ACCA

Financial Reporting (FR)

Specimen exam (full)

Questions

Time allowed 190 minutes

Full name:

1
Section A (2 marks per question)

1 On 1 January 20X1 Sty received $1m from the local government on the condition that they employ at least
100 staff each year for the next 4 years. Due to an economic downturn and reduced consumer demand on
1 January 20X2, Sty no longer needed to employ any more staff and the conditions of the grant required
full repayment.

What should be recorded in the financial statements on 1 January 20X2?

A Reduce deferred income balance by $750,000

B Reduce deferred income by $750,000 and recognize a loss of $250,000
C Reduce deferred income by $1,000,000
D Reduce deferred income by $1,000,000 and recognize a gain of $250,000

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 as a liability
C Creating a provision for staff relocation costs a part of a planned restructuring
D Recording a sale and repurchase transaction with a bank as a loan rather than a sale

3 According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how
should a material error in the previous financial reporting period be accounted for in the
current period?

A By making an adjustment in the financial statements of the current period through the
statement of profit or loss, and disclosing the nature of the error in a note.
B By making an adjustment in the financial statements of the current period as a movement
on reserves, and disclosing the nature of the error in a note.
C By restating the comparative amounts for the previous period at their correct value, and
disclosing the nature of the error in a note.
D By restating the comparative amounts for the previous period at their correct value, but
without the requirement for a disclosure of the nature of the error in a note.

2
Section A (2 marks per question)

4 To which of the following items does IAS 41 Agriculture apply?

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

A All four
B 1 only
C 1 and 2 only
D 2 and 3 only

5 IAS 2 Inventories specifies expenses that should be included in year-end inventory values.
Which THREE of the expenses below are allowable by IAS 2 as expenses that should be included
in the cost of finished goods inventories?

A Marketing and selling overhead

B Variable production overhead
C General management overhead
D Factory management overhead allocated to production
E Cost of delivering raw materials to the factory
F Abnormal increase in overhead charges caused by unusually low production levels due
to the exceptionally hot weather.

6 On 1 January 20X3 Rabbit acquires a new machine with an estimated useful life of 6 years under
the following agreement:

 An initial payment of $13,760 will be payable immediately.

 5 further annual payments of $20,000 will be due, commencing 1 January 20X3
 The increase rate implicit in the lease is 8%
 The present value of the lease payments, excluding the initial payments, is $86,240

What will be recorded in Rabbit’s financial statements at 31 December 20X4 in respect of

the lease liability?

Finance cost Non-current liability Current liability

A 4,123 35,662 20,000
B 5,299 51,539 20,000
C 5,312 51,712 20,000
D 5,851 43,709 15,281

3
Section A (2 marks per question)

7 On 1 January 20X6, Sideshow sold a property for its fair value of $2 million, transferring title to the
property on that date. Sideshow then leased it back under a 5-year lease, paying $150,000 per
annum on 31 December each year. The present value of rentals payable was $599,000 and the
interest rate implicit in the lease was 8%. The carrying amount of the property on 1 January 20X6
was $1.6 million and it had a remaining useful life of 20 years.

What entries would be made in Sideshow’s statement of profit or loss for the year ended
31 December 20X6?

A Profit on disposal of $280,200, depreciation of $95,840, finance cost of $47,920

B Profit on disposal of $400,000, rental expense of $150,000
C Profit on disposal of $400,000, depreciation expense of $95,840, finance cost of
$47,920
D Profit on disposal of $280,200, depreciation of $119,800, finance cost of $47,920

8 On 1 July 20X7, an entity purchased a five-year loan note investment with a par value of $7m. The
investment was purchased at a 12% discount. The loan note has a coupon rate of 5% and an
effective interest rate of 8%. Interest is receivable annually in arrears. The entity has the intention
of holding the loan note to receive the contractual cash flows.

How much finance income should be reported in the statement of profit or loss of the
entity for the year ended 30 June 20X8 (to the nearest $000)?

$ ,000

9 Sunshine is an entity with a reporting date of 31 December 20X1 and a functional currency of
dollars ($). On 30 June 20X1, it purchased land from overseas at a cost of 30 million dinars. The
land is an item of property, plant and equipment and is measured using the cost model.

