Business School

Discipline: Intermediate accounting I

Fall Semester 2023: Final Examination
Duration: 150 minutes (2 hours and 30 minutes)
The overall score is 40 points

Lecturer Aktleuova K.

Dean of Business School

Mukashev E.

Approved by protocol №4 of the 24th of November, 2023

Examination instructions
1. Do not open this question paper until instructed by the Lecturer.
2. All books, materials, papers, notes, magazines, journals, bags, brief cases and other materials
must be placed in the designated area.
3. Candidates may not borrow anything from other candidates.
4. Taking to anyone other than the invigilator in the examination room is regarded as cheating.
5. No questions may be asked after the examination is commenced.
6. All communications, in any form or looking at each other’s papers are strictly prohibited and
is regarded as cheating.
7. This question paper must not be removed from the examination hall.
8. Time allowed: 2 hour 30 minutes
9. 9. Section A (10 marks) – objective test questions. ALL 5 MCQ questions are
compulsory
Section B (10 marks) – objective case questions. ALL 5 MCQ questions are
compulsory
Section C (20 marks) – one open ended question is compulsory
10. 10. You must round the answer to the nearest two digits.
11. 11. Cheating is an academic offence and will be investigated according to the
University procedures.
12. Zero grade for the course will be awarded in case of cheating.
I have read and understood the examination rules, and I take the full responsibility of the consequences
of violating these rules.

Signature: ________________
Section A - MCQ

1. Gilbert took out a $7.5 million 10% loan on 1 January 20X6 to build a new warehouse during the
year Construction of the warehouse began on 1 February 20X6 and was completed on 30
November 20X6. As not all the funds were needed immediately, Gilbert invested $2 million in
4.5% bonds from 1 January to 1 May 20X6. What are the total borrowing costs to be capitalized
in respect of the warehouse? Show your calculations.

___________

Answer: $602,500
The interest can only be capitalised during the period of construction, which is from 1 February 20X6.
Therefore the interest can be capitalised for 10 months, being from 1 February to 30 November 20X6.
This gives $625,000 ($7.5 million * 10% *10/12).
Any temporary investment income earned during this period should be netted off the amount
capitalised. The amount earned from 1 February to 1 May 20X6 is $22,500 ($2 million * 4.5% * 3/12).
Therefore the amount to be capitalised is $625,000 – $22,500 = $602,500.
Note that all interest incurred and earned in January 20X6 is before the construction period and therefore
is recorded in the statement of profit or loss.

2. An entity purchased a property 15 years ago at a cost of $100,000 and have been depreciating it at
a rate of 2% per annum, on the straight line basis. The entity have had the property professionally
revalued at $500,000. What is the revaluation surplus that will be recorded in the financial
statements in respect of this property?
A. $400,000
B. $500,000
C. $530,000
D. $430,000

Answer: D
Current value 500,000
Carrying amount at date of revaluation
(100,000 – (100,000 * 2% * 15 yrs)) (70,000)
–––––––
Revaluation gain 430,000

3. To which of the following items does IAS 41 “Agriculture apply”?

(i) A change in fair value of a herd of animals relating to the unit price of the animals.
(ii) Logs held in a wood yard.
(iii) Farm land which is used for growing vegetables.
(iv) The cost of developing a new type of crop seed which is resistant to tropical diseases.

A. All four
B. (i) only
C. (i) and (ii) only
D. (ii) and (iii) only

Answer: B. The logs will be classed as inventory. The land will be classed as property, plant
and equipment. The development costs will be treated as an intangible asset.

Section B - MCQ
The following scenario relates to questions 1–5

Flightline is an airline which treats its aircraft as complex non‐current assets, accounted for
under the historical cost model. The cost and other details of an aircraft are:
$000 Estimated life
Interior cabin fittings – installed 1 April 20X5 25,000 5 years
Engine – installed 1 April 20X5 9,000 36,000 flying hours

In the year ended 31 March 20X9, the aircraft flew for 1,200 hours for the six months to 30
September 20X8.

