a) Adjust for the information in note (3) and calculate the 20X7 sector average equivalent ratios for Bun Co. (7 marks) (b) Assess the financial performance and position of Bun Co for the year ended 31 December 20X7 in comparison with the sector average ratios. (10 marks) (c) Explain three possible limitations of the comparison between Bun Co and the sector average ratios provided. (3 marks) 33Type 3: Consolidation ‘Question 3: Runner Co (Sep-Dec 2019) (On 1/4/20X4, Runner Co acquired 80% of Jogger Co's equity shares when the retained earnings of Jogger were $19.5m. The consolidated of cash of $42.5m paid on 1/4/20X4 and a further cash payment of $21m, deferred until 1/4/20X5. No accounting entries have been made in respect of the deferred cash payment. Runner Co has a cost of capital of 8%. The appropriate discount rate is 0.926, ‘The draft, summarized statements of financial position of the two companies at 31/3/20X5 are shown below: ASSETS Non-current assets Property, plant and equipment Investments Current assets Inventory Trade receivables Bank Total assets Equity and liabilities Equity Equity shares of $1 each Retained earnings Current liabilities Trade payables Total equity and liabilities 34 Runner Co $'000 455,800 55,000 510,800 22,000 35,300 2,800 60,100 570,900 202,500 286,600 489,100 81,800 570,900 Jogger $000 44,700 44,700 16,000 9,000 1,500 26,500 71,200 25,000 28,600 53,600 17,600 71,200(i) Runner’s policy is to value the non-controlling interest (NCI) at fair value at the date of acquisition. The FV of the NCI in Jogger Co at 1/4/X4 was estimated at $13m The FV of Jogger’s other assets, liabilities and contingent liabilities at 1/4/20X4 were equal to their carrying amounts with the exception of a specialized piece of plant which had a FV of $10m in excess of its carrying amount. This plant has a 10-year remaining useful life on 1/4/20x4 (ii). In Dec 20X4, Jogger sold goods to Runner Co for $6.4m, earning a gross margin of 15% on the sale, Runner still held $4.8m of these goods in its inventories at 31/3/20XS Required: (a) Prepare the consolidated statements of financial position for Runner Co as at 31/3/20XS. (16 marks) (b) Runner acquired 30% of Walker Co's equity shares on 1/4/20XS for $13m, Walker had been performing poorly over the last few years and Runner hoped its influence over Walker Co would help to turn the company around. In the year ended 31/3/20X6, Walk Co made a loss of $30m. Runner Co has no contractual obligation to make good the losses relating to Walker Co, Explain how Walker should be accounted for in the consolidated Statement of financial position of Runner co for the year ended 31/3/20X6. Your answer should also include a calculation of the carrying amount of the investment in the associate at that date. (4 marks) 35MOCK TEST - QUESTION PARTA ALL15 questions are compulsory and MUST be attempted Each question is worth 2 marks. (Total = 30 marks) 1. Which of the following would NOT contribute to a faithful representation in the financial statements? ‘A, Ensuring the financial statement are unbiased B. Ensuring that the financial statements can enable users to identify and understand similarities in and dif ferences among items. C. Ensuring the financial statements are free from error D. Inclusion of all transactions relating to the accounting period 2. Quartile is in the jewellery retail business which can be assumed to be highly seasonal. For the year ended 30 September 2014, Quartile assessed its operating performance by comparing selected accounting ratios with those of its business sector average as provided by an agency. You may assume that the business sector used by the agency is an accurate representation of Quartile’s business. Which of the following circumstances may invalidate the comparison of Quartile’s ratios with those of the sector average? (i) In the current year, Quartile has experienced significant rising costs for its purchases (ii) The sector average figures are complied from companies whose year end is between 1 July 2014 and 30 September 2014 (ii) Quartile does not revalue its properties, but is aware that other entities in this sector do (iv) During the year, Quartile discovered an error relating to the inventory count at 30 September 2013. This error was correctly accounted for in the financial statements for the current year ended 30 September 2014 A. All four B. (i), (i) and (ii) C. (ii) and (iii) only D. (i), (ii) and (iv) 3. An entity took out a loan for $500,000 to part finance the construction of a new item of equipment. The interest rate on the loan was 8% throughout the year ended 31 December 20X9, Construction began on 1 April 20X9. Construction and testing work was completed on 30 September 20X9, however the equipment was not brought into use until 1 December 20X9, How much interest should be capitalised in accordance with IAS 23 Borrowing Costs? A. $3333 B. $40,000 . $30,000 D. $10,000 36Which of the following could be classified as investment property in accordance with IAS 40 Investment Property in the financial statements of financial position? (i) Properties held for sale by company in the ordinary course of business (ii) Company's factory building (i) A floor let to third parties in an office building owned and occupied by company (iv) A building let out to third parties which is falling in value A. (i) and (iii) only 8. (i), it) and (iv) . all four D. (ii) and (iv) only Helby acquired a significant piece of machinery incurring the following amounts: $'000 List price 600 Trade discount (10%) (60) Cash discount (10) Reinforced flooring to house the machine 25 Salaries of staff involved in machine installation during period of installation 5 Testing costs 15 How much should be recognised as property, plant and equipment on initial recognition? A. $560,000 8, $585,000 c. $575,000 D. $580,000 Which of the following criticisms does NOT apply to historical cost accounts during a period of rising prices? ‘A, They contain mixed values; some items are at current values, some at out of date values B. They are difficult to verify as transactions could have happened many years ago C. They understate assets and overstate profit, D. They overstate gearing in the statement of financial position ‘Company X had 500,000 shares in issue, until on 30 September 20X9 it made a bonus issue of 100,000 shares. Calculate the EPS for 20X9 and the corresponding figure for 20X8 if total ‘earnings were $120,000 in 20X9 and EPS for 20X8 was $0.15. The company's accounting year runs from 1 January to 31 December. A,$0.15 and $0.15 8,$0.2and$0.15 _C. $0,125 and $0.15 _D. $0.2. and $0.125 378 Which of the following would be a change in accounting policy in accordance with IAS & Accounting Policies, Changes in Accounting Estimates and Errors? ‘A. Adjusting the financial statements of a subsidiary prior to consolidation as its accounting policies differ from those of its parent B. A change in reporting depreciation charges as cost of sales rather than as administrative expenses C. Depreciation charged on reducing balance method rather than straight line D. Reducing the value of inventory from cost to net realisable value due to a valid adjusting event after the reporting period 9. Andiez, a farmer has 600 two-year old cows on 1 January 20X9, 200 calves were born in December 20X9. 