Exchange rates are as follows:

Dinars: $1
As at 30 June 20X1 3.0
As at 31 December 20X1 2.0
Average rate for year-ended 31 December 20X1 2.5

The fair value of the land at 31 December 20X1 was 32 million dinars.

What is the carrying amount of the land as at 31 December 20X1?

A $10 million
B $15 million
C $12 million
D $16 million

4
Section A (2 marks per question)

10 Yling entered into a contract to construct an asset for a customer on 1 January 20X4 which is
expected to last 24 months. The agreed price for the contract is $5 million. At 30 September 20X4,
the costs incurred on the contract were $1.6 million and the estimated remaining costs to complete
were $2.4 million. On 20 September 20X4, Yling received a payment from the customer of $1.8
million which was equal to the full amount billed. Yling calculates contract progress using the input
method, on the basis of costs incurred compared to the estimated total costs.

What amount would be reported as a contract asset in Yling’s statement of financial

position as at 30 September 20X4?

11 Garfish had profits after tax of $3 million in the year ended 31 December 20X7. On 1 January
20X7, Garfish had 2.4 million ordinary shares in issue. On 1 April 20X7 Garfish made a one for
two rights issue at a price of $1.40 when the market price of Garfish’s shares was $2.00.

What is the basic earnings per share for the year ended 31 December 20X7, according to
IAS 33 Earnings Per Share?

A 89.1 cents
B 125 cents
C 80.2 cents
D 93.2 cents

12 On 1 January 20X4, Sam Co had 3 million ordinary shares in issue. On 1 June 20X4, Sam Co
made a 1 for 3 bonus issue. On 30 September 20X4, Sam Co issued a further 1 million shares at
full market price. Sam Co had profits attributable to ordinary equity holders of $2 million for the
year ended 31 December 20X4.

What is the basic earnings per share for the year ended 31 December 20X4, according to
IAS 33 Earnings Per Share?

A 47.1 cents
B 52.2 cents
C 56.8 cents
D 50.0 cents

5
Section A (2 marks per question)

13 Which of the following would require a provision for a liability to be created by BW at its
reporting date of 31 October 20X5?

A The government introduced new laws on data protection which come into force on 1
January 20X6. BW’s directors have agreed that this will require a large number of staff to
be retained. At 31 October 20X5, the directors were waiting on a report they had
commissioned that would identify the actual training requirements.
B At the year-end BW is negotiating with its insurance provider about an outstanding
insurance claim. On 20 November 20X5, the provider agreed to pay $200,000.
C BW makes refunds to customers for any goods returned within 30 days of sale, and has
done so for many years.
D A customer is suing BW for damages alleged to have been caused by BW’s product. BW is
contesting the claim and at 31 October 20X5 the directors have been advised by BW’s
legal advisers that it is very unlikely to lose the case.

14 At 1 October 2014, BK had accrued interest payable of $12,000.

During the year ended 30 September 20X5, BK charged finance costs of $41,000 to its statement
of profit or loss, including unwinding a discount relating to a provision stated at its present value
of $150,000 at 1 October 20X4. The closing balance on accrued interest payable account at 30
September 20X5 was $15,000, and BK has a discount rate of 6%.

How much interest paid should BK show on its statement of cash flows for the year
ended 30 September 20X5?

A $38,000
B $29,000
C $35,000
D $41,000

15 The following balances were extracted from N’s statement of financial position as at 31 December.

20X9 20X8
$’000 $’000
Deferred tax liability 38 27
Current tax payable 119 106

Extract from statement of profit or loss for the year ended 31 December 20X9.

$’000
Income tax expense 122

What should the amount of tax paid be included in N’s statement of cash flows for the
year ended 31 December 20X9?

6
Section B (2 marks per question)

The following scenario relates to questions 16-20

Speculate owns two properties and uses fair value accounting where possible.

Property A: An office building used by Speculate for administrative purposes. At 1 April 20X2 it had a
carrying amount of $2 million and a remaining life of 20 years. On 1 October 20X2, the property was let to
a third party and reclassified as an investment property. The property had a fair value of $2.3 million at 1
October 20X2, and $2.34 million at 31 March 20X3.

