Becker

REVISION QUESTION BANK MCQ – FINANCIAL REPORTING (F7) FINANCIAL REPORTING (F7) – REVISION QUESTION BANK MCQ
1 INTERNATIONAL FINANCIAL REPORTING STANDARDS 1.7 Which ONE of the following is one of the “3Es” in the “value for money” concept?
1.1 Which ONE of the following is NOT a function of the IASB? A Earnings
B Equity
A Responsibility for all IFRS technical matters C Evaluation
B Publication of IFRSs D Effectiveness
C Overall supervisory body of the IFRS organisations (14 marks)
D Final approval of interpretations by the IFRS Interpretations Committee
2 CONCEPTUAL FRAMEWORK
1.2 Which ONE of the following is NOT part of the process of developing a new
International Financial Reporting Standard? 2.1 Which ONE of the following is stated as an underlying assumption according to the
IASB’s Conceptual Framework for Financial Reporting?
A Issuing a discussion paper that sets out the possible options for a new standard
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B Publishing clarification of an IFRS where conflicting interpretations have developed A Neutrality
C Drafting an IFRS for public comment B Accruals
D Analysing the feedback received on a discussion paper C Relevance
D Going concern
1.3 Whose needs are general purpose financial statements intended to meet?
2.2 The International Accounting Standards Board’s uses the Conceptual Framework for
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A Shareholders of incorporated entities Financial Reporting (Framework) to assist in developing new standards.
B The general public
C Users of financial statements Which one of the following is NOT covered by the Framework?
D Regulatory authorities
A The format of financial statements
1.4 Which body develops International Financial Reporting Standards? B The objective of financial statements
C Concepts of capital maintenance
A IASB D The elements of financial statements
B IFRS Foundation
C IFRS IC 2.3 An item meets the definition of an element in accordance with the Conceptual Framework for
D IFRS Advisory Council Financial Reporting.
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1.5 According to the International Accounting Standards Board, in whose interests are Which of the following criteria must be met for item to be recognised in the financial
financial reporting standards issued? statements?
A Company directors (1) It is probable that any future economic benefit associated with the item will flow to
B The public or from the entity.
C Company auditors (2) The item has a cost or value that can be measured with reliability.
D The government
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(3) The rights or obligations associated with the item are controlled by the reporting
1.6 The issue of a new IFRS means that: entity.
A 1 only
(1) An existing standard may be partially or completely withdrawn. B 2 only
(2) Issues that are not in the scope of an existing standard are covered. C 1 and 2 only
(3) Issues raised by users of existing standards are explained and clarified. D 1, 2 and 3
(4) Current financial reporting practice is modified.
Which combination of the above will most likely be the result of issuing a new IFRS?
A 1, 2 and 3 only
B 2, 3 and 4 only
C 1, 3 and 4 only
D 1, 2 and 4 only
©2014 DeVry/Becker Educational Development Corp. All rights reserved. 1 2 ©2014 DeVry/Becker Educational Development Corp. All rights reserved.
2.4 Which of the following statements about the characteristics of financial information is 2.8 The IASB’s Conceptual Framework for Financial Reporting identifies qualitative
correct? characteristics of financial statements.
(1) Faithful representation means that the legal form of a transaction must be reflected Which TWO of the following characteristics are fundamental qualitative characteristics
in financial statements, regardless of the economic substance. according to the IASB’s Framework?
(2) Under the recognition concept only items capable of being measured in monetary
(1) Relevance
terms can be recognised in financial statements.
(2) Understandability
(3) It may sometimes be necessary to exclude information that is relevant and reliable (3) Faithful representation
from financial statements because it is too difficult for some users to understand. (4) Comparability
A 1 only
A 1 and 2 only
B 2 only
B 1 and 3 only
E
C 3 only
C 2 and 4 only
D None of these statements
D 3 and 4 only
2.5 Which of the following statements are correct?
2.9 Which of the following is the underlying assumption in the International Accounting
(1) The money measurement concept requires all assets and liabilities to be accounted Standards Board’s Conceptual Framework for Financial Reporting?
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for at original (historical) cost.
A Accruals
(2) Faithful representation means that the economic substance of a transaction should be B Reliability
reflected in the financial statements, not necessarily its legal form. C Going concern
(3) The realisation concept means that profits or gains cannot normally be recognised in D Relevance
the statement of profit or loss until cash has been received. (18 marks)
A 1 and 2 only 3 SUBSTANCE OVER FORM

B 1 and 3 only
C 2 and 3 only 3.1 In which of the following accounting treatments is the qualitative characteristic of
D All three statements faithful representation being applied?
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2.6 IFRS 13 Fair Value Measurement sets out a fair value hierarchy that categorises inputs into A An asset is depreciated on the straight-line basis
three levels. B The costs of a patent are capitalised
C An asset acquired through a finance lease is capitalised by the buyer
Which of the following inputs would have the highest authority? D An allowance is made for irrecoverable trade receivables
A Unobservable inputs 3.2 Which of the following are examples of transactions which could be used to create “off-
B Directly observable inputs other than quoted prices balance sheet finance”?
C Quoted prices in active markets at the measurement date
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D Market-corroborated inputs (1) Sale and repurchase arrangements
(2) Factoring of debts
2.7 The following are possible methods of measuring assets and liabilities other than historical (3) Warranty provisions
cost: (4) Consignment inventories
(1) Current cost A 1, 2 and 3

(2) Realisable value B 2, 3 and 4
(3) Present value C 1, 3 and 4
(4) Replacement cost D 1, 2 and 4
According to the IASB’s Conceptual Framework for Financial Reporting which of the
measurement bases above can be used by an entity for measuring assets and liabilities
shown in its statement of financial position?
A 1 and 2 only
B 1, 2 and 3 only
C 2 and 3 only
D All four
3.3 Which one of the following descriptions most accurately describes “creative 4 IAS 1 PRESENTATION OF FINANCIAL STATEMENTS
accounting”?
4.1 XYZ decided to change its reporting date which will result in a 15-month reporting period.
A Using loop-holes in the requirements of International Financial Reporting Standards
so that the financial statements are biased in a required direction Which of the following two items must be disclosed in accordance with IAS 1
Presentation of Financial Statements?
B Creating fictitious assets in the statement of financial position to show a stronger
financial position (1) The reason for the period being longer than 12 months.
C Not applying the requirements of International Financial Reporting Standards in
order to show a better year-end position (2) A statement that similar entities have also changed their accounting period.
D Deliberately falsifying the financial statements to show a stronger financial position (3) A statement that comparative amounts used in the financial statements are not
entirely comparable.
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3.4 Soco revalues its properties to market value each year. One of Soco’s warehouses, is valued
at its market value of $1,200,000 in its statements of financial position as at September 20X3.. (4) Whether the change is just for the current period or for the foreseeable future.
This building is sold on 29 September 20X4 for $900,000 with an option to repurchase after
four years at $1,093,956 ($900,000 plus compound interest for four years at 5% per annum). A 1 and 2 only
B 1 and 3 only
The warehouse’s market value at 29 September 20X4 was $1,380,000. C 2 and 4 only
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D 3 and 4 only
How should Soco treat this transaction in its financial statements for the year ended 30
September 20X4? 4.2 Which of the following disclosures are specifically required by IAS 1 Presentation of
Financial Statements?
A As a sale of the warehouse recording a loss on disposal of $300,000
B Leave the warehouse in its statement of financial position at $1,200,000 and record (1) The name of the reporting entity or other means of identification.
$900,000 as a loan received (2) The names of all major shareholders.
(3) The level of rounding used in presenting amounts in the financial statements.
C Revalue the warehouse to $1,380,000 and record a loss on disposal of $480,000 (4) Whether the financial statements cover the individual entity or a group of entities.
D Revalue the warehouse to $1,380,000 and record $900,000 as a loan received
A 2, 3and 4 only
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3.5 On 31 December 20X3 Tenby sold $100,000 of trade receivables to a factoring company, for B 1, 3 and 4 only
$90,000. If the factor has not collected the debt by 28 February 20X4 they can return the debt C 1, 2 and 4 only
to Tenby. D 1, 2 and 3 only
In respect of the above transaction what value should be placed on the receivables as at 4.3 Which item must be shown as a line item in the statement of financial position?
31 December 20X3?
A Intangible assets
A Nil B Work in progress
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B $10,000 C Trade receivables
C $90,000 D Taxation
D $100,000
(10 marks) 4.4 Balances under the following headings are extracted from the books of Ego.
(1) Staff costs – wages and salaries

(2) Raw materials and consumables
(3) Own work capitalised
The accountant wishes to use a classification of expenses within profit by nature format.
Which of the above balances may be included without further analysis in the statement
of profit or loss?
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D All three
4.5 During the year ended 31 March 20X3 Woolf sold a leasehold building for $1,550,000. The 4.8 DT’s final dividend for the year ended 31 October 20X5 of $150,000 was declared on 1
20-year lease was purchased on 1 July 20W0 for $100,000 but had been revalued to February 20X6 and paid in cash on 1 April 20X6. The financial statements were approved on
$1,900,000 on 31 March 20X0. Woolf depreciates leasehold buildings on a straight line basis 31 March 20X6.
over the life of the lease, with a full year’s amortisation in the year of acquisition and none in
the year of disposal. Which of the following statements reflect the correct treatment of the dividend in the
financial statements of DT?
Woolf revalues another leasehold building to $2,000,000 on 31 March 20X3. Its historical
cost was $1,000,000 and accumulated amortisation on the lease was $350,000. (1) The payment settles an accrued liability in the statement of financial position as at
31 October 20X5.
How are these transactions reflected in other comprehensive income and profit or loss?
(2) The dividend is shown as a deduction in the statement of profit or loss for the year
ended 31 October 20X6.
Other comprehensive
income Profit or loss (3) The dividend is shown as an accrued liability in the statement of financial position
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A $1,350,000 gain $1,510,000 profit as at 31 October 20X6.
B $500,000 loss $1,510,000 profit
(4) The $150,000 dividend was shown in the notes to the financial statements at 31
C $1,350,000 gain $30,000 profit
October 20X5.
D $500,000 loss $30,000 profit
(5) The dividend is shown as a deduction in the statement of changes in equity for the
4.6 Bell made a profit of $183,000 for the year ended 30 June 20X7 and paid a dividend during year ended 31 October 20X6.
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the year of $18,000. During the year the company wrote off development costs of $45,000
directly to retained earnings as a prior period adjustment and revalued a property with a A 1 and 2 only
carrying amount of $60,000 to $135,000. B 1 and 4 only
C 3 and 5 only
What was total comprehensive income for period ended 30 June 20X7? D 4 and 5 only
A $195,000 4.9 Which of the following items are required be disclosed in the notes to the financial
B $240,000 statements?
C $258,000
D $318,000 (1) Useful lives of assets or depreciation rates used.
(2) Increases in asset values as a result of revaluations in the period.
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4.7 IAS 1 Presentation of Financial Statements encourages an analysis of expenses to be (3) Depreciation expense for the period.
presented in the statement of profit or loss. This analysis must use a classification based on (4) Reconciliation of carrying amounts of non-current assets at the beginning and end
either the nature of expense, or its function, such as: of period.
(1) Raw materials and consumables used A All four