150 cows were sold during the year for $850 each. ‘The fair value less costs to sell the cows at 31 December 20X9 was: Calves $250 Two-year old cows $820 Three-year old cows $300 How much should be recognised in profit or loss in total in the farm for the year ended 31 December 20X9? A. $102,500 8. $90,500 c. $91,000 . $100,100 10. At 1 April 2014, Tilly owned a property with a carrying amount of $800,000 which had a remaining estimated life of 16 years. The property had not been revalued, On 1 October 2014, Tilly decided to sell the property and correctly classified it as being ‘held- for-sale’. A property agent reported that the property's fair value less costs to sell at 1 October 2014 was expected to be $790,500 which had not changed at 31 March 2015. What should be the carrying amount of the property in Tilly’s statement of financial position as at 31 March 2015? A. $775,000 8. $790,500 . $765,000 D. $750,000 11. Which of the following statements relating to intangible assets is true? A. All intangible assets must be carried at amortised cost or at an impaired amount; they cannot be revalued upwards B. The development of a new process which is not expected to increase sales revenues may still be recognised as an intangible asset 382 13 4. 15, C. Expenditure on the prototype of a new engine cannot be classified as an intangible asset because the prototype has been assembled and has physical substance D. Impairment losses for a cash generating unit are first applied to goodwill and then to other intangible assets before being applied to tangible assets An entity acquired an asset for $100,000 on 1 January 20X6 and depreciated it over a five- year useful life to a zero-residual value. For tax purposes, the asset is awarded tax allowances of 30% on a reducing balance basis. The tax rate is also 30%. How much is the profit or loss charge for deferred tax in the year ended 31 December 20X7? ‘A. $6,000 B. $300 c. $3,300 D. $3,000 Which of the following would be considered an indicator of significant influence relevant when determining whether an investor's shareholding in an investee is to be accounted for ‘as an associate? (i) The investor has seats on the board of directors of the investee (ii) An agreement between the investor and investee allows the investor to prevent the investee from paying any dividends (ii) The investor is a major customer of the investee (iv) The investor and investee operate in the same market in which there are three players each having a similar market share A. All four 8. (i), (i) and (iv) ©. (iJonly D. (i) and (ii) only Although the objectives and purposes of not-for-profit entities are different from those of commercial entities, the accounting requirements of not-for-profit entities are moving closer to those entities to which IFRSs apply. Which of the following IFRS requirements would NOT be relevant to a not-for-profit entity? A. Preparation of a statement of cash flows B. Requirement to capitalise a finance lease C. Disclosure of earnings per share D. Disclosure of non-adjusting events after the reporting date Raffen entered into an agreement on 1 January 20X7 to sell its head office building for its fair value of $5,800,000 and lease it back for six years. The carrying amount of the building on 1 January 20X7 was $5,500,000.The present value of the annual payments is $4,957,326 and the transaction constitutes a sale in accordance with IFRS 15. How much should Raffen recognise in profit or loss in the year ended 31 December 20X7 in respect of this transaction? A. $542,674 B. $300,000 €. $256,413 D. $43,587 39PARTB ‘Question 1: Sah constructed a furnace on 1 April 20XS, causing significant environmental damage which must be repaired at the end of the asset’s useful life of ten years. The present value of this is estimated to be $3 million. Sah has a cost of capital of 10%. (On 1/12/20X5, Sah received a government grant of $2.4 milion relating to the cost of plant with 2 five-year life. Sah accounts for grants using the deferred credit method. On 1/12/20XS, Sah also acquired land for 12 million dinars. The land was used to construct a factory during the year. Sah’'s functional currency is the dollar (S). ‘On 1/12/20XS the exchange rate was 4 Dinars: $1. At 31 March 20X6 the exchange rate was 2 Dinars:$1 and the average rate for the year was 3 Dinars:$1 16. What is the total finance cost (to the nearest thousand) to be recorded in the statement of profit or loss in respect of the environmental damage caused by the furnace for the year ended 31 March 20X6? $ 17. What is the non-current liability in respect of the government grant to be shown in Sab’s statement of financial position as at 31 March 20X4? ‘A. $840,000 B. $1,080,000 C. $960,000 D. $1,760,000 118. What is the carrying amount of the land to be shown in the statement of financial position of Sah as at 31 March 20X6? $ 19. The costs below are the costs associated with the construction of the factory. Which of the following can NOT be capitalized? ‘A. Legal fees relating to the site purchase B. Health and safety training for new construction workers C. Direct labour costs associated with the construction D. Costs of site preparation 20. In the following year it was discovered that Sah had breached the conditions relating to the government grant and therefore the grant had to be repaid. Which TWO of the following describe the correct accounting treatment to record the repayment of the grant? A. Remove all deferred income balances B. Record an expense in SOPL . Increase the cost of plant D. Make an adjustment to the prior year financial statements 40Question 2: Bay Co During the year Bay started research work on anew processor chip. Bay has a past history of being particularly successful in bringing similar projects to a profitable conclusion. In addition to this, Bay spent $250,000 training staff to use new equipment, Bay also developed a new online platform during the year, spending $150,000 a month evenly from 1/3/20XS to 31/10/20X5. Bay was unsure of the outcome of the project, but doubts were resolved on 1 July, following successful testing. The platform launched on 1 November 20XS and was expected to last 5 years. 21. Bay's accounting assistant has read something which states that intangible assets are identifiable, non-monetary items without physical substance. Which TWO of the following relate to items being classed as identifiable? ‘A. Items must have probable future economic benefits B. Items must have a measurable cost C. Items must be separable D. Items must arise from legal or contractual rights 22. Identify the correct accounting treatment for items below? Capitalise Expense Staff training Expenditure on processor device 23. How much should be recorded in Bay’s statement of profit or loss for the year ended 31 December 20XS in relation to the development of the online platform? $ 24. Which of the facts relating to the online platform is/are correct? (i) The online platform will be subject to annual impairment review due to the judgemental nature of the project (ii) Depreciation on any plant used to develop the platform would be capitalised as part of the development costs. i) Once capitalised, the development costs should be held at fair value at each year-end. A. (i) & (ii) only 8. (i) only C. (i) & (i) only D. (ill) only 4125. Bay Co acquired a patent with a 10-year life for $500,000 on 1 January 20X6. On 31 December 20X6, management believed that the patent was less fully utilized than expected and determined the following information as part of their impairment review: $'000 Potential sales proceeds of patent 400 Estimated disposal costs 20 Value in use asset 480 What is the value of impairment loss in the year ended 31/12/20X5? ‘A. $20,000 8. $30,000, coil 0. $70,000 ‘Question 3: Radar Radar's directors made the following decisions during the year ended 31 March 20X3: © Disposal of all outlets in province A ‘* rebranding all ofits outlets in province B to target the tourism market. The previous target market in province B had been aimed at business clients Ata board meeting on 1 January 20%3, Pulsar’s directors decided sell an item of plant, which had carrying value of $4 milion at 1 April 20X2 and a remaining life of 20 years. The plant is expected to sell for $3.9 million within 12 months. A decision was also made to close down a regional office, which was communicated to the employees before the year-end. 50 employees would be retrained and kept within Radar at a cost of $100,000, the others took redundancy and will be paid $300,000. $75,000 is to be spent on marketing materials directing customers of the existing factory to other production facilities operated by Radar. 