Property B: Another office building let on a 12-month lease to a subsidiary of Speculate. At 1 April 20X2, it
had a fair value of $1.5 million which had risen to $1.65 million at 31 March 20X3.

16 What is the correct treatment when Property A is reclassified as an investment property?

A Take $350,000 gain to other comprehensive income

B Take $350,000 gain to the statement of profit or loss
C Take $400,000 gain to other comprehensive income
D Take $400,000 gain to the statement of profit or loss

17 Which of the following models can Speculate use to account for investment properties
in its individual financial statements?
1) Cost models
2) Revaluation model
3) Fair value model

A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D All three

18 What is the total gain for investment properties to be included in Speculate’s individual
statement of profit or loss for the year ended 31 March 20X3? Enter your answer to the
nearest dollar ($).

7
Section B (2 marks per question)

19 In the individual and consolidated financial statements of Speculate, how would Property
B be accounted for?

Individual Consolidated
Investment property Investment property
Property, plant & equipment Property, plant & equipment
Within goodwill Cancelled as an intra-group item

20 What would the carrying amount of Property A be at 31 March 20X3 if Speculate used the
cost model for investment properties?

A $1,950,000
B $1,900,000
C $2,185,000
D $2,182,051

8
Section B (2 marks per question)

The following scenario relates to questions 21-25

On 1 September 20X3, Laidlaw factored (sold) $2 million of trade receivables to Finease. Laidlaw received
an immediate payment of $1.8 million. Under the factoring agreement any receivables not collected after
four months will be sold back to Laidlaw.

On 1 October 20X2, Laidlaw sold some maturing inventory which had a cost of $4.5 million to a bank for its
fair value of $5 million. Under the terms of the sale agreement Laidlaw has the option to repurchase the
inventory after a period of ten years at a price of $7.4 million. At this date the fair value of the inventory is
expected to be $11 million, and the repurchase price reflects an equivalent annual rate of interest of 4%.

Laidlaw issued $10 million convertible loan notes on 1 October 20X2 that carry a nominal (coupon) interest
rate of 5% per annum, and are redeemable on 1 October 20X5. A similar loan note, without the conversion
option, would have required Laidlaw to pay an interest rate of 8%.

Relevant discount rates are shown below:

End of year 5% 8%
1 0.95 0.93
2 0.91 0.86
3 0.86 0.79

21 Which of the following is correct regarding Laidlaw’s factoring of trade receivables for
the year ended 30 September 20X3?

A $200,000 should be recorded as an administrative expense for the disposal of the

receivables
B The receivables should be removed from the statement of financial position
C This represents a ‘without recourse’ factoring agreement
D The receipt of $1.8 million should be treated as a loan

22 What amount should be recorded in equity (to the nearest thousand) in respect of the
convertible loan notes issued by Laidlaw?

$ ,000

23 Which TWO of the following items should be recorded in Laidlaw’s financial statements
for the year ended 30 September 20X3 in respect of the maturing inventory sale?

A $200,000 finance cost

B $50,000 release of deferred income
C $5 million revenue
D $5.2 million loan
E $450,000 deferred income liability
F $500,000 gross profit

9
Section B (2 marks per question)

24 Which of the following statements regarding the convertible loan notes is NOT true?

A The convertible loan notes will affect gearing due to the liability component being
different to the equity component
B The equity amount will remain fixed until the date of conversion
C The liability at 30 September 20X5 will be $10 million
D 5% interest will be charged to the statement of profit or loss as a finance cost

25 Applying the principle of split accounting to convertible loan notes is important to satisfy
which of the following qualitative characteristics

A Faithful representation
B Timeliness
C Verifiability
D Relevance

10
Section B (2 marks per question)

The following scenario relates to questions 26-30

Manda Co prepares its financial statements to 30 September each year. Manda Co’s draft financial
statements were finalized on 20 October 20X3. They were authorized for issue on 15 December 20X3 and
the annual general meeting of shareholders took place on 23 December 20X3.