(2) Distribution costs B 1 and 2 only
(3) Employee benefit costs C 1 and 3 only
(4) Cost of sales D 2, 3 and 4 only
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(5) Depreciation and amortisation expense (18 marks)
Which of the above should be disclosed in the statement profit or loss if a manufacturing 5 ACCOUNTING POLICIES
entity uses analysis based on function?
5.1 According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors,
A 1, 3 and 4 only which ONE of the following is a change in accounting policy that requires retrospective
B 2 and 4 only application?
C 1 and 5 only
D 2, 3 and 5 only A The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in the current and future years
B The depreciation method of vehicles was changed from straight line depreciation to
reducing balance
C The provision for warranty claims was changed from 10% of sales revenue to 5%
D Based on information that became available in the current period a provision was
made for an injury compensation claim relating to an incident in a previous year
5.2 Which ONE of the following would require retrospective application in accordance with 5.6 IAS 8 Accounting Policies, Changes in Accounting Estimate and Errors specifies the
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors? definition and treatment of a number of different items.
A An entity changes its method of depreciation of machinery from straight line to Which of the following is NOT specified by IAS 8?
reducing balance
A The notification that a credit customer has just gone bankrupt owing debts of $250,000
B An entity has started capitalising borrowing costs for assets in accordance with IAS
B Identification of fraud relating to the current and prior years
23 Borrowing Costs. The borrowing costs previously had been charged to profit or
C Moving from FIFO to weighted average valuation model for inventory
loss
D The recognition of a decommissioning provision
C An entity changes its method of calculating the provision for warranty claims on its (12 marks)
products sold
6 IAS 18 REVENUE
D An entity disclosed a contingent liability for a legal claim in the previous year’s
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financial statements. In the current year, a provision has been made for the same 6.1 IAS 18 Revenue sets out criteria for the recognition of revenue from the sale of goods.
legal claim
Which ONE of the following is NOT a criterion specified by IAS 18 for recognising
5.3 During its 20X6 accounting year, DL made the following changes. revenue from the sale of goods?
Which ONE of these changes would be classified as “a change in accounting policy” as A The seller no longer retains any influence or control over the goods
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determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors? B The cost to the seller can be measured reliably
C The buyer has paid for the goods
A Increased the allowance for irrecoverable trade receivables for 20X6 from 5% to D The significant risks and rewards of ownership have been transferred to the buyer
10% of outstanding balances
B Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation 6.2 OC signed a contract to provide office cleaning services for an entity for a period of one year
from 1 October 20X8 for a fee of $500 per month.
C Changed the valuation method of inventory from FIFO to weighted average
D Changed the useful economic life of its motor vehicles from six years to four years The contract required the entity to make one payment to OC covering all twelve months’
service in advance. The contract cost to OC was estimated at $300 per month for wages,
5.4 The draft 20X5 statement of financial position of Vale reported retained earnings of materials and administration costs.
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$1,644,900 and net assets of $6,957,300. Following the completion of the draft 20X5
statement of financial position it was discovered that several items of inventory had been OC received $6,000 on 1 October 20X8.
valued at selling price at the 20X4 year end. This meant that the opening inventory value for
20X5 was overstated by $300,000. The closing inventory had been correctly valued in the What profit or loss on the contract should OC recognise in its statement of profit or loss
draft 20X5 statement of financial position. for the year ended 31 March 20X9?
If the error is corrected before the 20X5 financial statements are finalised, what figures A $600 loss
will be reported for retained earnings and net assets in the statement of financial B $1,200 profit
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position? C $2,400 profit
D $4,200 profit
Retained earnings Net assets
A $1,644,900 $6,657,300 6.3 LP received an order to supply 10,000 units of product A every month for two years. The
B $1,644,900 $6,957,300 customer had negotiated a low price of $200 per 1,000 units and agreed to pay $12,000 in
C $1,944,900 $6,657,300 advance every 6 months.
D $1,944,900 $6,957,300
The customer made the first payment on 1 July 20X2 and LP supplied the goods each month
5.5 In 20X3 Falkirk identified that a fraud had been perpetrated by an employee who had been from 1 July 20X2.
making payments to himself amounting to $6,200,000. $1,400,000 million were payments
made in 20X3, $1,800,000 in 20X2 and $3,000,000 prior to 20X2; the double entry to the LP’s year end is 30 September.
payments had created false assets.
How much of the fraud should be recognised as an expense in 20X3 profit or loss?
A Nil
B $1,400,000
C $3,200,000
D $6,200,000
In addition to recording the cash received, how should LP record this order, in its What figure should appear in the company’s statement of financial position at 30
financial statements for the year ended 30 September 20X2, in accordance with IAS 18 September 20X1 for inventory?
Revenue?
A $382,600
A Include $6,000 in revenue for the year and create a trade receivable for $36,000 B $384,200
B Include $6,000 in revenue for the year and create a current liability for $6,000 C $387,100
C Include $12,000 in revenue for the year and create a trade receivable for $36,000 D $400,600
D Include $12,000 in revenue for the year but do not create a trade receivable or
current liability 7.2 The inventory value for the financial statements of Q for the year ended 31 December 20X1
was based on an inventory count on 4 January 20X2, which gave a total inventory value of
6.4 On 31 March, DT received an order from a new customer, XX, for products with a sales value $836,200.
of $900,000. XX enclosed a deposit with the order of $90,000.
Between 31 December and 4 January 20X2, the following transactions took place:
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On 31 March, DT had not completed credit referencing of XX and had not despatched any
goods. DT is considering the following possible entries for this transaction in its financial $
statements for the year ended 31 March: Purchases of goods 8,600
Sales of goods (profit margin 30% on sales) 14,000
(1) Include $900,000 as revenue for the year; Goods returned by Q to supplier 700
(2) Include $90,000 as revenue for the year;
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(3) Do not include anything as revenue for the year; What adjusted figure should be included in the financial statements for inventories at 31
(4) Create a trade receivable for $810,000; December 20X1?
(5) Create a trade payable for $90,000.
A $818,500
According to IAS 18 Revenue, how should DT record this transaction in its financial B $834,300
statements for the year ended 31 March? C $838,100
D $853,900
A 1 and 4 only
B 2 and 5 only 7.3 According to IAS 2 Inventories, which of the following costs should be included in
C 3 and 4 only valuing the inventories of a manufacturing company?
D 3 and 5 only
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(1) Carriage inwards
6.5 Which of the following statements correctly describes the accounting treatment when (2) Carriage outwards
there are goods in transit with free on board shipping? (3) Depreciation of factory plant
(4) General administrative overheads
A If an entity is the buyer, inventory is recognised in its financial statements when it
receives the goods from a common carrier A 1 and 3 only
B 1, 2 and 4 only
B If an entity is the buyer, inventory cannot be recognised in its financial statements
C 2 and 3 only
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C If an entity is the buyer, inventory is recognised in its financial statements upon D 2, 3 and 4 only
shipment
7.4 IAS 2 Inventories defines the extent to which overheads are included in the cost of inventories
D If an entity is the seller, inventory is recognised in its financial statement until
of finished goods.
delivery is completed
(10 marks)
Which of the following statements about the IAS 2 requirements relating to overheads
are true?
7 INVENTORY AND BIOLOGICAL ASSETS
(1) Finished goods inventories may be valued on the basis of labour and materials cost
7.1 At 30 September 20X1 the closing inventory of a company amounted to $386,400. The
only, without including overheads.
following items were included in this total at cost:
(2) Factory management costs should be included in fixed overheads allocated to
(1) 1,000 items which had cost $18 each. These items were all sold in October 20X1 inventories of finished goods.
for $15 each, with selling expenses of $800.
A 1 only
(2) Five items which had been purchased for $100 each eight years ago. These items B 2 only
were sold in October 20X1 for $1,000 each, net of selling expenses. C Both 1 and 2
D Neither 1 nor 2
7.5 Which of the following are correct? 7.9 During the year ended 31 December 20X6 Grasmere purchased the following items for resale.
(1) The carrying amount of inventory should be as close as possible to net realisable Date Number of items Cost price per item
value. March 20 $11
June 20 $13
(2) The valuation of finished goods inventory must include production overheads.
(3) Production overheads included in valuing inventory should be calculated by This was a new product line and by 31 December 20X6 twenty items were left unsold. At
reference to the company’s normal level of production during the period. that date they were being sold at $12 an item and it would have cost Grasmere $10 an item to
(4) In assessing net realisable value, inventory items must be considered separately, or buy further supplies. Grasmere determines cost of inventory under the FIFO method.
in groups of similar items, not by taking the inventory value as a whole.
At what amount should finished goods inventory be shown in the statement of financial
A 1 and 2 only position on 31 December 20X6?
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B 1 and 3 only
A $200
C 2, 3 and 4
B $220
D 3 and 4 only
C $240
D $260
7.6 The net realisable value of inventory is defined as the actual or estimated selling price less all
costs to be incurred in marketing, selling and distribution.
7.10 Toulouse makes three different products. The following table shows the inventory valuation
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Which of all the following additional items should be deducted in calculating the net for each of the products under different bases.
realisable value of inventory?
First-in- Last-in- Net realisable
Trade Settlement Costs to first-out first-out value
$ $ $
discounts discounts completion
A No Yes Yes Product I 10 11 12
B Yes No Yes Product II 13 15 14
C Yes Yes No Product III 9 5 7
D Yes Yes Yes —— —— ——
32 31 33
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7.7 Which of the following costing methods for inventory valuation purposes is permissible
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under both IAS 2 Inventories?
At what value should Toulouse ’s inventory be stated in accordance with IAS 2
A Absorption costing Inventories?
B Direct costing
C Marginal costing A $28
D Variable costing B $30
C $31
D $32
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7.8 IAS 2 Inventories allows a number of methods for determining purchase price or production
of finished goods inventory.
7.11 Which of the following is NOT dealt with by IAS 41 Agriculture?
Which of the following valuation methods is also allowed by IAS 2?
A Sheep
A both LIFO and weighted average B Wool
B only LIFO C Wine
C only weighted average D Vines
D neither LIFO nor weighted average
7.12 XYZ Farm purchased 100 turkeys for $10,000 on 17 November 20X1. At the year end of
XYZ , 31 December 20X1, the estimated sales price of the 100 turkeys was measured at
$10,500. In addition, the following costs are expected to be incurred in respect to the sale of
the turkeys.
$
Transportation cost 700
Finance cost 300
Income taxes related to this sale 1,000
What amount should be recognised for the biological assets in XYZ’s statement of 8.2 Augustus is involved in a number of construction contracts at 30 September 20X3. The
financial position as at 31 December 20X1? company calculates profit on a sales basis.
A $8,500 At that date the following information is available with respect to contract ZX45.
B $9,800
C $10,000 $
D $10,500 Contract price 225
Costs incurred to date 115
7.13 IAS 41 Agriculture is applied to all of the following items except one. Estimated further costs to completion 65
Work certified 125
Which item does IAS 41 not apply to? Amounts invoiced 145
A Biological assets What amount should be included in the statement of financial position of Augustus in
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B Land related to agricultural activity respect of contract ZX45 as at 30 September 20X3?
C Agricultural produce at the point of harvest
D Government grants related to agricultural activity A Nil
B $5,000 due to customer
7.14 Which of the following is NOT an example of agricultural activity, as defined in IAS 41 C $5,000 due from customer
Agriculture? D $20,000 due to customer
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A Cultivating orchards 8.3 B entered into a three-year contract to build a leisure centre for an entity. The contract value
B Floriculture was $6 million. B recognises profit on the basis of certified work completed.
C Fish farming
D Sale of harvested crops At the end of the first year, the following figures were extracted from B's accounting records:
(28 marks)
$000
8 IAS 11 CONSTRUCTION CONTRACTS Certified value of work completed (progress payments billed) 2,000
Cost of work certified as complete 1,650
8.1 Digger commenced a construction contract, X47, on 1 July 20X3 and details for the first year Cost of work-in-progress (not included in completed work) 550
of the contract were as follows: Estimated cost of remaining work required to complete the contract 2,750
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$ Progress payments billed and received from entity 1,600
Amounts invoiced 2,400 Cash paid to suppliers for work on the contract 1,300
Costs to date of last certificate 1,800
Costs since last certificate 200 What values should B record for this contract as “gross amounts due from customers”
Amounts received 2,100 and “current liabilities – trade and other payables”?
Total contract price 4,200
Estimated costs to complete 1,200 Gross amounts due from Current liabilities – trade and
Work certified 2,625 customers other payables
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A $950,000 $350,000
The company invoices the customer immediately it receives a certificate of the value of the B $950,000 $900,000
work done. C $1,250,000 $350,000
D $2,550,000 $900,000
What should Digger include as cost of sales for the X47 contract for the year ended
30 June 20X4, assuming profit is calculated on a cost basis?. (To the nearest $) 8.4 C started work on a four-year contract on 24 October 20X1. C recognises profit on the basis
of the certified percentage of work completed. The contract price is $10 million.
A $1,938,000
B $1,971,000 An analysis of C’s records provided the following information for the year to 30 September
C $1,875,000 20X3:
D $2,000,000
Percentage of work completed and certified in year 25%
Total cost incurred during the year $1,700,000
Estimated cost of remaining work to complete contract $3,900,000
Total payments made for the cost incurred during the year $2,000,000
In the year ended 30 September 20X2 costs of $2,900,000 had been incurred, the contract was
30% complete and a profit of $330,000 had been recognised.
How much profit should C recognise in its statement of profit or loss for the year ended 9.3 Which of the following statements are correct?
30 September 20X3?
(1) All non-current assets must be depreciated.
A $330,000 (2) If goodwill is revalued, the revaluation surplus appears in the statement of changes
B $375,000 in equity.
C $495,000
D $825,000 (3) If a tangible non-current asset is revalued, all tangible assets of the same class
should be revalued.
8.5 Under what circumstances is it appropriate to immediately recognise a loss on a (4) In a company’s published statement of financial position, tangible assets and
construction contract? intangible assets must be shown separately.
A After work has commenced on the contract A 1 and 2 only