26. Which THREE of the following criteria need to be satisfied in order to recognise an asset as held for sale in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations? A. Asset is no longer in use B, Sale of the asset has been agreed C. Asset is likely to be sold within twelve months D. The plan to sell the asset is unlikely to be withdrawn E. Asset is being actively marketed 4227. Identify whether the change in operations in countries A and B represent a discontinued operation in accordance with IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations. A. Neither country will be regarded as a discontinued operation B. Both countries will be regarded as discontinued operations C. Only country A represents a discontinued operation D. Only country B represents a discontinued operation 28. At what value should the plant be held at 31 March 20X3 according to IFRS 5 Non-Current Assets Held for Sale and Discontinued Operations: A.$3.8m B.$3.9m c.$4m D. $3.85m, 29. What provision should be recorded in relation to the office closure? ‘A. $300,000 B. $375,000 C. $475,000 D. $400,000 30. On 30 June 20X3, before the financial statements were authorised for issue, the plant was sold at a loss of $100,000 and the redundancies were settled at $50,000 more than expected. Identify whether each item represents an adjusting or non-adjusting event according to IAS 10 Events After the Reporting Period? Adjusting event | Non-adjusting event Plant disposal Redundancy settlement 43PART C ‘Question 1: Quincy (Dec 2012) The following trial balance relates to Quincy as at 30 September 20X2: Revenue (note (i)) Cost of sales Distribution costs ‘Administrative expenses (note (i)) Loan note interest (note (i) Dividend paid Investment income Equity shares of 25 cents each 6% loan note (note (ii) Retained earnings at 1 October 20X1 Plant and equipment at cost (note (ii) Accumulated depreciation at 1 October 20X1: plant and equipment Equity financial asset investments (note (iv)) Inventory at 30 September 20X2 Trade receivables Bank Current tax (note (v)) Deferred tax (note (v)) Trade payables 44 $'000 136,800 12,500 19,000 1,500 19,200 83,700 17,000 24,800 28,500 2,900 1,100 347,000 $'000 213,500 400 60,000 25,000 6500 33,700 1,200 6,700 347,000The following notes are releva (i) On 1 October 20X1, Quincy sold one of its products for $10 million (included in revenue in the trial balance). As part of the sale agreement, Quincy is committed to the ongoing servicing of this product until 30 September 20X4 (i.e. three years from the date of sale). The value of this service has been included in the selling price of $10 million. The estimated cost to Quincy of the servicing is $600,000 per annum and Quincy's normal {gross profit margin on this type of servicing is 25%. The service performance obligation will be satisfied over time Ignore discounting {l) Quincy issued a $25 million 6% loan note on 1 October 20X1. Issue costs were $1 million and these have been charged to administrative expenses. The loan will be redeemed on 30/9/20X4 at a premium which gives an effective interest rate on the loan of 8% Plant and equipment is depreciated at 15% per annum using the reducing balance method. No depreciation has yet been charged for the year ended 30 September 20X2. All depreciation is charged to cost of sales. (iv) The investments had a fair value of $15.7 million as at 30 September 20X2. There were no acquisitions or disposals of these investments during the year ended 30 September 20x2. (v)_ The balance on current tax represents the under/over provision of the tax liability for the year ended 30 September 20X1. A provision for income tax for the year ended 30 September 20X2 of $7.4 million is required. At 30 September 202, Quincy had taxable temporary differences of $5 million, requiring a provision for deferred tax. Any deferred tax adjustment should be reported in the statement of profit or loss. The income tax rate of Quincy is 20% Required: {a) Prepare the statement of profit or loss and other comprehensive income for Quincy for the year ended 30 September 20X2. (b) Prepare the statement of financial position for Quincy as at 30 September 20X2. 45Question 2: Penketh (June 2014) On 1 October 20%3, Penketh acquired 90 million of Sphere’s 150 million $0.50 equity shares. Penketh willpay $1.54 cash on 30 September 20X4 for each share acquired. Penketh’s finance cost is 10% per annum. Sphere’s share price as at 1 October 20X3 was $1.25. The statements of profit or loss and other comprehensive income for the year ended 31 March 20X4 are: $7000 $'000 Revenue 620,000 310,000 Cost of sales (400,000) (150,000) Gross profit 220,000 160,000 Distribution costs (40,000) (20,000) Administrative expenses (36,000) (25,000) Investment income 5,000 1,600 Finance costs (2,000) (5,600) Profit before tax 147,000 111,000 Income tax expense (45,000) (31,000) Profit for the year 102,000 80,000 Other comprehensive income Gain/(loss) on revaluation of land (note (ii)) (2,200) 1,000 Total comprehensive income for the year 99,800 81,000 The following information is relevant: (i) A fair value exercise on 1 October 20X3 concluded that the carrying amounts of Sphere’s net assets were equal to their fair values with the following exceptions: Plant with a remaining life of two years had a fair value of $6 million in excess of its carrying amount. Plant depreciation is charged to cost of sales. = Penketh placed a value of $5 million on Sphere's good relationships with its customers. Penketh expected, on average, a customer relationship to last for a further five years. Amortisation is charged to administrative expenses. (ii) Sphere’s land, valued using the revaluation model, increased by $1 million since the acquisition After the acquisition Penketh sold goods to Sphere for $20 million at a 25% mark-up. Sphere had one fifth of these goods still in inventory at 31 March 20X4 46(iv) All items accrue evenly over the year unless otherwise indicated. Sphere had retained earnings of $70 million at 1 April 20X3. There were no other components of equity at this date. (v) Penketh measures the non-controlling interest at fair value at the date of acquisition. To calculate fair value, the share price of Sphere should be used Required: {a) Calculate goodwill arising on the acquisition of Sphere as at 1 October 20X3. (b) Prepare the consolidated statement of profit or loss and other comprehensive income of Penketh for the year ended 31 March 20X4. 