On 1 October 20X8 the aircraft suffered a ‘bird strike’ accident which damaged the engine
beyond repair. This was replaced by a new engine with a life of 36,000 hours at cost of $10.8
million.

Flightline’s year end is 31 March 20X9.

1. What is the depreciation to be charged in respect of the engine for the 6 month period to 1
October 20X8?
$__________ ,000

Answer: $300,000
The engine will be depreciated over the life of 36,000 flight hours. As the aircraft has flown
for 1,200 hours in the first 6 months, the depreciation for the engine will be $9 million*
1,200/36,000 = $300,000.

2. Which of the following explains the correct accounting treatment of the engine?
A. Write off the damaged engine, capitalize the new engine and depreciate over 24,000
hours
B. Treat the $10.8 million as a repair to the damaged engine and continue to depreciate the
engine as in the first 6 months
C. Capitalize $6 million to replace the damaged engine, expense the other $4.8 million
D. Write off the damaged engine, capitalize the new engine and depreciate over 36,000
hours

Answer: D
Replacement components of complex assets can be capitalized. As the new engine has a life of
36,000 hours, the engine will be depreciated over this life rather than the based on the On 1
October 20X8 the aircraft suffered a ‘bird strike’ accident which damaged the engine beyond
repair. This was replaced by a new engine with a life of 36,000 hours at cost of $10.8 million.

3. A wing was also damaged, but was repaired at a cost of $3 million. The accident also
caused cosmetic damage to the exterior of the aircraft which required repainting at a cost
of $2 million.

Identify the correct treatment for the $3 million repair costs to the wing and the $2 million
repainting of the aircraft
Capitalize Expense
$3 million repair of the wing
$2 million repainting of the exterior

Answer:
Capitalize Expense
$3 million repair of the wing
$2 million repainting of the exterior

Both costs will be regarded as repairs and must be expensed.

4. As the aircraft was out of service for some weeks due to the accident, Flightline took the
opportunity to upgrade its cabin facilities at a cost of $4.5 million. This did not increase
the estimated remaining life of the cabin fittings, but the improved facilities enabled
Flightline to substantially increase the air fares on this aircraft.

What is the carrying amount of the cabin fittings as at 31 March 20X9?

A. $8,600,000
B. $8,000,000
C. $5,000,000
D. $7,250,000

Answer: B
Cabin fittings – at 1 October 20X8 the carrying amount of the cabin fittings is $7.5 million
(25,000 – (25,000 * 3.5/5). The cost of improving the cabin facilities of $4.5 million should be
capitalized as it led to enhanced future economic benefits in the form of substantially higher
fares.

The cabin fittings would then have a carrying amount of $12 million (7,500 + 4,500) and an
unchanged remaining life of 18 months. Thus depreciation for the six months to 31 March
20X9 is $4 million (12,000 * 6/18), giving a carrying amount of $8 million.

If you selected A, you have depreciated the upgrade over 5 years rather than the remaining life.
If you selected C, you have not capitalized the upgrade. If you selected D, you have done a full
year’s depreciation on the upgrade.

Section C – open ended questions

1. The following trial balance relates to LLP “Timur” at 31 March 2021:

DR CR
$000 $000
Equity shares of $1 each 50,000
Other components of equity 15,000
10% loan note (note iii) 10,000
Retained earnings at 1 April 2020 25,400
Intangible assets – at cost (note (ii)) 55,000
Plant and equipment – at cost (note (ii)) 66,500
Accumulated depreciation – 1 April 2020 – intangible assets 7,000
– plant and equipment 22,500
Investments at fair value through profit or loss (note (iii)) 22,500
Inventory at 31 March 2021 48,000
Trade receivables 50,700
Bank 10,500
Trade payables 42,000
Revenue 300,000
Cost of sales (note 1) 154,000
Distribution costs 30,400
Administrative expenses 31,000
Dividend paid 8,000
Loan note interest paid 400
Investment income 1,500
Income tax expenses 9,000
Current tax 12,600
486,000 486,000

The following notes are relevant:

(i) Non‐current assets:
The company use strait-line depreciation/amortization method for its intangible
assets and Plant & equipment. Useful life of intangible assets is 10 years, while for
plant & equipment it is 25 years.
No depreciation/amortization has yet been charged on any non‐current asset for the
year ended 31 March 2021. Depreciation, amortization and impairment charges are
charged as following: cost of sales - 70%, administrative expense - 30%.