B After 50% stage of completion of contract activity B 1 and 4 only
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C When it is probable that total contract costs will exceed total contract revenues C 2 and 3 only
D All of the above D 3 and 4 only
(10 marks)
9.4 ABC has revalued its property for the first time this year. It is proposing a policy whereby
9 IAS 16 PROPERTY, PLANT AND EQUIPMENT depreciation based on the original historic cost is charged as an expense to profit or loss and
the depreciation based on the revalued amount is charged directly to revaluation surplus, this
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9.1 On 1 January 20X1 a company purchased some plant. The invoice showed: policy is known as split depreciation.
$
Under IAS 16 Property, Plant and Equipment is this policy of split depreciation
Cost of plant 48,000
permitted?
Delivery to factory 400
One year warranty covering breakdown during 20X1 800
A Yes, it is required
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B Yes, it is allowed but not required
49,200
C Yes, it is allowed only in prescribed circumstances
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D No it is not allowed
Modifications to the factory building costing $2,200 were necessary to enable the plant to be
installed.
9.5 Thames depreciates non-current assets at 20% per annum on a reducing balance basis. All
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non-current assets were purchased on 1 April 20X3. The carrying amount on 31 March 20X6
What amount should be capitalised for the plant in the company’s records in
is $20,000.
accordance with IAS 16 Property, Plant and Equipment?
What is the accumulated depreciation (to the nearest $000) as at that date?
A $48,000
B $48,400
A $15,000
C $50,600
B $19,000
D $51,400
C $30,000
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D $39,000
9.2 At 31 December 2014 Cutie owned a building that had cost $800,000 on 1 January 2005. It
was being depreciated at 2% per year.
9.6 The following information relates to the disposal of two machines by Halwell:
On 31 December 2014 a revaluation to $1,000,000 was recognised. At this date the building
Machine 1 Machine 2
had a remaining useful life of 40 years.
$ $
Cost 120,000 100,000
Which of the following pairs of figures correctly reflects the effects of the revaluation?
Selling price 90,000 40,000
Depreciation charge for Revaluation surplus Profit/(loss) on sale 30,000 (20,000)
year ending 31 December 2015 as at 31 December 2014
$ $ What was the total accumulated depreciation on both machines sold?
A 25,000 200,000
A $80,000
B 25,000 360,000
B $100,000
C 20,000 200,000
C $120,000
D 20,000 360,000
D $140,000
9.7 Lydd purchased production machinery costing $100,000, having an estimated useful life of 10.2 Which of the following would qualify as a borrowing cost as defined in IAS 23
twenty years and a residual value of $2,000. After being in use for six years the remaining Borrowing Costs?
useful life of the machinery is revised and estimated to be twenty-five years, with an
unchanged residual value. (1) Premium on redemption of preference share capital.
(2) Discount on the issue of convertible debt.
What is the annual depreciation charge on the machinery in year 7? (3) Interest expense calculated using the effective interest rate.
(4) Finance charges related to finance leases.
A $3,226
B $3,161
A 1, 2 and 3 only
C $2,824
B 2, 3 and 4 only
D $2,744
C 1 and 4 only
D All four
9.8 Upton makes up its financial statements to 31 December each year. On 1 January 20X0 it
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bought a machine with a useful life of 10 years for $200,000 and started to depreciate it at
10.3 Borrowing costs from which category of borrowed funds may be capitalised (to the
15% per annum on the reducing balance basis. On 31 December 20X3 the accumulated
extent they are directly attributable to qualifying assets)?
depreciation was $95,600 and the carrying amount $104,400. During 20X4 the company
changed the basis of depreciation to straight line.
A Funds borrowed specifically to construct a qualifying asset
What is the correct accounting treatment to be adopted in the financial statements of B Funds borrowed in advance of expenditure on qualifying assets
Upton for the year ended 31 December 20X4? C General borrowed funds used to finance a qualifying asset
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D All of the above
A Depreciation charge ($10,440) Prior period adjustment Nil
B Depreciation charge ($17,400) Prior period adjustment Nil 10.4 Which of the following is an example of an asset that would never qualify for
C Depreciation charge ($17,400) Prior period adjustment $15,600 capitalisation of borrowing costs under IAS 23 Borrowing Costs?
D Depreciation charge ($20,000) Extraordinary item $15,600
A Intangible assets
9.9 Which ONE of the following items would CM recognise as subsequent expenditure on a B Financial assets
non-current asset and capitalise it as required by IAS 16 Property, Plant and Equipment? C Manufacturing plants
D Power generation facilities
A When CM purchased a furnace five years ago, the furnace lining was separately
identified in the accounting records. The furnace now requires relining at a cost of 10.5 Which qualitative characteristic is applied by IAS 23 Borrowing Costs to the
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$200,000. Once relined the furnace will be usable for a further five years capitalisation of borrowing costs?
B CM’s office building has been badly damaged by a fire. CM intends to restore the
A Consistency
building to its original condition at a cost of $250,000
B Timeliness
C CM’s delivery vehicle broke down. When it was inspected by the garage it was C Materiality
found to be in need of a new engine. The engine and associated labour costs are D Understandability
estimated to be $5,000
10.6 QI in incurring expenditure on project 275 which meets the definition of a qualifying asset, in
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D CM closes its factory for two weeks every year. During this time, all plant and
equipment has an annual maintenance check and any necessary repairs are carried accordance with IAS 23 Borrowing Costs. The company has the following debt components:
out. The cost of the current year’s maintenance check and repairs was $75,000
(1) 6% $100,000 debt used specifically to finance project 274.
(2) 7% $500,000 preference share capital.
(18 marks)
(3) 10% $80,000 short-term loan.
10 IAS 23 BORROWING COSTS (4) 4% $200,000 convertible debt.
10.1 Under what conditions can an entity capitalise borrowing costs? What capitalisation rate would QI apply to expenditure incurred on project 275?
A 7%
A The borrowing costs are incurred for purchases of inventory items B 6.75%
B The borrowing costs are directly attributable to the acquisition, construction, or C 6.54%
production of a qualifying asset D 4%
(12 marks)
C The borrowing costs are directly attributable to the acquisition, construction, or
production of routinely manufactured assets
D The borrowing costs are incurred for purchases of property, plant and equipment
11 GOVERNMENT GRANTS 11.5 Which of the following disclosures for government grants is required under IAS 20
Accounting for Government Grants and Disclosure of Government Assistance?
11.1 Which of the following accounting policies for grants related to assets is allowed under
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance? (1) The accounting policy adopted for government grants.
(2) The nature and extent of government grants recognised in the financial statements.
(1) Deduct from the cost of related asset in the statement of financial position.
(2) Include in liabilities in the statement of financial position. (3) Unfulfilled conditions and other contingencies attached to government assistance
(3) Credit profit and loss immediately with cash received. that have been recognised.
A All three A 1 only

B 1 and 2 only B 1 and 2 only
C 1 and 3 only C 1 and 3 only
D 2 and 3 only D 1, 2, and 3
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11.2 Under IAS 20 Accounting for Government Grants and Disclosure of Government 11.6 On 1 January 20X1 Emex received a government grant of $100,000 to assist in the purchase
Assistance, what is the correct term for a loan which the lender undertakes to waive of new machinery costing $1,000,000 with a useful life of five years. The grant is repayable
repayment of under certain conditions? on a sliding scale if the machine is sold within five year; that is the full amount if sold in the
first year, 80% if sold in the second year and so on. The management of Emex intends to use
A A forgivable loan the machine for five years.
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B A non-payable loan
C A non-recourse loan The accounting policy is to offset the grant against the cost of the asset.
D A recourse loan
What will be the depreciation expense for the year ended 31 December 20X2 and what
11.3 Under IAS 20 Accounting for Government Grants and Disclosure of Government provision will be required for the repayment of the grant as at 31 December 20X2?
Assistance, how are government grants related to depreciable assets treated in the profit
or loss? Depreciation charge Provision
$000 $000
A The government grant is recognised over the period and in the proportions in which A 180 60
depreciation expense on those assets is recognised B 180 Nil
C 200 60
B The government grant must be recognised in the year in which the depreciable asset
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D 200 Nil
is received and the following year only
(12 marks)
C The government grant must be recognised over a period of five years
12 IAS 40 INVESTMENT PROPERTIES
D The government grant must be recognised over a period of no more than 10 years
12.1 What is the definition of an investment property according to IAS 40 Investment
11.4 IAS 20 Accounting for Government Grants and Disclosure of Government Assistance defines Property?
government assistance as an action by government designed to provide an economic benefit
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specific to an entity qualifying under certain criteria. A An investment in land and or buildings whether let to third parties or occupied by an
entity within the group
Which of the following is an example of government assistance?
B A property owned and occupied by an entity for its own purposes
A Free technical or marketing advice C A property which is held to earn rentals or for capital appreciation
B Provision of infrastructure by improvement to the general transportation network
C Supply of improved facilities such as irrigation D An investment in land and or buildings other than leased property
D A cash grant to buy a new item of plant
12.2 IAS 40 Investment Property gives examples of investment properties, which include some of
the following:
(1) Property held for long-term capital appreciation