47ANSWERPART A: OBJECTIVE TEST QUESTIONS CHAPTER 1: CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING Question 1.1: C Guidance: Remember: Identify liability according to below features + Apresent obligation arising from past events ‘+ The settlement of which is expected to result in an outflow of resources from the business embodying economic benefits. ‘Answer: C. SAP has estimated the tax charge on its profits for the year just ended as $200,000. ‘The license payment could be avoided by ceasing manufacture. > Ais false. The fall in value of the investment is a loss chargeable to profit or loss. > B is false. Planned expenditure does not constitute an obligation > D is false. ue: gion 1.2: Guidance: Remember: Faithful presentation includes: + Neutral: Objective, the matters are not manipulated by subjectivity of entity + Completeness: all occurred transactions must be reflected in financial statement ‘+ Free from error: prevent material misstatements. +__ Substance over form ‘Answer: D. Recording a sale and repurchase transaction with a bank as a loan rather than a sale. Items A to C all represent incorrect accounting treatments, and item D reflects that a sale and repurchase agreement with a bank is likely to represent a secured loan rather than a sale (they all violate the principle of Substance over form) 49CHAPTER 2: ACCOUNTING FOR INFLATION Question 2.1: A Guidance: Apply theory in FR Lecture note, Chapter 2 In times of rising prices, current cost > historical cost -> asset values will be understated (it is represented by historical cost). Additionally, the real purchase cost of replacement items will not be incorporated in the cost of asset, leading to lowering depreciation=> profits are overstated. Answer: A. Profits will be overstated and assets will be understated Question 2.2: B Guidance: Remember: Carrying amount = Cost ~ Depreciation Depreciation annual (straight-line method) = (Cost ~ residual value)/useful life Historical cost. Current cost $'000 $'000 Cost/Valuation 500 600 Depreciation ((500,000 x 90%) /5) x 2 (180) Depreciation ((600,000 x 90%) /5) x 2 (216) Carrying amount 320 384 eee 50CHAPTER 3: REGULATORY FRAMEWORK Question 3.1: B Guidance: Remember four steps process of issuing IFRS Establish an Advisory Committee to give advice on issues Develop and publish Discussion Papers for public comment. Develop and publish an Exposure Draft for public comment. Issue a final International Financial Reporting Standard. ‘Answer: B. In the early stages of the project, the IASB will consult with the Advisory Committee and IFRS Advisory Council to seek out the key issues. and D Question 3. Guidance: International Financial Reporting Standards: Principles based, giving only principles, not specific or detailed accounting treatments, encouraging judgment. > A & Cis false. D is true General accepted accounting principles based on rules based: tries to guide each accounting in detail, limit judgment > Bis true Answer: B. GAAP will tend to give rise to a larger number of accounting standards than IFRS D. IFRS requires the exercise of more judgement in application than a GAAP. Question 3. Guidance: Accounting standard could be represented under rules based or principle based. ‘Answer: B. Local accounting standards can be influenced by the tax regime within a country. ‘Accounting standards on their own provide a complete system of regulation > C is true, soe 51CHAPTER 4A: PROPERTY, PLANT AND EQUIPMENT Question 48.1: C Step 1: No information on when construction start > assume it starts in line with the borrowing timing $2,000 x 5% + $6,000 598% + $4,000 96 10% _ '$2,000 + $6,000 + $4,000 : Step 2: Weighted average of cost: 8.17% Step 3: Calculate interest amount = $10,000 x 8.17% = $817 Step 4: Calculate any interest received on loans proceeds not used (if any) Investment income Step 5: interest should be capitalized = Calculate interest amount (step 3) - interest received on loans proceeds (step 4) = $817 Answer: C. $817 Question 48.2: C Guidance: Apply theory in FR Lecture note, Chapter 4a, Section II.2.2. “Enhances the economic benefits” is the key for which expenditure is eligible to be capitalized. Reference: Lecture FR, Chapter 4A. 1.2.2 Answer: . Capitalize and depreciate over three years to December 2017 soe CHAPTER 4B: INVESTMENT PROPERTY & NON-CURRENT ASSET HELD FOR SALE Question 48.1: B Guidance: Remember Investment property is: + Property (land or a building or part of building or both) +) Held by the owner or the lessee asa right of use asset | + To earn rentals or for capital appreciation or both ‘Answer: B. Land purchased for its investment potential. Planning permission has not been obtained for building construction of any kind 52Asset A would be classed as a non-current asset held for sale under IFRS 5 Non-current Assets Held for Sale and Discontinued Operations. Assets C and D would both be classified as property, plant and equipment per IAS 16 Property, Plant and Equipment. Question 48.2: B Guidance: Step 1: Calculate accumulated depreciation at transfer day Depreciation each year = Initial cost/Useful life Accumulated depreciation = Total depreciation from purchase date to transfer day Step 2: Calculate carrying amount at transfer day Carrying amount = Initial cost - Accumulated depreciation (step 1) Step 3: Calculate revaluation surplus at transfer day Revaluation surplus/ Profit or loss = Fair value ~ Carrying amount Step 4: Determine gain or loss from revalued value of investment property through SOPL Gain/loss = fair value at year end ~ fair value at transfer day ‘Answer: B. Net income = 200,000; Other comprehensive income = 750,000 Step 1: Calculate accumulated depreciation at transfer day Six months’ depreciation should be accounted for up to 30 June 20x2 > $50,000 ($5mx (6/12)/50) recognized as an expense in SOPL of 20X2 ‘Accumulated depreciation = 200,000 ($5mil x 2/50) + 50,000 = $250,000 Step 2: Calculate carrying amount at transfer day Carrying amount = Initial cost ~ Accumulated depreciation = 5,000,000 ~ 250,000 = $4,750,000 Step 3: Calculate revaluation surplus at transfer day Revaluation surplus/ Profit or loss = Fair value - Carrying amount = 5,500,000 ~ 4,750,000 = $750,000 > through other comprehensive income 53Step 4: Determine gain or loss from revalued value of investment property air value at year end — fair value at transfer day = 5,750,000 — 5,500,000 = $250,000 ‘+ Net income = Gain — depreciation expense = 250,000 — 50,000 = $200,000 Ga Profit or loss (net income) Other comprehensive income 200,000 750,000 Question 48.3: A. 2 and 3 Guidance: Criteria of highly probable sale: ‘+ Management must be committed to a plan to sell the asset > (3) is true ‘© There must be an active program to locate a buyer > (1) is false Sale at a price that is reasonable in relation to its current fair value ~> (2) is true The sale should be expected to take place within one year from the date of classification > (4) is false Itis unlikely that significant changes to the plan will be made or that the plan will be withdrawn soe CHAPTER 4C: GOVERNMENT GRANTS Question 4C.1: B Remember: Accounting treatments of government grants depends on grant types © Capital Grant: Deduct from PPE’s cost or recognize as deferred income and re-allocate to other income over the useful life of asset. ‘* Revenue Grant: Recognize as deferred income and re-allocate to other income over the relevant period. Answer: B. (ii) and (ii) (i) Is false because the grant should be deducted from the asset’s cost, not carrying amount (ii) Is true as deferred income method. |s true as marketing advice cannot be reasonably valued => out of IAS 23 scope. Is false. Grant repayment is treated as a change in accounting estimates (IAS 8), applied prospectively. 