(ii) The investments at fair value through profit or loss had a fair value of $18 million
on 31 March 2021. There were no purchases or disposals of any of these
investments during the year.
(iii) The 10% loan note was issued on 1 April 2019 and it is repayable in five years.

Required:
A. Prepare the statement of profit or loss for LLP “Timur” for the year ended 31 March
2021,
B. the statement of financial position for LLP “Timur” as at 31 March 2021.

Answers

The statement of profit or loss for LLP “Timur” for the year ended 31 March 2021
In $000
Revenue 300,000
COS ((154,000+8,160*70%) (W1)) (159,712)
Gross profit 140,288
Distribution cost (30,400)
Admin cost (31,000+8,160*30%) (33,488)
Profit from operation 76,440
Investment income 1,500
Loss from investment P&L (22,500-18,000) (4,500)
Financed cost (10%*10,000) (1,000)
Profit before tax 72,440
Income tax expense (9,000)
Profit after tax 63,440
 The statement of financial position for LLP “Timur” as at 31 March 2021
$000
Non-current assets
Intangible assets 42,500
Plant and equipment 41,340
Investments at fair value through profit or loss 18,000
Total non current assets 101,840

Current assets
Inventory 48,000
Trade receivable 50,700
Bank 10,500
Total current assets 109,200
Total assets 211,040

Equity
Share capital 50,000
Other components of equity 15,000
Retained earnings (25,400+63,440-8,000) 80,840
Total equity 145,840

Liabilities
Non-current liabilities
10% loan note 10,000
Total non current liabilities 10,000

Current liabilities
Trade payable 42,000
Interest payable (1,000-400) 600
Current tax payable 12,600
Total current liabilities 55,200
Total liabilities 65,100
Total liabilities and equity 211,040

W1.
Intangible assets Plant and equipment
Cost at BB 55,000 66,500
Accumulated dep/amor at BB (7,000) (22,500)
Net cost at BB 48,000 44,000
Depreciation charge per year (5,500) (2,660)
Net cost at EB 42,500 41,340
2. Preparation of a Statement of Cash Flows and a Statement of Financial Position. Chekov
Corporation’s statement of financial position at the end of 2021 included the following
items.

The following information is available for 2022.

1. Net income was $55,000.
2. Equipment (cost $20,000 and accumulated depreciation $8,000) was sold for $9,000.
3. Depreciation expense was $4,000 on the building and $9,000 on equipment.
4. Patent amortization was $2,500.
5. Current assets other than cash increased by $25,000. Current liabilities increased by $13,000.
6. An addition to the building was completed at a cost of $27,000.
7. A long-term investment in debt securities was purchased for $16,000.
8. Bonds payable of $50,000 were issued.
9. Cash dividends of $25,000 were declared and paid.
10. Treasury shares were purchased at a cost of $11,000.

Instructions
Prepare a statement of cash flows for 2022.

Answer
CHEKOV CORPORATION
Statement of Cash Flows
For the Year Ended December 31, 2022
Cash flows from operating activities
Net income $55,000
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation expense ($4,000 + $9,000)=$13,000
Patent amortization. 2,500
Loss on sale of equipment 3,000*
Increase in current liabilities 13,000
Increase in current assets (other than cash) (25,000)
Net cash provided by operating activities 61,500
Cash flows from investing activities
Sale of equipment 9,000
Addition to building (27,000)
Purchase of investment in debt securities (16,000)
Net cash used by investing activities (34,000)
Cash flows from financing activities
Issuance of bonds 50,000
Payment of dividends (25,000)
Purchase of treasury shares (11,000)
Net cash provided by financing activities 14,000
Net increase in cash $41,500

*[$9,000 – ($20,000 – $8,000)]