(2) Property leased to another entity on a finance lease
(3) Property leased out under one or more operating leases
(4) Owner-occupied property
(5) Land held for an undetermined future use
(6) Property occupied by employees
Which of the above are listed by IAS 40 as examples of an investment property? 13.2 Which ONE of the following would most likely result in the recognition of an asset in
KJH’s statement of financial position at 31 January 20X2?
A 1, 5 and 6 only
B 1, 3 and 5 only A KJH spent $50,000 on an advertising campaign in January 20X2. KJH expects the
C 2, 3 and 4 only advertising to generate additional sales of $100,000 over the period February to
D 2, 4 and 6 only April 20X2
B KJH is taking legal action against a contractor for faulty work. Advice from its
12.3 Which of the following qualifies as investment property under IAS 40 Investment legal team is that it is probable that KJH may receive $250,000 in settlement of its
Property? claim within the next 12 months
A A building that is vacant but is held to be leased out under an operating lease C KJH purchased the copyright and film rights to the next book to be written by a
B Property being constructed on behalf of third parties famous author for $75,000 on 1 March 20X1. A first manuscript has already been
C Property that is leased to another entity under a finance lease received and advance orders suggest that the book will be a best seller
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D Owner-occupied property D KJH has developed a new brand name internally. The directors value the brand
name at $150,000
12.4 Under IAS 40 Investment Property, which of the following transfers would result in a
change from the cost measurement basis before transfer to the fair value measurement 13.3 IAS 38 Intangible Assets governs the accounting treatment of expenditure on research and
basis after transfer? development.
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A A transfer from investment property to owner-occupied property Which of the following statements are correct?
B A transfer from inventories to investment property at the commencement of an
operating lease to another party (1) Capitalised development expenditure must be amortised over a period not exceeding
five years.
C A transfer from investment property to inventories, when the property is intended
for sale (2) If all the conditions specified in IAS 38 are met, development expenditure may be
capitalised if the directors decide to do so.
D None of the above
(3) Capitalised development costs are shown in the statement of financial position
12.5 Under IAS 40 Investment Property, which of the following is correct? under the heading of Intangible Assets.
(4) Amortisation of capitalised development expenditure will appear as an item in a
A Investment property is property held for administrative purposes
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company’s statement of changes in equity.
B Investment property is property held for use in the supply of services
C Investment property is property held for use in the production of goods A 1 and 3 only
D Investment property is property held by owner to earn rental income or for capital B 1 and 4 only
appreciation C 2 and 3 only
(10 marks) D 3 only
13 IAS 38 INTANGIBLE ASSETS 13.4 Which of the following is NOT an intangible asset?
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13.1 Which one of the following could be classified as deferred development expenditure in A Patents
M’s statement of financial position as at 31 March 20X1 according to IAS 38 Intangible B Development costs
Assets? C Short leaseholds
D Licences
A $120,000 spent on developing a prototype and testing a new type of propulsion
system for trains. The project needs further work on it as the propulsion system is
13.5 Which of the following may be included in a company’s statement of financial position
currently not viable
as an intangible asset under IAS 38 Intangible Assets?
B A payment of $50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques A Payment on account of patents
B Expenditure on completed research
C $35,000 spent on consumer testing a new type of electric bicycle. The project is
C Start-up costs
near completion and the product will probably be launched in the next twelve
D Internally-generated goodwill
months. M is not yet certain that there is going to be a viable market for the
finished product
D $65,000 spent on developing a special type of new packaging for a new energy
efficient light bulb. The packaging is expected to be used by M for many years and
is expected to reduce M’s distribution costs by $35,000 a year
13.6 Henna was incorporated on 1 January 20X6. At 31 December 20X6 the following costs had 13.10 RD ’s figures for research and development are as follows:
been incurred:
Research $267,000
$ Development expenditure in the year $215,000
(1) Legal fees incurred in establishing the entity 80,000 Brought forward deferred development expenditure $305,000
(2) Customer lists purchased from a company that has gone out of business 100,000 Written off deferred expenditure in the year **
(3) Goodwill created by the company 80,000
** To be calculated.
(4) Patents purchased for valuable consideration 70,000
(5) Costs incurred by the company in developing patents 60,000 At 31 December 20X4 the balance carried forward for development expenditure was
$375,000.
What is the total cost of intangible assets to be recognised in the statement of financial
position of Henna at 31 December 20X6 in accordance with IAS 38 Intangible Assets? What amount will RD charge to profit or loss for research and development for 20X4?
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A $310,000 A $267,000
B $250,000 B $412,000
C $230,000 C $482,000
D $170,000 D $787,000
(20 marks)
13.7 Which of the following conditions would preclude any part of the development
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expenditure to which it relates from being capitalised? 14 NON-CURRENT ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
A The development is incomplete 14.1 PQ has ceased operations overseas in the current accounting period. This resulted in the
closure of a number of small retail outlets.
B The benefits flowing from the completed development are expected to be greater
than its cost Which one of the following costs would be excluded from the loss on discontinued
C Funds are unlikely to be available to complete the development operations?
D The development is expected to give rise to more than one product A Loss on the disposal of the retail outlets
B Redundancy costs for overseas staff
13.8 Which of the following types of expenditure must be recognised as an expense when it is C Cost of restructuring head office as a result of closing the overseas operations
incurred? D Trading losses of the overseas retail outlets up to the date of closure
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A Tangible non-current assets acquired in order to provide facilities for research and 14.2 BN has an asset that was classified as held for sale at 31 March 20X2. The asset had a
development activities carrying amount of $900 and a fair value of $800. The cost of disposal was estimated to be
$50.
B Legal costs in connection with registration of a patent
C Costs of searching for possible alternative products According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations,
which ONE of the following values should be used for the asset in BN’s statement of
D Costs of research work which are to be reimbursed by a customer
financial position as at 31 March 20X2?
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13.9 On 1 October 20X1 Hyena paid $500,000 deposit towards the cost of a laboratory for research
A $750
and development. On 31 December 20X1, Hyena ’s financial year end, the laboratory had
B $800
still not been completed.
C $850
D $900
Where should the payment of $500,000 appear in Hyena’s statement of financial
position on 31 December 20X1?
14.3 During the year to 30 April 20X9 two companies carried out major re-organisations of their
activities. The re-organisations were as follows:
A Development costs under intangible assets
B Payments on account under intangible assets
Maynard closed down its manufacturing division on 1 January 20X9. This division
C Payments on account under tangible non-current assets
accounted for 30% of Maynard’s revenue, Maynard will now focus all of their efforts on its
D Payments on account under current assets
retail division.
Grant purchased a group of companies in February 20X9. One of the subsidiaries within the
group, Lytton, did not meet the profile required by Grant and therefore the intention of Grant
is to sell this subsidiary as soon as possible, and no later than 30 September 20X9.
Which of these re-organisations would be classified as discontinued operations for the What is the total impairment loss?
year ended 30 April 20X9?
A $Nil
A Maynard B $10,000
B Lytton C $15,000
C Both Maynard and Lytton D $20,000
D Neither Maynard or Lytton
15.2 Dodgy has a property which is currently stated at a revalued carrying amount of $253,000.
14.4 On 1 January 20X0 Beech purchased an asset for $500,000, the asset had a useful life of eight
years and nil residual value. Due to a slump in property prices the value of the property is currently only $180,000.
On 1 July 20X3 the asset was classified as held for sale in accordance with IFRS 5 Non- The historical cost carrying amount of the property is $207,000.
current Assets Held for Sale and Discontinuing Activities. On that date the fair value less cost
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of disposing of the asset were assessed as $254,000. How should the above impairment in value be reflected in the financial statements in
accordance with IAS 36 Impairment of Assets?
What is the total expense should be recognised in respect of this asset in the statement of
profit or loss for 20X3? Profit or loss Other
account Comprehensive
A $31,250 Income
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B $56,650 A Dr $73,000 Cr $46,000
C $58,500 B Dr $27,000 Dr $46,000
D $62,500 C Dr $73,000 –
D – Dr $73,000
14.5 In order for an asset to be classified as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinuing Activities the sale of the asset must be highly 15.3 Noddy has an item of equipment included in its statement of financial position at a carrying
probable. amount of $2,750. The asset had been revalued several years ago. If the asset had not been
revalued its carrying amount would only have been $1,250.
Which TWO of the following are indicators that the sale of the asset is highly probable?
An impairment review of the asset has been undertaken and it is estimated that the
(1) The asset has been advertised for sale in a trade journal. recoverable amount of the asset is only $1,000.
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(2) A contract with a buyer has been signed.
Noddy has not made any annual transfers from the revaluation surplus to retained earnings.
(3) The market value of similar assets is $50,000 and management hopes to sell the
asset for a profit of $30,000. How much of the impairment loss should be charged to other comprehensive income in
accordance with IAS 36 Impairment of Assets?
(4) Necessary repairs to the asset will be carried out when management has signed a
contract for the sale. A $1,750
B $1,500
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A 1 and 2 only C $nil
B 2 and 3 only D $250
C 3 and 4 only
D 1 and 4 only 15.4 In 20X3 Angry revalued at $360,000 a plot of land which had been purchased in 20X1 for
(10 marks) $300,000 and recognised a revaluation gain of $60,000.
15 IAS 36 IMPAIRMENT OF ASSETS In 20X4 Angry revalued to $130,000 a second plot of land which had been purchased for
$100,000 in 20X2 and recognised a further revaluation gain of $30,000.
15.1 The following information relates to three assets held by a company:
In 20X5 Angry wishes to write down the value of the first plot of land from $360,000 to
Asset A B C
$260,000 because of an impairment in its value due to changes in market prices.
$000 $000 $000
Carrying amount 100 50 40 There have been no other movements on the revaluation surplus.
Fair value less costs of disposal 80 60 35
Value in use 90 70 30
What amounts should be recognised in the financial statements for 20X5 for the 16.2 IAS 17 Leases requires a lessee to capitalise a finance lease at which of the following
impairment loss? amounts?
Profit or loss Other Comprehensive Income A Fair value of the leased asset
A $100,000 Nil B Present value of the minimum lease payments
B $40,000 $60,000 C Lower of fair value of the leased asset and present value of the minimum lease payments
C $10,000 $90,000 D Lower of minimum lease payments and fair value of leased asset
D Nil $100,000
16.3 Alpha enters into a lease with Omega of an aircraft which had a fair value of $240,000 at the
15.5 The following measures relate to a non-current asset: inception of the lease. The terms of the lease require Alpha to pay 10 annual rentals of
$36,000 in arrears. Alpha is totally responsible for the maintenance of the aircraft which has
(1) Carrying amount $20,000 a useful life of approximately fifteen years.
(2) Net realisable value $18,000
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(3) Value in use $22,000 The present value of the 10 annual rentals of $36,000 discounted at the interest rate implicit in
(4) Replacement cost $50,000 the lease is $220,000.
What is the recoverable amount of the asset? Applying the requirements of IAS 17 Leases to this lease what is the increase in Alpha’s
non-current assets?
A $18,000
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B $20,000 A Nil
C $22,000 B $220,000
D $50,000 C $240,000
(10 marks) D $360,000
16 IAS 17 LEASES 16.4 Acor is planning to acquire a new machine, which would cost $1,750,000. The acquisition
will be financed through a finance lease agreement, which has an implicit interest rate of 13%
16.1 On 1 January 20X7 Melon bought a machine by way of a finance lease. The terms of the per annum. The lease is for four years and Acor is required to make four annual payments of
contract were as follows: $520,000, with the first payment due on commencement of the lease agreement.
$
Cash price 18,000 There is uncertainty regarding title of the asset at the end of the lease period.
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Deposit (6,000)
——— Acor’s usual policy is to depreciate similar machinery over five years on the straight line
12,000 basis.
Interest (9% for two years) 2,160
——— What is the correct total charge to profit or loss for the first year of the lease?
Balance 14,160
——— A $509,900
B $577,500
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The balance is payable in two annual instalments commencing 31 December 20X7. C $597,400
D $665,000
The rate of interest implicit in the contract is approximately 12%.
16.5 Z entered into a finance lease agreement on 1 November 20X2. The lease was for five years,
Applying the requirements of IAS 17 Leases what is the finance charge to profit or loss the fair value of the asset acquired was $45,000 and the interest rate implicit in the lease was
for the year ended 31 December 20X7? 7%. The annual payment was $10,975 in arrears.
A $1,080 What is the total amount owing under the lease at 31 October 20X4?
B $1,440
C $1,620 A $27,212
D $2,160 B $28,802
C $29,350
D $40,108
(10 marks)
17 IAS 37 PROVISIONS, CONTINGENT LIABILITIES AND CONTINGENT ASSETS 17.4 Which of the following statements about contingent assets and contingent liabilities is
true?
17.1 TY is the main contractor employing sub-contractors to assist it when required.
(1) A contingent asset should be disclosed by note if an inflow of economic benefits is probable.
TY has recently completed a contract replacing a roof on the local school. Despite this, the
roof has been leaking and some sections are now unsafe. The school is suing TY for $20,000 (2) A contingent liability should be disclosed by note if it is probable that a transfer of
to repair the roof. economic benefits to settle it will be required, with no provision being made.
TY used a sub-contractor to install the roof and regards the sub-contractor’s work as faulty. (3) No disclosure is required for a contingent liability if it is less than probable that a
TY has raised a court action against the sub-contractor claiming the cost of the school’s action transfer of economic benefits to settle it will be required.
plus legal fees, a total of $22,000.
A 1 only
TY has been informed by legal advisers that it will probably lose the case brought against it B 2 only
by the school and will probably win the case against the sub-contractor. C 3 only
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How should these items be treated in TY’s financial statements? D None of these statements
A A provision should be made for the $20,000 liability and the case against the sub- 17.5 IAS 37 Provisions, Contingent Liabilities and Contingent Assets deals with accounting for
contractor ignored contingencies. An entity has a present obligation that probably requires the outflow of
economic resources and a contingent asset where the inflow of economic benefits is probable.
B A provision should be made for the $20,000 liability and the probable receipt of
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cash from the case against the sub-contractor disclosed as a note How should the entity treat the present obligation and contingent asset?
C No provisions should be made but the $20,000 liability should be disclosed as a Present obligation Contingent asset
note A Provided for Disclosed
D A provision should be made for the $20,000 liability and the probable receipt of B Provided for Not disclosed
cash from the case against the sub-contractor recognised as a current asset C Disclosed, but not provided for Disclosed
D Disclosed, but not provided for Not disclosed
17.2 MN obtained a government licence to operate a mine from 1 April 20X1. The licence
requires that at the end of the mine’s useful life, all buildings must be removed from the site 17.6 The following describe potential provisions.
and the site landscaped. MN estimates that the cost of this decommissioning work will be
$1,000,000 in 10 years’ time using a discount factor of 8%, a 10 year discount factor at 8% is (1) A provision to cover refunds. The company is in the retail sector and has a
0.463. reputation for a “no questions asked” policy on refunds.
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(2) A provision to cover an onerous contract on an operating lease. The lease was on a
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets how much building which the company has subsequently vacated. The lease cannot be
should MN include in provisions in its statement of financial position as at 31 March terminated and cannot be re-let.
20X2?
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets in
A $100,000 which of the above situations would a company be allowed to recognise a provision in its
B $463,000 financial statements?
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C $500,000
D $1,000,000 A Neither situation
B Both situations
17.3 Which of the following statements about provisions, contingencies and events after the C Situation 1 only
reporting period is correct? D Situation 2 only
A A company expecting future operating losses should make provision for those 17.7 Porter is finalising its financial statements for the year ended 30 September 20X3.
losses as soon as it becomes probable that they will be incurred
B Details of all adjusting events after the reporting period must be disclosed by note in A former employee of Porter has initiated legal action for damages against the company after
a company’s financial statements being summarily dismissed in October 20X3. Porter ’s legal advisors feel that the employee
will probably win the case and have given the company a reasonably accurate estimate of the
C A contingent asset must be recognised as an asset in the statement of financial damages which would be awarded. Porter has not decided whether to contest the case.
position if it is probable that it will arise
D Contingent liabilities must be treated as actual liabilities and provided for when it is
probable that they will arise, if they can be measured with reliability
How should this item be classified in the financial statements of Porter for the year 18.2 IAS 10 Events After the Reporting Period distinguishes between adjusting and non-adjusting
ended 30 September 20X3? events.
A A non-adjusting event Which ONE of the following gives rise to an adjusting event?
B An adjusting event
A A dispute with workers caused all production to cease six weeks after the year end
C A contingent liability disclosed by way of note
D A provision B A month after the year end the directors decided to cease production of one of three
product lines and to close the production facility
17.8 Which ONE of the following would require a provision to be created by BW at its C One month after the year end a court awarded damages of $50,000 to one of the
reporting date of 31 October 20X5? reporting entity’s customers. The entity had expected to lose the case and made a
provision of $30,000 at the year end
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 D Three weeks after the year end a fire destroyed the reporting entity’s main
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staff to be retrained. At 31 October 20X5, the directors were waiting on a report warehouse facility and most of its inventory
they had commissioned that would identify the actual training requirements
18.3 The draft financial statements of a limited liability company are under consideration. The
B At the reporting date, BW is negotiating with its insurance provider about the
accounting treatment of the following material events after the reporting period needs to be
amount of an insurance claim that it had filed. On 20 November 20X5, the
determined:
insurance provider agreed to pay $200,000
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C BW makes refunds to customers for any goods returned within 30 days of sale, and (1) The bankruptcy of a major customer, with a substantial debt outstanding at the end
has done so for many years of the reporting period.
D A customer is suing BW for damages alleged to have been caused by BW’s product. (2) A fire destroying some of the company’s inventory (the company’s going concern
BW is contesting the claim and, at 31 October 20X5, the directors have been status is not affected).
advised by BW’s legal advisers it is very unlikely to lose the case (3) An issue of shares to finance expansion.
(16 marks) (4) Sale for less than cost of some inventory held at the end of the reporting period.
18 IAS 10 EVENTS AFTER THE REPORTING PERIOD According to IAS 10 Events After the Reporting Period, which of the above events require
an adjustment to the figures in the draft financial statements?
18.1 WDC’s year end is 30 September 20X1.
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A 1 and 4 only
Which ONE of the following should be classified by WDC as a non-adjusting event B 1, 2 and 3 only
according to IAS 10 Events After The Reporting Period? C 2 and 3 only
D 2 and 4 only
A WDC was notified on 5 November 20X1 that one of its customers was insolvent
and was unlikely to repay any of its debts. The balance outstanding at 30 18.4 Which of the following events between the end of the reporting period and the date the
September 20X1 was $42,000 financial statements are authorised for issue must be adjusted in the financial
statements?
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B On 30 September WDC had an outstanding court action against it. WDC had made
a provision in its financial statements for the year ended 30 September 20X1 for (1) Declaration of equity dividends.
damages awarded against it of $22,000. On 29 October 20X1 the court awarded (2) Decline in market value of investments.
damages of $18,000 (3) The announcement of changes in tax rates.
(4) The announcement of a major restructuring.
C On 5 October 20X1 a serious fire occurred in WDC’s main production centre and
severely damaged the production facility
A 1 and 2 only
D The year end inventory balance included $50,000 of goods from a discontinued B 2 and 4 only
product line. On 1 November 20X1 these goods were sold for a net total of $20,000 C 3 and 4 only
D None of them
18.5 Which of the following events occurring after the year end is classified as a non-
adjusting event in accordance with IAS 10 Events After the Reporting Period?
A A property valuation which provides evidence of a permanent diminution in value