On 30 September 20X3, Manda Co moved out of one of its properties and put it up for sale. The property
met the criteria as held for sale on 30 September 20X3. On 1 October 20X2, the property had a carrying
amount of $2.6m and a remaining life of 20 years. The property is held under the revaluation model. The
property was expected to sell for a gross amount of $2.5m with selling costs estimated at $50,000.

Manda Co decided to sell an item of plant during the year ended 30 September 20X3. On 1 October 20X2,
the plant had a carrying amount of $490,000 and a remaining useful life of seven years. The plant met the
held for sale criteria on 1 April 20X3. At 1 April 20X3, the plant had a fair value less costs to sell of $470,000,
which had fallen to $465,000 at 30 September 20X3.

26 In accordance with IAS 10 Events after the Reporting Period, which of the following
statements is/ are CORRECT for Manda Co?

1) All events which occur between 30 September 20X3 and 15 December 20X3 should be
considered as events occurring after the reporting period

2) An event which occurs between 30 September 20X3 and 15 December 20X3 and which
provides evidence of a condition which existed at 30 September 20X3 should be
considered as an adjusting event

A 1 only
B Both 1 and 2
C 2 only
D Neither 1 nor 2

27 In accordance with IAS 10, which of the following events would be classed as a non-
adjusting event in Manda Co’s financial statements for the year ended 30 September
20X3?

A During October 20X3, there was evidence of a permanent diminution in the carrying
amount of a property held at 30 September 20X3
B On 1 December 20X3 the acquisition of a subsidiary was completed, following
lengthy negotiations which began in September 20X3
C The sale of inventory during October 20X3 at a value less than its cost. This inventory
was included in the financial statements at cost on 30 September 20X3
D The insolvency of a major customer during October 20X3, whose balance was
included within receivables at 30 September 20X3

11
Section B (2 marks per question)

28 What is the total amount charged to Manda Co’s profit or loss in respect of the property
for the year ended 30 September 20X3?

A $130,000
B $180,000
C $150,000
D $100,000

29 In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
what is the carrying amount of the plant in Manda Co’s statement of financial position as
at 30 September 20X3?
A $420,000
B $470,000
C $455,000
D $465,000

30 Which of the following items should be classed as an asset held for sale under IFRS 5?

A Manda Co’s head office building is to be demolished, at which point the land will be
put up for sale. A number of prospective bidders have declared an interest and the
land is expected to sell within a few months of the demolition.
B An item of plant was put up for sale at the start of the year for $500,000. Six parties
have made a bid to Manda Co for the plant but none of these bids has been above
$200,000.
C A chain of retail outlets are currently advertised for sale. Manda Co has provisionally
accepted a bid, subject to surveys being completed. The surveys are not expected to
highlight any problems. The outlets are currently empty.
D A brand name which Manda Co purchased in 20X2 is associated with the sale of
potentially harmful products. Manda Co has decided to stop producing products
under this brand, which is currently held within intangible assets.

12
Section C (20 marks)

31 Chang Co

On 1 January 20X8 Chang Co acquired 80% of the 8 million $1 equity share capital of Sing Co.
Chang Co issued three new shares in exchange for every five shares it acquired in Sing Co.
Additionally Chang Co will pay further consideration on 31 December 20X8 of $2.20 per share
acquired. Chang co’s cost of capital is 10% per annum and the discount factor at 10% for one year
is 0.9091. At the date of acquisition, the fair value of Chang Co’s shares was $9 each.

Statement of profit or loss for the year ended 30 September 20X8

Chang Co Sing Co
$’000 $’000
Revenue 51,680 30,400
Cost of sales (30,960) (20,800)

Gross profit 20,720 9,600

Distribution costs (1,280) (1,490)
Administrative expenses (3,040) (1,870)
Investment income 400 -
Finance costs (336) -

Profit before tax 16,464 6,240

Income tax expense (2,240) (1,280)

Profit for the year 14,224 4,960

The following information is relevant:

1) At 1 October 20X7, the retained earnings of Sing Co were $28m.