54Question 4C. Remember: Accounting treatment for capital grant repayment: Dr PPE Dr PPE ‘and CR cash with the amount repaid The extra depreciation to date that would have been recognized had the grant not been netted off against cost should be recognized immediately as an expense. The repayment of the grant must be treated as a change in accounting estimate. The carrying ‘amount of the asset must be increased as the netting off method has been used. The resulting extra depreciation must be charged immediately to profit or loss. Answer: A. Step 1: Calculate Step 2: Calculate Step 3: Make asset's carrying asset's carrying adjustments for grant amount with grant amount without repayments: grant Cost 90,000 90,000 Grant (30,000) 60,000 Depreciation (210,000) [1 year] | (30,000) [2 years) | PF Depreciation . u Ve : . 20,000 Carrying amount 50.000 [1/1/X7] 60,000 [31/12/X7] Dr PPE 10,000 Cr Cash 30,000 Reference: FR Lecture note, Chapter 4C, Section Ill, Example 2 and 4, soe 55.CHAPTER 5: INTANGIBLE NON-CURRENT ASSET Remember: These characteristics of an intangible non-current asset: Intangible asset is a non-monetary asset without physical substance that is: ‘© Identifiable (is separable and arises from contractual or other legal rights) ‘© Controlled by entity as a result of past events (power to obtain benefits from the asset) | ‘© Future economic benefits (such as revenues or reduced future costs) are expected. ‘Answer: D. $70,000 developing a special type of new packaging for a new energy-efficient solar energy battery. The packaging is expected to reduce M’s distribution costs by $20,000 a year. Acannot be capitalized because it does not meet all the criteria above as itis viable > It is NOT identifiable Bis research cost and cannot be capitalized C cannot be capitalized because it does not meet all the criteria as itis making a loss -> Do NOT make future economic benefits Question 5.2: $88,000 Guidance: In relation to an intangible asset, its research costs and amortization of capitalised expenditure will be charged to P&L of the related period. Answer: $88,000 $ Write off to 1 January 2014 to 28 February 2014 (2 x $40,000) (*) 80,000 Amortisation (((40,000%4)/5)x3/12) (March to June) (**) 8,000 ‘88,000 (*) The development cost should be capitalized if an entity can demonstrate all of six Criteria P.LRA.TE (see more in FR Lecture note, Chapter 4, Section Ill) and amortized for its useful life. In this case, development cost must be expense off from 1/1/2014 to 28/02/2014 because it does not satisfy one of six criteria (probable future economic benefits). Ongoing 01/03/2014, development cost should be capitalised and amortised for its useful life. 56(**) From 1/3 - 30/6 (from when the directors become confident on the project's success until its completion), related expenditure during this period should be capitalized ($40,000 x 4 months = $160,000}. The amortization period last over 3 months (July ~ September 20X4), Note: This is a fil in the blank questions, it is important that student pay attention to the units provided. In this case, the format given is in “000” unit; therefore, only “88” should be inserted in blank. If students carelessly put "88,000", then this will not get any marks. Question 5.3: € Guidance: Research costs and development costs which are not satisfy capitalisation criteria are written off as an expense in SOPL. Development cost which is capitalised should be amortised over its useful life Answer Research costs 700,000 Expensed development Jan-Mar (400,00 x 3) 1,200,000 Depreciation on capitalised amount b/f (10m x 20%) 2,000,000 3,900,000 Note that no depreciation is charged on the new project as itis still in development Questions. Examiner's report Candidates should be able to understand the criteria for the recognition of intangible assets. It is important to note that all four options must be correct to get 2 marks. Unfortunately, many candidates got three answers correct but not all four; hence, got on marks. 97Intangible Options assets (*) (ix)Brand name developed by New —_| (x) $3m spent on a licence to (i) Designs worth $10m operate a production facility for six years (xi)$2.5m spent on new equipment to | (xii) $3m paid to acquire the Ww) develop a new successful product brand name Fast Designs (xiii) $2m spent on an advertising (xiv) $1m spent on the (vi) campaign expected increase construction of a product revenue by $20m prototype before its launch (xv) $4.5m spent on training (xvi) $2m paid as goodwill when (vit) customer service staff expected to acquiring Unique Co increase revenue by $5m Reasons for correct answers: Options Reasons (i) Meets the definition of intangible assets a Meets the definition of intangible assets (note that this contrast with the internal development of a brand) wi) Meet the definition of development expenditure (vil) | Meets the definition of intangible assets Reasons for incorrect answers: Options Reasons a Internally developed and therefore capitalization is prohibited (ii) Definitely not an intangible asset w This expenditure cannot be controlled and therefore it does not meet the definition of an asset (vii) | This expenditure cannot be controlled and therefore it does not meet the definition of an asset 58(*) This has been re-designed to be more user-friendly as presented on paper. Each line of options will contain two options, in which one is correct and the other is false. This could enable you to auto eliminate the false answer once you confirm a correct answer. i Intangible Options assets (*) Each line of | 1. Brand name developed by | 2. $3mspent on alicence to (i) options >| New Designs worth $10m operate a production facility for six years However, in a real CBE exam, all the options’ location is mixed up and it is vital to carefully read all the options given to pick the correct answer. eee CHAPTER 6: INVENTORY AND AGRICULTURAL/BIOLOGICAL ASSET Question 6.1: D Guidance: NRV = Estimated sel Reasons for the fact that NRV is less than cost: 1g price — Estimated completion costs — Estimated selling costs. ‘+ An increase in costs or a fallin selling price, ‘© Aphysical deterioration in the condition of inventory * Obsolescence of products. © Adecision as part of the company's strategy to manufacture or sell products at a loss. © Errors in production or purchasing. A,B, Care indicators of NRV is less than cost, because: A. The change in dress color indicates physical deterioration in inventory condition B. The court action might affect the product's reputation, leading to lower selling price. C._ Inventory condition indicates its obsolescence. Item D, the director's decision to cease production does not necessarily affect the NRV. 59Question 6.2: D Guidance: Remember | The standard on agriculture does not apply to land, intangible assets related to agricultural | activity nor to agricultural product at the point of harvest. It does not apply to biological assets ~ defined by the standard as living plants or animal IAS 41. | Grapes are agriculture bearer product => Out of scope of IAS 41 Land is out of IAS 41 scope Wine bottles are not agriculture produce => Out of IAS 41 product Grape vine is biological asset under IAS 41 scope A B, c D. Question 6.3: D Guidance: Remember Biological assets should be revalued to fair value less sale costs at the year end, with the gain or loss being taken to the statement of profit or loss If you chose A, you have used the cost model. If you chose B or C, you have not deducted the point-of-sale costs. 