B The renegotiation of amounts owing by credit customers
C The determination of the amount of bonus payments to be made to employees
D Government announcing a change in tax rates
18.6 The financial statements of an entity for the year ended 31 March 20X4 were approved by the Income tax on profits is at a rate of 25%.
directors on 31 August 20X4.
What would be the amount for deferred tax in DM’s statement of financial position as at
Which of the following would be classified as an adjusting event in accordance with IAS 30 September 20X3, in accordance with IAS 12 Income Taxes?
10 Events after the Reporting Period/
A $3,750
A A reorganisation of the entity proposed by a director on 31 January 20X4 was B $11,250
agreed by the Board on 10 July 20X4 C $18,750
D $45,000
B A strike by the workforce which started on 1 May 20X4 stopped all production for
10 weeks before working terms and conditions were settled
19.3 The following information relating to taxation appears in the records of Stapley.
C An insurance claim for damage caused by a fire in a warehouse on 1 January 20X4
for $2.5 million was settled with a receipt of $1.5 million on 1 June 20X4 $
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Balance on income tax account on 1 January 20X2 187,500
D On 3 September 20X4 the entity sold some inventory for $100,000 which had a
Income tax paid in 20X2 in full settlement for the year
carrying amount at 31 March 20X4 of $122,000
ended 31 December 20X1 194,300
(12 marks)
Estimated income tax for the year ended 31 December 20X2 137,600
19 IAS 12 INCOME TAXES
What will the corporation tax liability be in Stapley’s statement of financial position on
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19.1 At 1 October 20X1 DX had the following balances in respect of property, plant and 31 December 20X2?
equipment:
A $194,300
$
B $144,400
Cost $220,000
C $137,600
Tax written down value $82,500
D $130,800
Statement of financial position:
Carrying amount $132,000
19.4 DZ recognised a tax liability of $290,000 in its financial statements for the year ended 30
September 20X5. This was subsequently agreed with and paid to the tax authorities as
DX depreciates all property, plant and equipment over five years using the straight line
$280,000 on 1 March 20X6. The directors of DZ estimate that the tax due on the profits for
method and no residual value. All assets were less than five years old at 1 October 20X1. No
the year to 30 September 20X6 will be $320,000. DZ has no deferred tax liability.
assets were purchased or sold during the year ended 30 September 20X2.
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What is DZ’s profit or loss tax charge for the year ended 30 September 20X6?
The local tax regime allows tax depreciation of 50% on additions to property, plant and
equipment in the accounting period in which they are purchased. In subsequent accounting
A $310,000
periods tax depreciation of 25% per year of the tax written down value is allowed. Income
B $320,000
tax on profits is at a rate of 25%.
C $330,000
D $600,000
What should be the amount for deferred tax in DX’s statement of financial position as at
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30 September 20X2 in accordance with IAS 12 Income Taxes?
19.5 At 30 April 20X3 the non-current assets of Shades have a carrying amount of $365,700 and a
A $5,843 tax written down value of $220,000. The balance brought forward on the deferred tax
B $6,531 account at 1 May 20X2 was $33,000. The tax rate is 25%.
C $12,375
What is the balance on the deferred tax account at 30 April 20X3?
D $23,375
A $33,000
19.2 DF purchased its only item of plant on 1 October 20X1 for $200,000. DF charges
B $36,425
depreciation on a straight line basis over five years.
C $55,000
D $91,425
Tax depreciation is allowed as follows:
50% of additions to property, plant and equipment in the accounting period in which 19.6 At 30 April 20X6, the carrying amount of the non-current assets of Bahno was $80,000
they are recorded; greater than the tax written down value, and the balance brought forward on the deferred tax
account was $24,800. The company accountant calculated that the corporation tax charge on
25% per year of the written down value in subsequent accounting periods except the reported profit for the year to 30 April 20X6 would be $53,960, based on the tax rate of
that in which the asset is disposed of; 24%.
What is the total charge for taxation in the statement of profit and loss for the year to 30 20.4 How should the proceeds from issuing a compound instrument be allocated between
April 20X6? liability and equity components in accordance with IAS 32 Financial Instruments:
Presentation?
A $48,360
B $59,560 A The liability component is measured at fair value and the remainder is allocated to
C $73,160 the equity component
D $78,760
B The equity component is measured at fair value and the remainder is allocated to the
(12 marks)
liability component
20 FINANCIAL INSTRUMENTS C The fair values of both the components are estimated and the proceeds allocated
proportionately
20.1 TS purchased 100,000 of its own equity shares in the market and classified them as treasury
D The equity component is measured at its intrinsic value and the remainder is
shares. At the end of the accounting period TS still held the treasury shares.
E
allocated to the liability component
Which ONE of the following is the correct presentation of the treasury shares in TS’s
closing statement of financial position in accordance with IAS 32 Financial Instruments: 20.5 In the current financial year, Natamo has raised a loan for $3m. The loan is repayable in 10
Presentation? equal half-yearly instalments. The first instalment is due six months after the loan was raised.
A As a current asset investment How should the loan be reported in Natamo’s next financial statements?
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B As a non-current liability
C As a non-current asset A As a current liability
D As a deduction from equity B As a non-current liability
C As equity
20.2 IAS 32 Financial Instruments: Presentation classifies issued shares as either equity D As both a current and a non-current liability
instruments or financial liabilities. An entity has the following categories of funding on its
statement of financial position: 20.6 On 1 January 20X2 LMN issued $2,000,000 8% convertible debt at par. The debt is
repayable, or convertible, at a premium of 10% four years after issue. The effective interest
(1) A preference share that is redeemable for cash at a 10% premium on 30 May 20X5. rate for the debt is 14%. The present values $1 receivable at the end of each year, based on
discount rates of 8%, 10% and 14% are:
(2) An ordinary share which is not redeemable and has no restrictions on receiving
8% 10% 14%
dividends.
End of year 1 0.926 0.909 0.877
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(3) A loan note that is redeemable at par in 2020. 2 0.857 0.826 0.769
3 0.794 0.751 0.675
(4) An irredeemable loan note that pays interest at 7% a year.
4 0.735 0.683 0.592
Applying IAS 32, how would each of the above be categorised in the statement of
What is the finance charge to LMN’s profit or loss for the year ended 31 December
financial position?
20X3?
As an equity As a financial
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SA
instrument liability A $160,000
A 1 and 2 only 3 and 4 only B $248,000
B 2 and 3 only 1 and 4 only C $260,000
C 2 only 1, 3 and 4 only D $274,000
D 1, 2 and 3 only 4 only
20.7 On 1 March 20X2 PQR purchased a debt instrument from the market for $105,000, the par
value of the instrument was $100,000. At 31 December 20X2 the fair value of the instrument
20.3 How should convertible debt be classified in accordance with IAS 32 Financial is $112,000 and the amortised cost has been calculated to be $104,000.
Instruments: Presentation?
PQR does not hold this type of asset for contractual cash flows.
A As either a liability or equity based on an evaluation of the substance of the
contractual arrangement At what amount should the investment be included in PQR’s statement of financial
position as at 31 December 20X2?
B As separate liability and equity components , basing the liability element on the
present value of future cash flows A $100,000
C As equity in its entirety, on the presumption that all options to convert the debt into B $104,000
equity will be exercised in the future C $105,000
D $112,000
D As a liability in its entirety, until it is converted into equity
20.8 On 1 January 20X2 XYZ issued $1,000,000 4% convertible loan notes, at a discount of 95. 21.3 During the last three years Harvert had held 400,000 ordinary shares in Jamee. The issued
The loan notes are redeemable in five years at a premium of 10%. share capital of Jamee is $500,000 in shares of 50 cents each. The finance director of Harvert
is a director of Jamee.
What are the total finance costs that should be charged to profit or loss over the five-
year term of the convertible loan notes? How should the investment in Jamee be treated in the consolidated financial statements
of Harvert ?
A $350,000
B $345,000 A As a non-current asset investment
C $250,000 B As a current asset investment
D $200,000 C As an associated undertaking
D As a subsidiary
20.9 In accordance with IFRS 9 Financial Instruments, under what circumstances, can an
entity classify financial assets that meet the amortised cost criteria as at fair value 21.4 Which of the following statements regarding consolidated financial statements is
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through profit or loss? correct?
A Where the instrument is held to maturity (1) Only the group’s share of the assets of a subsidiary is reflected on the consolidated
B If doing so eliminates an accounting mismatch statement of financial position.
C Where the financial asset passes the contractual cash flow characteristics test
(2) Only the group’s share of the net assets of an associate is reflected on the
D Where the business model approach is adopted
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consolidated statement of financial position.
(18 marks) (3) The value of share capital on a consolidated statement of financial position will
include the share capital of both the investor and the investee.
21 REGULATORY FRAMEWORK
A 1 only
21.1 Harwich holds 70,000 $1 “B” shares in Sall. These shares carry one vote each. B 2 only
C 3 only
Felixstowe holds 18,000 $1 “A” shares in Sall. These shares carry 10 votes each. D None of the statements
The share capital of Sall is made up of the following:
$ 21.5 Which TWO of the following situations would indicate that a parent has control over a
100,000 “B” shares of $1 each 100,000 subsidiary?
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20,000 “A” shares of $1 each 20,000
———— (1) The company has a 50% shareholding with the other 50% owned by another
120,000 company. Both owners must be in agreement.
———— (2) The company owns 100% of preference shares and 10% of the ordinary shares.
Of which of the following reporting entities is Sall a subsidiary undertaking? (3) The company owns 40% of the ordinary shares and also has an agreement with
another 40% of the owners of ordinary shares that they will always vote with the
A Both Harwich and Felixstowe company.
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SA
B Harwich
C Felixstowe (4) The company owns 30% of the ordinary shares and has the ability to control the
D Neither Harwich nor Felixstowe board of directors.
21.2 Sam has a share capital of $10,000 split into 2,000 A ordinary shares of $1 each and 8,000 B A 1 and 2 only
ordinary shares of $1 each. Each A ordinary share has 10 votes and each B ordinary share has B 2 and 3 only
one vote. Both classes of shares have the same rights to dividends and on liquidations. Tom C 3 and 4 only
owns 1,500 A ordinary shares in Sam. Dick owns 6,000 B ordinary shares in Sam. D 1 and 4 only
(10 marks)
All three companies conduct similar activities and there is no special relationship between the
companies other than that already stated. The shareholdings in Sam are held as long-term
investments and are the only shareholdings of Tom and Dick.
Which companies must prepare consolidated financial statements?
A Neither Tom nor Dick
B Tom only
C Dick only
D Both Tom and Dick
22 CONSOLIDATED STATEMENT OF FINANCIAL POSITION What amount of goodwill should be included in the consolidated statement of financial
position of Jarndyce as at 31 December 20X1?
22.1 HX acquired 80% of SA’s 100,000 equity shares on 1 July 20X0 for $140,000. On 1 July
20X0 the fair value of SA’s identifiable net assets was $126,000. The fair value of non- A $144,000
controlling interest on acquisition is based on SA’s share price, which was $1.70. B $230,400
C $345,600
The trainee accountant has suggested three possible values for goodwill on acquisition as D $428,000
follows:
22.4 Vaynor acquired 80,000 ordinary shares in Weeton some years ago.
(1) $14,000
(2) $39,200 Extracts from the statements of financial position of the two companies as at 30 September
(3) $48,000 20X7 are as follows:
Vaynor Weeton
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Which of the above values for goodwill is an acceptable valuation in accordance with $000 $000
IFRS 3 Business Combinations? Ordinary shares of $1 each 500 100
Retained earnings 90 40
A 1 and 2 only
B 1 and 3 only On acquisition the retained earnings of Weeton showed a deficit of $10,000.
C 2 and 3 only
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D All three Goodwill has been impaired by $15,000 since acquisition. Non-controlling interest is
measured at fair value on acquisition.
22.2 At 1 January 20X1 Barley acquired 100% of the share capital of Corn for $1,400,000. At that
date the share capital of Corn consisted of 600,000 ordinary shares of 50c each and its What were the consolidated retained earnings of Vaynor on 30 September 20X7?
retained earnings were $50,000.
A $102,000
On acquisition Corn had some assets whose carrying amount was $230,000 but the fair value B $115,000
was $250,000. C $118,000
D $125,000
What was goodwill on acquisition?
22.5 Gonzo acquired 80% of the share capital of Bamboo a number of years ago. Bamboo has
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A $730,000 issued 200,000 $1 shares which had a market price of $3.10 on acquisition. The carrying
B $750,000 amount of Bamboo’s net assets today is $650,000, this is $50,000 higher than it was on
C $1,030,000 acquisition.
D $1,050,000
Non-controlling interest was measured at fair value on acquisition.
22.3 On 1 January 20X1, Jarndyce acquired 80% of the ordinary share capital of Skimpole for
$576,000. The statements of financial position of the two companies at 31 December 20X1 What amount should be shown for non-controlling interest in Gonzo’s consolidated
were as follows: statement of financial position today?
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Jarndyce Skimpole
$000 $000 A $120,000
Net assets 468 432 B $124,000
Investment in Skimpole 576 – C $130,000
––––– –––– D $134,000
1,044 432 (10 marks)
––––– ––––
Issued share capital 720 180 23 CONSOLIDATION ADJUSTMENTS
Retained earnings
At 31 December 20X0 144 108 23.1 HW sold goods to SD, its 100% owned subsidiary on 1 February 20X1. The goods were sold
Profit for 20X1 180 144 to SD for $48,000. HW made a profit of 33.33% on the original cost of the goods.
––––– ––––
1,044 432 At the year end, 30 June 20X1, 40% of the goods had been sold by SD; the remainder was
––––– –––– still in SD’s inventory and SD had not paid for any of the goods.
Non-controlling interest is valued at fair value on acquisition, which was $140,000. There
has been no impairment of goodwill since the acquisition took place.
Which ONE of the following states the correct adjustments required in the HW group’s 23.5 Which of the following statements apply when producing a consolidated statement of
consolidated statement of financial position at 30 June 20X1? financial position?
A Reduce inventory and retained earnings by $7,200 and Reduce payables and (1) All inter-company balances should be eliminated.
receivables by $7,200 (2) Inter-company profit in year-end inventory should be eliminated.
(3) Closing inventory held by subsidiaries needs to be included at fair value.
B Reduce inventory and retained earnings by $9,600 and Reduce payables and
receivables by $9,600
A 1 only
C Reduce inventory and retained earnings by $7,200 and Reduce payables and B 1 and 2 only
receivables by $48,000 C 2 and 3 only
D 3 only
D Reduce inventory and retained earnings by $9,600 and Reduce payables and
receivables by $48,000
23.6 Milton owns all the share capital of Keynes. The following information is extracted from the
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individual company statements of financial position as at 31 December 20X1.
23.2 Salt owns 100% of Pepper. During the year Salt sold goods to Pepper for a sales price of
$1,044,000, generating a margin of 25%. 40% of these goods had been sold on by Pepper to Milton Keynes
external parties at the end of the reporting period. $ $
Current assets 500,000 200,000
What adjustment for unrealised profit should be made in Salt’s consolidated financial
Current liabilities 220,000 90,000
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statements?
Included in Milton purchase ledger is a balance in respect of Keynes of $20,000. The balance
A $83,520
on Milton account in the sales ledger of Keynes is $22,000. The difference between those
B $104,400
figures is accounted for by cash in transit.
C $125,280
D $156,600
If there are no other intra-group balances, what is the value of the net current assets in
the consolidated statement of financial position of Milton and its subsidiary?
23.3 On 1 April 20X6, Woolwich paid $816,000 for 80% of Malta’s $408,000 share capital.
Malta’s retained earnings at that date were $476,000. At 31 March 20X1 the retained
A $368,000
earnings of the companies are:
B $370,000
$000
C $388,000
Woolwich 1,224
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D $390,000
Malta 680
23.7 A parent company sold goods to its wholly owned subsidiary for $1,800 representing cost
Woolwich’s inventory includes goods purchased from Malta for $18,000. Malta makes a
plus 20%. At the year end two-thirds of the goods were still in inventory.
profit at 20% on the cost of all goods sold to Woolwich.
What is the amount of unrealised profit at the year end?
What are the retained earnings in the consolidated statement of financial position of
Woolwich as at 31 March 20X1? A $360
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B $300
A $1,384,320 C $240
B $1,384,800 D $200
C $1,387,200
D $1,439,200 23.8 Bass acquired its 70% holding in Miller many years ago. At 31 December 20X7 Miller had
inventory with a book value of $15,000 purchased from Bass at cost plus 25%.
23.4 During the year Subway invoiced $200,000 to its parent company for transfers of goods in
inventory. Transfers were made at a 25% mark-up. At the end of the year the parent still held What will be the effects on non-controlling interest and retained earnings in the
60% of the goods in inventory. consolidated statement of financial position after dealing with the consolidation
adjustment required for inventory?
What adjustment should be made for unrealised profit in the consolidated financial
statements for the year? Non-controlling interest Retained earnings
A No effect Reduce by $3,000
A $16,000 B No effect Reduce by $3,750
B $24,000 C Reduce by $900 Reduce by $2,100
C $30,000 D Reduce by $1,125 Reduce by $2,625
D $40,000
23.9 Rugby has a 75% subsidiary, Stafford , and is preparing its consolidated statement of 24.3 Tom has purchased all the share capital of Jerry during the year.
financial position as on 31 December 20X6. The carrying amount of non-current assets in the
two companies at that date is as follows: Which of the following items would Tom take into account when calculating the fair
value of the net assets acquired in accordance with IFRS 3 Business Combinations?
$
Rugby 260,000 (1) A contingent liability dependent on the outcome of a legal case which has been
Stafford 80,000 provided for in Jerry’s books.
On 1 January 20X6 Stafford had transferred an item of equipment to Rugby for $40,000. At (2) A provision required to cover costs of reorganising Jerry ’s departments to fit in
the date of transfer the equipment, which had cost $42,000, had a carrying amount of $30,000 with Tom’s structure.
and a remaining useful economic life of five years. The group accounting policy is to (3) A warranty provision in Jerry’s books to cover costs of commitments made to
depreciate non-current assets on a straight-line basis down to a nil residual value. It is also customers.
group policy not to revalue non-current assets.
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A 3 only
What is the figure that will be disclosed as the carrying amount of non-current assets in B 2 and 3 only
the consolidated statement of financial position of Rugby as on 31 December 20X6? C 1 and 3 only
D 1 only
A $340,000
B $332,000
24.4 The books of Tiny contain a provision for reorganisation. The reorganisation is under way
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C $330,000
and the provision is to cover costs to be incurred in the next six months to complete the
D $312,000
reorganisation.
(18 marks)
Huge is considering acquiring Tiny. If it does so, the reorganisation of Tiny will continue.
24 FURTHER CONSOLIDATION ADJUSTMENTS
In assessing the fair value of net assets the directors of Huge wish to make a provision for
24.1 Huge acquired 60% of Small’s 500,000 shares on 1 January 20X2. The purchase
future trading losses, and include the existing provision for reorganisation costs.
consideration consisted of an immediate cash payment of $3.45 per share plus a share
exchange of three shares in Huge for every two shares in Small. At the acquisition date the In accordance with IFRS 3 Business Combinations which provisions, if any, may be
market prices of each share in Huge and each share in small were $6.50 and $4.20, included?
respectively.
Provision for trading losses Provision for reorganisation costs
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What amount should be included in Huge’s statement of financial position in respect of A Include Include
its investment in Small? B Exclude Include
C Include Exclude
A $3,960,000 D Exclude Exclude
B $2,925,000
C $2,335,000 24.5 Which of the following are required when assessing fair values on acquisition in
D $1,875,000 accordance with IFRS 3 Business Combinations?
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24.2 In relation to accounting for positive purchased goodwill, what is the correct accounting (1) Valuation of non-current assets at market value where this is higher than its carrying
treatment in accordance with IFRS 3 Business Combinations? amount.
(2) Discounting trade receivables to present values where debt is not due to be
A Carry as an asset and amortise goodwill over its useful economic life
recovered for two years.
B Carry as an asset and test annually for impairment
C Value each year to fair value (3) Inclusion of a contingent liability, which is a present obligation, of the acquired
D Write off immediately against consolidated retained earnings company.
A 1 only
B 2 only
C 1 and 2 only
D 1, 2 and 3
24.6 Leeds acquired the whole of the issued share capital of Cardiff for $12 million in cash. In How should these transaction costs be accounted for in Debbie’s financial statements?
arriving at the purchase price Leeds had taken into account in respect of Cardiff future re-
organisation costs of $1 million and anticipated future losses of $2 million. The fair value of A Legal fees of $800,000 should be expensed immediately and the share issue costs of
the net assets of Cardiff before taking into account these matters was $7 million. $200,000 should be set off against share premium
B The full amount of $1,000,000 should be expensed immediately
In accordance with IFRS 3 Business Combinations, what is the amount of goodwill on
the acquisition? C The full amount of $1,000,000 should be included as part of the cost of investment
in Harry
A $8 million
D Legal fees of $800,000 should be expensed immediately and the share issue costs of
B $7 million
$200,000 should be added to the cost of investment
C $6 million
D $5 million
(18 marks)
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24.7 On 1 January 20X2 Harry purchased 75% of the equity shares of Sally. The purchase
25 CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
consideration consisted of an immediate cash payment of $2 per share plus an additional
payment of $3 per share on 1 January 20X4. 25.1 Constable owns 40% of Turner which it treats as an associated undertaking. Constable also
owns 60% of Whistler. Constable has held both of these shareholdings for more than one
Harry’s cost of capital is 6% and Sally’s equity shares consist of $100,000 50 cent shares.
year. Revenue of each company for the year ended 30 June 20X2 was as follows:
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What is the cost of investment in Harry’s statement of financial position at 31 December $m
20X2 and how should the deferred consideration be presented? Constable 400
Turner 200
Cost of investment Presented as Whistler 100
A $700,000 Current liability
B $724,000 Current liability What figure should be shown as revenue in Constable’s consolidated statement of profit
C $700,000 Non-current liability or loss for the year ended 30 June 20X2?
D $724,000 Non-current liability
A $460 million
24.8 Mungo acquired 80% of the equity share capital of Jerry on 1 January 20X2, paying cash of B $500 million
$1,200,000. Mungo has agreed to make a further cash payment of $600,000 if Jerry’s share C $580 million
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price increases by at least 10% each year for the next three years. The fair value of this D $700 million
contingent consideration on 1 January 20X2 was measured at $320,000.
25.2 Barley has owned 100% of the issued share capital of Oats for many years. Barley sells
At 31 December 20X2 the fair value of the contingent consideration was remeasured to goods to Oats at cost plus 20%. The following information is available for the year.
$345,000, but market expectations for the next 12 months are very poor and the market as a
whole is expected to fall by 15%. If the market reacts as expected then the estimated fair Revenue
value of the contingent consideration on 31 December 20X3 would be $180,000. Barley $460,000
Oats $120,000
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SA
At what amount will Mungo include the contingent consideration in its statement of
financial position as at 31 December 20X2? During the year Barley sold goods to Oats for $60,000, of which $18,000 were still held in
inventory by Oats at the year end.
A $600,000
B $345,000 At what amount should total revenue appear in the consolidated statement of profit or
C $320,000 loss?
D $180,000
A $520,000
24.9 Debbie incurred $1,000,000 of transaction costs in respect of the recent purchase of a B $530,000
controlling stake in Harry. These costs consist of $800,000 legal fees associated with the C $538,000
acquisition and $200,000 of issue costs relating to the equity shares issued by Debbie as part D $562,000
of the purchase consideration.
25.3 Ufton is the sole subsidiary of Walcot. The cost of sales figures for 20X1 for Walcot and 25.7 Chicken owns 80% of Egg. Egg sells goods to Chicken at cost plus 50%. The total invoiced
Ufton were $11 million and $10 million respectively. During 20X1 Walcot sold goods which sales to Chicken by Egg in the year ended 31 December 20X1 were $900,000 and, of these
had cost $2 million to Ufton for $3 million. Ufton has not yet sold any of these goods. sales, goods which had been invoiced at $60,000 were held in inventory by Chicken at 31
December 20X1.
What is the consolidated cost of sales figure for 20X1?
What is the reduction in aggregate group gross profit?
A $16 million
B $18 million A $20,000
C $19 million B $24,000
D $20 million C $30,000
D $40,000
25.4 Patience has a wholly owned subsidiary, Bunthorne. During 20X1 Bunthorne sold goods to
Patience for $40,000 which was cost plus 25%. At 31 December 20X1 $20,000 of these 25.8 Fosters in 20X7 invoiced $120,000 of goods to its 75% subsidiary, Stella , at cost plus 30%.
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goods remained unsold. Stella had 25% of these in goods in inventory at the year end. At the start of the year Stella
had $15,000 worth of inventory invoiced from Fosters, all of which was sold in 20X7.
By what amount will revenue be reduced in the consolidated statement of profit and loss
for the year ended 31 December 20X1? What is the amount of unrealised profit adjustment to consolidated gross profit?
A $20,000 A $3,461
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B $30,000 B $4,500
C $32,000 C $6,923
D $40,000 D $9,000
25.5 Patience has a wholly owned subsidiary, Bunthorne. During 20X1 Bunthorne sold goods to 25.9 Cherry owned 75% of Plum. For the year ended 31 December 20X1 Plum reported a net
Patience for $40,000 which was cost plus 25%. At 31 December 20X1 $20,000 of these profit of $118,000. During 20X1 Plum sold goods to Cherry for $36,000 at cost plus 50%.
goods remained unsold. At the year end these goods are still held by Cherry.
By what amount will profit be reduced in the consolidated statement of profit or loss for What is the non-controlling interest in the consolidated statement of profit or loss for
the year ended 31 December 20X1? the year ended 31 December 20X1?
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A $4,000 A $25,000
B $6,000 B $26,500
C $8,000 C $27,250
D $10,000 D $29,500
25.6 The following figures related to Sanderstead and its subsidiary Croydon for the year ended 31 25.10 Hot owns 80% of the issued share capital of Warm and 40% of the issued share capital of
December 20X9. Cold. In the individual company financial statements the tax charges for the year are:
Sanderstead Croydon
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$
$ $
Hot 40,000
Revenue 600,000 300,000
Warm 36,000
Cost of sales (400,000) (200,000)
Cold 20,000
Gross profit 200,000 100,000
At what amount should be shown for the tax charge in the consolidated statement of
During the year Sanderstead sold goods to Croydon for $20,000, making a profit of $5,000.
profit or loss?
These goods were all sold by Croydon before the year end.
A $68,800
What are the amounts for revenue and gross profit in the consolidated statement of
B $76,000
profit and loss of Sanderstead for the year ended 31 December 20X9?
C $76,800
D $84,000
Revenue Gross profit
A $900,000 $300,000
B $900,000 $295,000
C $880,000 $300,000
D $880,000 $295,000
25.11 Vaynor acquired 100,000 ordinary shares in Weeton and 20,000 ordinary shares in Yarlet What amount should be shown in HY’s consolidated statement of financial position at
some years ago. The investment in Yarlet gives Vaynor significant influence. 30 June 20X1 for the investment in associate?
Extracts from the statements of financial position of the three companies as on 30 September A $115,500
20X7 are as follows: B $98,000
Vaynor Weeton Yarlet C $87,500
$000 $000 $000 D $70,000
Ordinary shares of $1 each 500 100 50
Retained earnings 90 40 70 26.3 Which of the following statements regarding the equity method of accounting is true?
At acquisition the retained earnings of Weeton showed a deficit of $10,000 and of Yarlet a (1) An investment in an associate is always carried at cost.
surplus of $30,000. (2) An investor recognises its share of the associate’s profit or loss in consolidated
profit or loss.
E
What were the consolidated retained earnings of Vaynor on 30 September 20X7?
A Neither statement
A $136,000 B Statement 1 only
B $156,000 C Statement 2 only
C $200,000 D Both statements
D $210,000
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26.4 Which of the following could provide evidence of “significant influence”?
(22 marks)
(1) 51% of the voting power of the investee.
26 INVESTMENTS IN ASSOCIATES (2) interchange of management personnel.
(3) participation in decisions about dividends.
26.1 The HC group acquired 30% of the equity share capital of AF on 1 July 20X0 paying (4) provision of essential technical information.
$25,000.
A 1, 2 and 3 only
At 1 April 20X0 the equity of AF comprised: B 1, 2 and 4 only
$ C 1, 3 and 4 only
$1 equity shares 50,000 D 2, 3 and 4 only
Share premium 12,500
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Retained earnings 10,000 26.5 Inveresk has equity shareholdings in three other companies, as shown below, and has a seat
on the board of each:
AF made a profit for the year to 31 March 20X1 (prior to dividend distribution) of $6,500 and
paid a dividend of $3,500 to its equity shareholders. Profits accrue evenly throughout the Inveresk Other shareholders
year. Raby 40% No other holdings larger than 10%
What amount of income from associate will be included in the consolidated statement of Seal 30% Another company holds 60% of Seal’s equity
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profit or loss for the year ended 31 March 20X1? Toft 15% Two other companies hold respectively 50% and 35% of Toft’s
equity, and each has a seat on its board. Inveresk exerts
A $675 significant influence over Toft
B $900
C $1,462.50 Which of the above shareholdings are associated undertakings of Inversk?
D $1,950
A Raby only
26.2 The HY group acquired 35% of the equity share capital of SX on 1 July 20X0 paying B Raby and Seal
$70,000. This shareholding enabled HY group to exercise significant influence over SX. C Raby and Toft
D Raby, Seal and Toft
At 1 July 20X0 the equity of SX comprised:
$
$1 equity shares 100,000
Retained earnings 50,000
SX made a profit for the year ended 30 June 20X1 (prior to dividend distribution) of $130,000
and paid a dividend of $80,000 to its equity shareholders.
26.6 Holly has a 30% holding in Johnson which allows Holly to exert significant influence over 27.4 Gormenghast’s current ratio has been calculated as 1.2. However, it has now been discovered
Johnson. During the current year Holly sold goods to Johnson for $15,000; Holly applies a that closing inventory has been understated by $24,000 and opening inventory has been
mark-up of 25% on cost. Johnson still held half of these goods in inventory at the year end. overstated by $24,000.
What is the amount of unrealised profit that will be reflected in Holly’s consolidated How did these misstatements affect the calculations of Gormenghast’s current ratio and
financial statements for the current year? inventory days?
A $450 Current ratio Inventory days