2) At the date of acquisition, the fair value of Sing Co’s assets was equal to their carrying amounts
with the exception of two items:

An item of plant had a fair value of $1.8m above its carrying amount. The remaining life of the
plant at the date of acquisition was three years. Depreciation is charged to cost of sales.

Sing Co had a contingent liability which Chang Co estimated to have a fair value of $400,000.
This has not changed as at 30 September 20X8.

Sing Co has not incorporated these fair value changes into its financial statements.
3) Chang Co’s policy is to value the non-controlling interest at acquisition as a proportion of the
subsidiary’s net assets.
4) Sales from Sing Co to Chang Co in the post-acquisition period had consistently been $300,000
per month. Sing Co made a margin of 25% on these sales. Chang Co’s inventory included
$600,000 of these goods at 30 September 20X8.
5) Chang Co’s investment income is a dividend received from its investment in a 30% owned
associate which it has held for several years. The associate made a profit after tax of $1m for the
year ended 30 September 20X8.

13
Section C (20 marks)

6) On 1 October 20X7 Chang Co issued 50,000 $100 6% convertible loan notes at par value, with
interest payable annually in arrears over a five-year term. The equivalent rate for non-convertible
loan notes was 8%. Chang Co has recorded the loan notes as a liability at par value and charged
the annual 6% interest to finance costs.

Year 5 discount 5 years annuity

End of year
factors factors
6% 0.747 4.212
8% 0.681 3.993

7) At 30 September 20X8 goodwill is to be impaired by $1 million.

8) Profits accrue evenly throughout the year unless otherwise stated.

Required:

a) Calculate the goodwill arising on the acquisition of Sing Co. (5 marks)

b) Prepare the consolidated statement of profit or loss for Chang Co for the year ended 30
September 20X8 (15 marks)

14
Section C (20 marks)

32 Parul Co

Extracts from the financial statements of the Parul Group and Parul Co for the years ended 31
December 20X8 and 20X7 are shown below.

Statement of profit or loss (extracts):

Parul Co
Parul Group (Single
entity)
20X8 20X7
$’000 $’000
Revenue 267,920 254,680
Cost of sales (165,840) (157,360)

Gross profit 102,080 97,320

Net operating expense (44,920) (41,240)

Profit from operations 57,160 56,080

Statement of financial position (extracts):

Parul Co
Parul Group
(Single
20X8 20X7
$’000 $’000
Inventories 151,920 121,800
Cash and cash equivalents 15,120 19,160
Long-term borrowings 798,400 675,600

On 1 September 20X8, Parul Co acquired a subsidiary, Saachi Co, purchasing 100% of the equity
shares. This acquisition has been correctly accounted for. Summary financial information of
Saachi Co for the year ended 31 December 20X8 is as follows:

Statement of profit or loss

$’000
Revenue 87,600
Cost of sales (30,780)

Gross profit 56,820

Net operating expense (8,020)

Operating profit 48,800

Statement of financial position (extracts):

$’000
Inventories 4,240
Cash and cash equivalents 14,680

15
Section C (20 marks)

For several years, Saachi Co has provided a consultancy service to Parul Co, for which it invoices
$400,000 per month. Parul Co includes this as an operating expense and pays Saachi as soon as
it receives the invoice.

Parul Co is being considered as a possible acquisition target. The following ratios have been
calculated based on the 20X8 Parul Co consolidated financial statements:

Gross profit margin 38.1%

Operating profit margin 21.3%
Inventory turnover period 334 days

There is concern that the acquisition of Saachi Co may make it difficult to assess the underlying
performance of Parul Co in 20X8 compared to 20X7.

Required

a. Restate the following items for the Parul Group for 20X8 as though the acquisition of
Saachi co had not taken place:
 The consolidated statement of profit or loss
 Inventories
 Cash and cash equivalents
(6 marks)

b. The scenario provides three ratios calculated for 20X8. Calculate equivalent ratios for Parul
Co for 20X7 and, using the adjusted 20X8 figures calculated in part (a), restate the 20X8
ratios
(3 marks)

c. Comment on Parul Co’s performance and on its liquidity position in respect of inventory
and cash.

Note: Your answer should refer to the impact that the acquisition of Saachi Co might have on your
analysis.
(11 marks)

16