5 500 - (6,500 x 2%) = 6,370 => Dr Cattle 1,120 Value of cattle after revaluation = Revaluation gain = 6,370 ~ 5,250 = 1,120 => Cr Revaluation surplus 1,120 CHAPTER 7: IMPAIRMENT OF ASSETS Question 7.1: D Guidance: Remember indications of impairment: External sources: ‘© Decline in asset's market value © Adverse effect in the technological, market, economic or legal environment ‘© Increase in market interest rates 60Internal sources: ‘© Obsolescence or physical damage ‘© Significant changes with an adverse effect ‘* Economic performance and expected net cashflows of an asset are worse than expected Answer: D. The carrying amount of an entity's net assets being below the entity's market capitalisation is not an indication of impairment, itis an indication of increase in its value. Question 7. Guidance: Step 1: Total impairment of CGU Step 2: Determine any asset that is impaired (e.g. if an asset was specifically damaged) Step 3: Calculate impairment of goodwill in the cash generating unit. Step 4: Identify impairment of other assets in unit on pro-rata basis. Answer: Step 1: Total impairment of CGU: Recoverable amount of the cash-generating unit ~ Carrying amount = $400,000 - $300,000 $100,000 Step 2: Determine any asset that is impaired (e.g. if an asset was specifically damaged) There is no specific impairment loss in this case. Step 3: Calculate impairment of goodwill in the cash generating unit Goodwill is impaired by $50,000 and reduced to zero Step 4: Identify impairment of other assets in unit on pro-rata basis. Remained impairment of CGU = Total impairment (1) - Goodwill impairment (2) = $50,000 61Carrying amount | Impairment loss | Carrying amount post- (sm) (Sm) impairment ($m) PPE 300,000 46,875 253,125 [50,000 x DA 300,000/(300,000 +20,000)) Product patient 20,000 3,125 16,875 [50,000 x 20,000/(300,000 +20,000)} Current assets 30,000 - 30,000 Total 350,000 50,000 300,000 soe CHAPTER 8: FINANCIAL INSTRUMENT Question 8.1: B. Intangible assets Guidance: Apply theory in FR Lecture note, Section Ill. Remember: IAS 32 makes it clear that the following items are not financial instruments. (2) Physical assets and intangible assets (patents, trademarks etc) (b) Prepaid expenses, deferred revenue and most warranty obligations (c) Liabilities or assets that are not contractual in nature Answer: B. Intangible assets are not financial instrument as IAS 32 above. Question 8.2: B Guidance: Apply theory in Lecture note ACCA FR, chapter 8, Section I~ amortized cost and FVOCI: Initial measurement = fair value + transaction cost ‘+ With FVTPL = fair value; transaction cost > P/L Answer . Financial assets at fair value through profit or loss 62Question 8.3: $121,500 Guidance: This is compound financial instrument > split it into 2 parts: Debt instrument and Equity instrument Step 1: Calculate total proceeds Total proceeds = Number of convertible bonds x face value of each bond Step 2: Calculate annual interest payable ‘Annual interest payable = Total proceeds x Nominal annual interest rate Step 3: Calculate present value of interest cash flow and total proceeds Present value of annual interest payable = Discount rate x Annual interest payable Present value of total proceeds at the end of term = Discount rate x Total proceeds Discount rate = 1/(1+r)’— with r: market interest rate for similar debt, y: payment year Step 4: Calculate value of financial liability and equity instrument Value of financial liability = Present value of (annual interest payable + total proceeds) Value of Equity instrument = Total proceeds — Value of financial liability ‘Answer: Step 1: Calculate total proceeds Total proceeds = $1,500,000 (from thread) Step 2: Calculate annual interest payable $1,500,000 x 5% = $750,000 Annual interest payabl Step 3: Present value of annual interest cash flow and total proceeds [Time [Payment | Discount rate _| Present value | Year 1| $75,000 | 1/(1+8%)*1=0.93 $69,750 Year 2| $75,000 | 1/(1+8%)" 36| $64,500 Year3| $75,000 | 1/(1+8%)* 79 $59,250 Present value of total proceeds = $1,500,000 x 1/(1+8%) Step 4: Value of debt instrument = $69,750+ $64,500 + $59,250 + $1,185,000= $1,378,520 Value of Equity instruments = $1,500,000 - $1,378,520 = $121,500 63CHAPTER 9: LEASE Question 9.1: D Guidance: Apply theory in Lecture note ACCA FR, Chapter 9, Section I~ At the commencement of the lease, the lessee should recognize a lease liability and a right-of-use asset. The lease liability is initially measured at the present value of the lease payments that have not yet been paid ‘The right-of-use asset is initially recognised at cost, which comprises: ‘+ The amount of the initial measurement of the lease liability + Any lease payments made at or before the commencement date + Any initial direct costs ‘+The estimated costs of removing or dismantling the underlying asset in accordance with the terms of the lease. Answer: D. Total lease rentals payable under the lease agreement ‘The value recognised in respect of the lease payments will be the present value of future lease payments rather than the total value. Question 9. Guidance: Apply theory in Lecture note, Chapter 9, Section II Answer: D. A new motor vehicle with a cost of $27,000, leased for 12 months Assets permitted to be exempted from recognition are low-value assets or those with a lease term of 12 months or ess => Dis true; A, 8, Care false. Question 9. Guidance 7.040 Step 1: Calculate subtotal Subtotal cease liability (b/f) - Annual payment Step 2: Calculate lease liability (c/f) and interest rely on above table Interest = Subtotal x Tax rate Lease liability (c/) = Subtotal ~ Interest Answer: Apply above step, we have following table 6420x7 | $60,000 | ($20,000) | $40,000 $4,000 $44,000 ($40,000 x 10%) | ($40,000 + $4,000) 20x8 | $44,000 | ($20,000) | $24,000 $2,400 $26,400 ($24,000 x 10%) | ($24,000 + $2,400) 20x9 | $26,400 ($20,000) $6,400 $640 $7,040 ($6,400 x 10%) | (36,400 + $640) see CHAPTER 10: PROVISION, CONTINGENT LIABILITIES AND CONTINGENT ASSETS Question 10.1: $2.27m Guidance: Step 1: Discount cash flow of provision from year 5 to present value Step 2: Discount cash flow of provision from year 5 to year 2 Step 3: Unwinding provision at year 2 = Step 2 - Step 1 Answer: Cash outflow (present value) = $10m*1/(1+8%)° Cash outflow (year 2 value) = $10m*1/(1+8%)? Unwinding provisio Question 10.2: € Guidance: Lecture note ACCA FR, Apply theory in chapter 10, Step 1: Identify whether exist present obligation that arise from past event or not If Exist > Step 2: Assess whether have probable outflow or not from that obligation IF Yes > Step 3: Assess whether outflow can estimate reliable or not IFYes > Itis a provision ‘Answer: C. NCC makes refunds to customers for any cars returned that are detected technical defects 65‘Answer A is incorrect because the obligation does not exist at the reporting date and also cannot be reliably measured at present. ‘Answer B is an example of an adjusting event after the reporting date as it provides evidence of