B $562.5 A Too high Too high
C $1,500 B Too high oo low
D $3,000 C Too low Too high
D Too low Too low
(12 marks)
E
27.5 The following are extracts from the financial statements of Lamas for the year ended
27 ANALYSIS AND INTERPRETATION 31 December 20X2.
27.1 An entity that fixes prices by adding 50% to cost actually achieved a mark-up of 45%. Statement of financial position Statement of profit or loss
$ $
Which of the following factors could account for the shortfall? Issued share capital 2,000 Operating profit 795
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Retained earnings 1,000 Loan note interest (120)
A Sales were lower than expected ——— ——
B Opening inventories had been overstated 3,000 675
C Closing inventories were higher than opening inventories 12% Loan notes 20X8 1,000 ——
D Purchases were higher than expected ———
4,000
27.2 Which of the following factors could cause a company’s gross profit percentage on sales ———
to fall below the expected level?
What is the return on capital employed at the end of the year?
A Overstatement of closing inventories
B The incorrect inclusion in purchases of invoices relating to goods supplied in the A 22.5%
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following period B 19.9%
C 16.9%
C The inclusion in sales of the proceeds of sale of non-current assets D 16.6%
D Trade discounts offered to customers were lower than expected
27.6 Welwyn buys and sells a single product. The following is an extract from its statement of
27.3 Which of the following are true of trend analysis? financial position at 31 December 20X7:
20X7 20X6
(1) It uses changes in monetary amount and percentage terms to identify patterns. $ $
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(2) It concentrates on the relative size of current assets. Inventories 50 40
(3) It examines changes over time. Trade receivables 16 24
(4) It examines the relationships of percentage changes to each other.
Sales and purchases during 20X7 were $200,000 and $120,000 respectively. 20% of sales
A 1 and 3 only were for cash.
B 1 and 4 only
C 2 and 3 only What were the average receivables collection period and gross profit percentage for the
D 2 and 4 only year ended 31 December 20X7?
Average receivables collection period Gross profit percentage
A 37 days 35%
B 37 days 45%
C 46 days 35%
D 46 days 45%
27.7 Marple has a current ratio of 2:1. 28.3 An extract from a statement of cash flows prepared by a trainee accountant is shown below:
Which of the following transactions will cause the current ratio to decrease? $m
Profit before taxation 28
A Receives cash in respect of a long-term loan Adjustments for:
B Receives cash in respect of a short-term loan Depreciation (9)
C Pays an existing creditor ––
D Writes off an existing trade receivable against the allowance for irrecoverable debts Operating profit before working capital changes 19
Decrease in inventories 3
(14 marks) Increase in receivables (4)
Increase in payables (8)
28 IAS 7 STATEMENT OF CASH FLOWS ––
Cash generated from operations 10
E
28.1 IAS 7 Statement of Cash Flows sets out the three main headings to be used in a statement of —
cash flows. Items that may appear on a statement of cash flows include:
Which of the following criticisms of this extract are correct?
(1) Tax paid
(2) Purchase of investments (1) Depreciation charges should have been added, not deducted.
(3) Loss on disposal of machinery (2) Decrease in inventories should have been deducted, not added.
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(4) Purchase of equipment (3) Increase in receivables should have been added, not deducted.
(4) Increase in payables should have been added, not deducted.
Which of the above items would be included under the heading “Cash flows from
operating activities” according to IAS 7? A 1 and 3 only
B 1 and 4 only
A 1 and 2 only C 2 and 3 only
B 1 and 3 only D 2 and 4 only
C 2 and 4 only
D 3 and 4 only 28.4 At 1 January 20X0 Casey had property, plant and equipment with a carrying amount of
$250,000. In the year ended 31 December 20X0 the company disposed of assets with a
28.2 Which ONE of the following would be shown in a statement of cash flow using the direct carrying amount of $45,000 for $50,000. The company revalued a building from $75,000 to
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method but not in a statement of cash flow using the indirect method of calculating cash $100,000 and charged depreciation for the year of $20,000. At the end of the year the
generated from operations? carrying amount of property, plant and equipment was $270,000.
A Cash payments to employees How much will be reported in the statement of cash flows for the year ended 31
B Increase/(decrease) in receivables December 20X0under the heading “cash flows from investing activities”?
C Depreciation
D Finance costs A $10,000 outflow
B $10,000 inflow
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C $35,000 outflow
D $50,000 inflow
28.5 A company sold a building at a profit.
How should this transaction be treated in the company’s statement of cash flows?
Proceeds of sale Profit on sale

A Cash inflow under Added to profit in calculating cash flow
Financing activities from operating activities
B Cash inflow under Deducted from profit in calculating cash flow
Investing activities from operating activities
C Cash inflow under Added to profit in calculating cash flow from
Investing activities operating activities
D Cash inflow under Deducted from profit in calculating cash flow
Financing activities from operating activities
28.6 The non-current assets of Ealing were as follows: 28.9 The following items have been extracted from the statement of cash flows of Gresham for the
Start of year End of year year ended 31 December 20X1.
$ $ $
Cost 180,000 240,000 Depreciation 30,000
Aggregate depreciation (120,000) (140,000) Profit on sale of non-current assets 5,000
––––––– ––––––– Proceeds from sale of non-current assets 20,000
Carrying amount 60,000 100,000 Purchase of non-current assets 25,000
––––––– –––––––
If the carrying amount of non-current assets was $110,000 on 31 December 20X0, what
During the year non-current assets which had cost $80,000 and which had a carrying amount was it on 31 December 20X1?
of $30,000 were sold for $20,000.
A $70,000
Profit before tax for the year was $300,000. B $80,000
E
C $85,000
By how much did Ealing’s cash balances increase during the year as a result of the D $90,000
above transactions?
28.10 Waterloo acquired a building by issuing $400,000 8% loan notes at par. The market rate of
A $210,000 interest at the time of the issue was also 8%.
B $240,000
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C $260,000 How should the acquisition be presented in the statement of cash flows for the period?
D $290,000
Investing activities Financing activities
28.7 On comparing the components of net assets of Deep on 31 December 20X2 and 31 December A $(400,000) $400,000
20X1 the following movements were noted. B $(400,000) Nil
C Nil $400,000
(1) A decrease in the warranty provision of $12,000 due to a change in estimate. D Nil Nil
(2) An increase in tangible non-current assets of $98,000 due to a revaluation in the
year. 28.11 At 1 October 20X0, BK had an accrued interest payable balance of $12,000 in its statement of
financial position. During the year ended 30 September 20X1, BK charged interest payable
Which of the above items should be included in the notes to the cash flow statement of of $41,000 to its statement of profit or loss. Accrued interest payable at 30 September20X1
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Deep as part of the reconciliation of operating profit to net cash flow from operating was $15,000.
activities?
Included in the interest charged to profit or loss for the year was an unwinding of the discount
A Neither 1 nor 2 on a decommissioning provision of $5,000 and finance lease interest of $3,000. The finance
B 1 only lease is paid in cash annually in arrears.
C 2 only
D Both 1 and 2 What is the cash flow in respect of interest paid that will appear in BK’s statement of
cash flows for the year ended 30 September 20X1?
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28.8 A company incurs expenditure on development during the year which is capitalised.
A $30,000
How would this expenditure be shown in the statement of cash flows? B $33,000
C $36,000
A As an operating cash flow D $38,000
B As an investing cash flow (22 marks)
C As an item in the reconciliation of operating profit and net cash inflow from 29 IAS 33 EARNINGS PER SHARE
operating activities
29.1 A listed company makes a rights issue.
D It will not appear at all
Which of the following rankings of prices is most valid? (Note: the symbol “<” below
means “is less than”)
A Ex-rights < Cum-rights < Issue price