conditions existing at the reporting. Answer D is a contingent liability. However, as its likelihood is remote no provision is necessary. eee (CHAPTER 11: REVENUE Question 11.1: A, C Guidance: Apply theory in FR Lecture note, chapter 11, Section III Consignment inventory means that A sells goods to B, B agrees to buy, but goods are temporarily remained at A's warehouse. In this case, B bears all risks of the goods, including fire and explosion, and Bis not allowed to return the goods to A. Then A will record the revenue. Answer: A, C Both A and C indicate that the manufacturer retains ownership of the inventory. The other ‘options would indicate that the risks and rewards have been transferred to the dealer. Question 11. Guidance: Apply theory in section Il chapter 11 ~ Lecture note ACCA FR Before IFRS 15 was applied, the company did not record $ 100 from Handset revenue, and total revenue for both: Network + Handset services was recorded as $720. After IFRS 15 is applied, although Handset is free for customers and does not generate revenue for the business, revenue for both: Network + Handset services must be recognized, as Handset is also an obligation to perform in the contract. ‘Answer: Step 1: Calculate total amount received from the contract Total amount = $30 x 12 months x 2 years = $720 Step 2: Allocate the transaction price to the performance obligations Revenue for the two types of Network + Handset services is allocated proportionally as follows: $ % Handset. 150 | 17% (150/870) Contract - two years 720 | 83% (720/870) Total Values 870 | 100% 66CHAPTER 12: FOREIGN CURRENCY TRANSACTIONS Question 12.1: C Guidance: ‘+ Monetary items are measured at closing rate ‘+ Non-monetary items carried at historical cost should not be re-measured ‘+ Non-monetary items carried at fair value should be re-measured using the exchange rate as of the FV determination date Answer: C. Rate at date of transaction Non-monetary items carried at historical cost should not be re-measured > using rate at date of transaction Question 12.2: Guidance: oss $5 Step 1: Calculate amount of money in each period by using exchange rate ‘Step 2: Compare amount of money in 1 November 20X8 with total amount of money in 1 December 20X8 and 31 December 20X8 Answer: Loss $5 Date |Rate| $ : afi | 1.52 | 26,315 | 40,000 1/12 | 1.50 | 13,333 | 20,000 31/12 | 1.54 | 12,987 | 20,000 Net Exchange = 26,315 ~ (13,333+ 12,987) = - 5 > Loss eee CHAPTER 13: TAXATION Question 13.1: $20m Guidance: ‘Step 1: Opening tax balance = opening current tax liability + opening deferred tax liability Step 2: Closing tax balance = closing current tax liability + closing deferred tax liability ‘Step 3: Tax paid = Opening tax balance + Total tax expense (tax charge) - Closing tax balance 67Answer: ‘Step 1: Opening tax balance = $120m + $180m = $300m, Step 2: Closing tax balance = $150m + $400m = $550m Step 3: Tax paid = ($300m + 270m) - $550m = $20m Question 13.2: Guidance: ‘The tax expense in the statement of profit or loss is made up of the current year estimate, the prior year overprovision and the movement in deferred tax. The prior year overprovision must be deducted from the current year expense, and the movement in deferred tax must be added to the current year expense, as the deferred tax liability has increased Tax expense = Income tax payable for the year + closing tax balance - opening tax balance - over provision ‘Answer: D. $56,100 Tax expense = $60,000 ~ $4,500 + $600 = $56,100 Question 13.3: $100 Guidance: Deferred tax = [Accounting base (1) - Tax base (2)] x % Tax rate ‘Accounting base (1) = Carrying amount = $1,000 Tax base (2) = Cost — depreciation for tax purpose = $1,500 - $900 = $600 Answer: Deferred tax = ($1,000 - $600) = $400 x 25% = $100 oe CHAPTER 14: PREPARATION OF FINANCIAL STATEMENTS FOR SINGLE ENTITY Question 14.1: D Guidance: Apply theory in FR Lecture note, Chapter 14 ‘Answer: D. A revaluation gain of PPE => appear in OCI section. Question 14.2: 8 Guidance: Apply theory in FR Lecture note chapter 14. Answer: B. Loss on sale of investments. ‘The loss on sale of investments will be recognised in the statement of comprehensive income. 68CHAPTER 15: STATEMENT OF CASH FLOW (IAS 7) ion 15. 18 D Guidance: Apply theory in FR Lecture note, Chapter 15 Remember: + Operating activities are the principal revenue-producing activities of the entity and other activities that are not investing or financing activi ‘+ Investing activities are the acquisition and disposal of non-current assets and other investments not included in cash equivalents, ;ncing activities are activities that result in changes in the size and composition of the equity capital and borrowings of the entity Answer: Tax paid > operating activities > A is false Dividend paid > financing activities > Cis false 15. es Guidance: Remember: For investing cash flow: ‘© Outflow cash = Cash payments for acquiring PPE (purchase) ‘Inflow cash = Cash receipts from sales of PPE (disposal) © Loss on sale of PPE is non-cash expense > Not included in investing cash flow PPE ($000) ff 2,000 Disposal (CA) 250 Revaluation 150 Depreciation 300 Purchase balance} 1,400 b/t 3,000 3,550 3,550 69Question 15.3: $52,600 Guidance: Increase in cash and bank balances = Cash generated ~ Cash outflows Apply indirect method: Step 1: Start with operating profit Step 2: Adjust for non-cash items Step 3: Adjust for cash inflows/ outflows of current accounts ‘Step 4: Calculate increase in cash and bank balances ‘Answer: $ Step 1: Profit 75,000 Step 2: Add: Depreciation 5,000 Step 3: Increase in receivables (4,000) Decrease in inventory 7,200 Increase in payables Step 4: Cash generated from operations 84,600 Purchase of non-current assets (32,000) Net increase in cash and cash equivalents 52,600 eee CHAPTER 16: INTRODUCTION TO GROUPS Question 16. Guidance: Remember: Parent control over a subsidiary is determined when the parent company holds more than 50% of voting rights in the subsidiary unless it is clearly specified that ownership is not link with control. In the following cases, the parent company retains control even if the parent company holds less than 50% of voting rights in the subsidiary: + Other investors agree to grant the parent company more than 50% of the voting rights; + The parent company has the right to dominate the financial and operating policies as agreed upon; ‘+ The parent company has the right to appoint or dismiss a majority of the members of the Board of Directors or an equivalent level of management; + The parent company has the majority of voting rights at the meetings of the Board of Directors or equivalent management level. 