B Ex-rights < Issue price < Cum-rights
C Cum-rights < Ex-rights < Issue price
D Issue price < Ex-rights < Cum-rights
29.2 A company currently has 10 million $1 shares in issue with a market value of $3 per share. 29.6 In the year to 30 November the retained profit of Dale was $3,640,500. This was after paying
The company wishes to raise new funds using a 1-for-4 rights issue. The theoretical ex rights dividends as follows:
price per share is $2·80.
Ordinary: 5 cents per share on 1·5 million shares
How much new finance was raised by the rights issue? Preference: 7 cents per share on 600,000 shares
A $2,500,000 What figure will be reported for basic earnings per share as defined in IAS 33 Earnings
B $4,000,000 per Share?
C $5,000,000
D $7,000,000 A 173·4 cents
B 176·9 cents
29.3 A company makes a 2-for-3 rights issue at an issue price of $2. The cum-rights price is $4. C 242·7 cents
D 247·7 cents
E
What is the theoretical ex rights price?
29.7 Reploy has reported a profit before interest and tax of $728,654 for the last financial year.
A $2·50 The company’s profit or loss statement reports an interest charge of $45,860, a tax charge of
B $2·80 $158,740 whilst the statement of changes in equity shows that an ordinary dividend of
C $3·00 $50,000 was paid. The company’s issued ordinary share capital is $500,000 in $1 shares.
D $3·20
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What figure should be reported for earnings per share?
29.4 Chartwell has in issue $120,000 Ordinary shares of 50 cents each and 10,000 6% Preference
shares of $3 each. A 94·8 cents
B 104·8 cents
Extracts from the financial statements for the year to 31 March 20X3 are shown below: C 136·6 cents
D 145·7 cents
$
Profit before interest and tax 528,934 29.8 The financial statements of Epis Group showed that retained earnings had increased in the
Interest paid 6,578 year by $689,424. The following items were presented by Epis in either the statement of
Preference dividend 1,800 profit or loss for the year or in the statement of changes in equity:
Taxation 125,860
$
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Ordinary dividend 10,800
Interest 84,441
What figure should be reported as basic earnings per share as defined in IAS 33 Taxation 227,553
Earnings per Share? Non-controlling interest 47,338
Ordinary dividend (10 cents per share) 65,000
A 159.9 cents
B 164.4 cents What figure should be reported in the financial statements for basic earnings per share,
C 319.9 cents to the nearest cent?
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D 328.9 cents
A 10 cents
29.5 In the year to 30 September 20X3, Wexam reported a retained profit of $4·8m after paying B 113 cents
preference dividends of $200,000 and dividends of $800,000 to the holders of the ordinary C 116 cents
shares in issue at the year end. On 1 October 20X2 Wexham had three million shares in issue. D 123 cents
On 1 April 20X3 the company had made a bonus issue of one share for every three held.
29.9 The most recent income statement of Waylor reported a profit before tax of $125,800 and a
What figure should be reported as basic earnings per share as defined in IAS 33 tax expense of $22,400. Half way through the year the company had issued 40,000 bonus
Earnings per Share? shares which brought the total number of shares in issue to 440,000.
A 120 cents What figure should be reported for earnings per share?
B 140 cents
C 145 cents A 23·5 cents
D 160 cents B 24·7 cents
C 28·6 cents
D 29·9 cents

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REVISION QUESTION BANK MCQ – FINANCIAL REPORTING (F7) FINANCIAL REPORTING (F7) – REVISION QUESTION BANK MCQ

A 1 and 2 only 3 SUBSTANCE OVER FORM

(1) Current cost A 1, 2 and 3

(1) Staff costs – wages and salaries

(1) Raw materials and consumables used A All four

A After work has commenced on the contract A 1 and 2 only

A All three A 1 only

(1) Property held for long-term capital appreciation

A A property valuation which provides evidence of a permanent diminution in value

A $450 Current ratio Inventory days

Proceeds of sale Profit on sale

A Ex-rights < Cum-rights < Issue price

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