70Answer: B. Owning 51%, but the constitution requires that decisions need the unanimous (consistent) consent of shareholders. Bis true. This situation is unlikely to represent parent control over investee because of the fact, that decisions need unanimous consent of shareholders may indicate that 51% owing of share not attached with relative % of voting rights. ‘Ais false because when the parent company is able to elect 5 of the 8 directors (over 50% voting rights), it indicates control over investee. C js false because parent company has potential to have shareholding up to 55%, normally attached with relative % of voting rights if nothing stated otherwise, indicating control over investee. Dis false because parent company stills has the majority of voting rights. Question 16. Guidance: Remember Company is exempt from producing consolidated financial statements in one of following following situations: + (2) The parent is itself a wholly-owned subsidiary or it is a partially owned subsidiary of | another entity and its other owners, including those not otherwise entitled to vote, have | been informed about, and do not object to, the parent not presenting consolidated | financial statements. + (2)Its securities are not publicly traded. + (3) tis not in the process of issuing securities in public securities markets. + (4) The ultimate or intermediate parent publishes consolidated financial statements that, comply with International Financial Reporting Standards ‘Answer: A. The activities of the subsidiary are significantly different to the rest of the group and to consolidate them would prejudice the overall group position => does not satisfy any situation above. Bis false because itis exactly the situation (4). Cis false because the parent is in situation (3). Dis false because the parent is in situation (1). maCHAPTER 17: PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF FINANCIAL POSITION Question 17.1: $480,000 Guidance: Step 1: Calculate non-controlling interests (NCI) at acquisition date There are 2 methods for calculating NCI at acquisition date ‘+ Method 1 partial fair value: NCI = % NCI own x fair value of net assets | Method 2 full fair value: NCI = Number of share NCI own x Share price of subsidiary at acquisition date Step 2: Calculate post-acquisition RE of subsidiaries allocated for NCI Post-acquisition RE of subsidiaries = (Closing RE - Opening RE) x % NCI own Step 3: Calculate NCI at reporting date NCI at reporting date Net Answer: ICI at acquisition date + post acquisition RE of subsidiaries allocated for Step 1: Calculate NCI at acquisition date ,000,000 x $2 x 20% =$400,000 Step 2: Calculate post-acquisition RE of subsidiaries allocated for NCI NCI value at acquisition = Share of post-acquisition retained earnings = ($800,000 - $400,000) x 20% = $80,000 Step 3: NCI at reporting date = $400,000 + $80,000 = $480,000 Question 17.2: $10.9m Guidance: Remember: ‘There are two cases when parent company acquired subsidiaries + Transfer cash immediately at acquisition date > Cash consideration = Amount of cash at acquisition date ~ Professional fees (if exist) + Transfer cash in future ‘> Cash consideration = Amount of cash at transfer day/ (1+ cost of capital)* With tis period of time from acquisition day to transfer day 72‘Answer: $10.9m, ‘+ Transfer cash immediately at acquisition date Cash consideration = $8,000,000 ~ $500,000 = $7.5m + Transfer cash in future Cash consideration = $12,000,000/(1+0.1)?= $10.9m Question 17.3: C Guidance: Eliminating intra-group unrealized profit never affects non-controlling interests ~ (ii) is false Unrealized profit will affect non-controlling interests in case subsidiary takes profit from parent (subsidiary sells good for parent) The profit made by a parent on the sale of goods to a subsidiary is only realized when subsidiary sells the goods to a third party > (i) is true ‘The profit element of goods supplied by the parent to an associate and held in year-end inventory must be eliminated in partly > (ii) is true Unrealized profit = Total profit from sale x unsold x % owned in associate > Just be partly eliminated Answer: C. (i) and (ii) oot CHAPTER 18A: PREPARATION OF CONSOLIDATED FINANCIAL STATEMENT - STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME Question 184.1: $174,000 Guidance: Calculate NCI using the format below: Profit for the year ($000) Subsidiary’s profit for year x ‘Add: Revaluation surplus x Less: FV depreciation of NCA a) uRP a) Impairment (FV method applied) ” NCI (x NCI) 3year ($/000) Subsidiary's profit for year 1,500 ‘Add: Revaluation surplus 40 Less: URP (6,000,000 x 10%) (600) Impairment (FV method applied) (70) 870 NCI (870 x 20% NCI) 174 Question 18A.2: $12.25m Guidance: Group profit or loss on disposal could be calculated using the pro-forma as follow: $ Sale proceeds (or consideration transferred) x Add: NClat date of disposal a Less: S’s net assets at date of disposal ”) Remaining goodwill at date of disposal o X/(X) Step 1: Identify given information and non-given (to be calculated) information related to profit or loss on disposal calculation Step 2: Calculate non-given information Step 3: Calculate the profit or loss on disposal using the pro-forma. Answer: Step 1: Identify given information and non-given (to be calculated) information related to profit or loss on disposal calculation Profit for the > Non-given $'(000) Sale proceeds (or consideration transferred) 20,000 ‘Add: NClat date of disposal x Less: Group's share of S's net assets at date of disposal (12,000) Remaining goodwill at date of disposal 0) XX) 74Step 2: Calculate non-given information ~ NCI at date of disposal $"(000) Non-controlling interest at acquisition 3,500 Add; %NCIin post-acquisition of S's net asset 1,500 (($12m-$7m) x (1-70%)) Less: % NCI of goodwill impairment (750) ($2.5m x (1-70%)) NCI at date of disposal 4250 Step 3: Calculate the profit or loss on disposal using the pro-forma. $'(000) Sale proceeds (or consideration transferred) 20,000 Add: —_NClat date of disposal 4,250 Less: Group's share of S’s net assets at date of disposal (12,000) Remaining goodwill at date of disposal (0) 12,250 Question 184.3: $723,975 Guidance: Remember: Gross profit Group = Gross profit of Parent + Gross Profit of Subsidiaries - Unrealized Profit Step 1: Identify Gross profit of Parent (from scenario) Step 2: Gross Profit Subsidiary = Year-end gross profit (from scenario) x Time apportioned Step 3: Calculate unrealized profit (from intra group sale) Unrealized profit = Sale of good x Mark-up/(1 + Mark-up) Answer: $723,975 Step 1: Gross profit of P = $550,800 Step 2: Gross Profit Subsidiary = $232,900 x 9/12 (from 1/4/20X9-31/12/20X9) = $174,675 Step 3: Unrealized profit = (50,000 x 0.25 /1.25) x 15% = $1,500 > Gross profit Group = $550,800 + $174,675 ~ $1,500 = $723,975 5Question 18A.4: (Sep/Dec 2020) $6,280,000 Group's RE at 31/12/2078: ‘000 100% Pater’s RE 4,000 Sono's post acquisition profit (3,400-520 pre-acquisition = 2,280 30 URP (W)) x 80% Group's RE 6,280 (W) URP when S sells goods to P: URP = Gross profit x % goods unsold at year end = 240,000 x 20/120 x % = 30,000 Examiner's report: This is a fill in the blank, candidates should take care to read all the information given to ensure their calculation is accurate and has taken account of all the details provided. Unfortunately, most candidates made one error by not reading the question scenario carefully enough. The three most common errors were: calculating the PUP adjustment using margin rather than mark-up: URP calculated as 240,000 x 20% x % = 36,000; so, arrived RE as 4,000,000 + (3,400,000 ~ 520,000 - 36,000) x 80% = 6,275,200 (ii) Not reflecting the 80% ownership: 4,000,000 + (3,400,000 ~ 520,000 36,000) = 6,850,000 (ili) Not taking into account the retained earnings figure in Sono Co at the date of acquisition: 4,000,000 + (3,400,000 ~ 36,000) x 80% = 6,696,000 It is worth pointing out that most candidates who did not arrive at the correct figure only made one of these errors which suggests they are not methodically working through the information given. co CHAPTER 18B: ACCOUNTING FOR ASSOCIATES Question 188.1: C. $180m Guidance: Step 1: Calculate investment in Associate at acquisition date Step 2: Calculate Associate’s post-acquisition earnings 76