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CIMA F1 practice questions

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Question 1Financial reporting

Under the IASB's Conceptual Framework, which qualitative characteristic requires information to be capable of making a difference in users' decisions?

  1. Comparability
  2. Timeliness
  3. Verifiability
  4. Relevance Correct answer.

Explanation

Relevance is a fundamental qualitative characteristic. Information is relevant when it has predictive value, confirmatory value, or both, so it can influence decisions. Comparability, timeliness and verifiability are enhancing characteristics that support useful information but do not by themselves make it capable of making a difference.

Question 2Financial reporting

A company pays a one-year insurance premium of 24,000 in advance on 1 April. Under accrual accounting, what is recognised in the statement of financial position at 31 December of the same year?

  1. No asset, because the cash has been paid
  2. A prepayment asset of 6,000 Correct answer.
  3. A prepayment asset of 18,000
  4. An accrual liability of 6,000

Explanation

Nine months of cover has expired by 31 December, so 18,000 is expensed and 6,000 (three months) remains as a prepayment. Accrual accounting matches the expense to the period benefited, so the unexpired portion is carried forward as an asset.

Question 3Financial reporting

Which body is responsible for issuing International Financial Reporting Standards?

  1. The IFRS Interpretations Committee
  2. The IFRS Foundation Trustees
  3. The International Accounting Standards Board Correct answer.
  4. The International Federation of Accountants

Explanation

The International Accounting Standards Board develops and issues IFRSs and the related exposure drafts. The IFRS Foundation oversees the structure and appoints the board, while the Interpretations Committee issues interpretations of existing standards.

Question 4Financial reporting

A machine is bought for 50,000 with an estimated residual value of 5,000 and a useful life of five years. Using straight-line depreciation, what is the annual charge?

  1. 9,000 Correct answer.
  2. 11,000
  3. 5,000
  4. 10,000

Explanation

Straight-line depreciation spreads the depreciable amount, being cost less residual value, over the useful life. The depreciable amount is 45,000, divided by five years gives 9,000 per year. Residual value is excluded because it is expected to be recovered on disposal.

Question 5Financial reporting

Which statement best describes the objective of general purpose financial reporting?

  1. To provide information to management for internal cost control
  2. To provide financial information about the reporting entity useful to existing and potential investors and lenders Correct answer.
  3. To enable tax authorities to compute taxable profit accurately
  4. To guarantee that the entity will continue as a going concern

Explanation

The Conceptual Framework states that the objective is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions about providing resources. Management and tax authorities may use the reports, but they are not the primary audience.

Question 6Financial reporting

An entity's inventory cost is 20,000 and its net realisable value is 17,500. At what amount should inventory be measured in the statement of financial position?

  1. 20,000
  2. The higher of the two amounts
  3. 18,750
  4. 17,500 Correct answer.

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. Because NRV of 17,500 is below cost of 20,000, a write-down of 2,500 is recognised and inventory is carried at 17,500.

Question 7Financial reporting

Which of the following is an enhancing qualitative characteristic of useful financial information?

  1. Understandability Correct answer.
  2. Relevance
  3. Faithful representation
  4. Prudence

Explanation

Understandability is one of the four enhancing characteristics, alongside comparability, verifiability and timeliness. Faithful representation and relevance are the two fundamental characteristics, and prudence is a concept supporting neutrality rather than a characteristic in its own right.

Question 8Financial reporting

A company issues 100,000 ordinary shares of 1 nominal value at 3.50 each. How should the excess over nominal value be recorded?

  1. As a liability to the shareholders
  2. As revenue in profit or loss
  3. As a reduction of retained earnings
  4. As a share premium within equity Correct answer.

Explanation

Amounts received above nominal value on issuing shares are credited to share premium, which is a component of equity. They are not income because they arise from transactions with owners in their capacity as owners, and they are not repayable like a liability.

Question 9Financial reporting

A sole trader's trial balance at year end shows debits of 180,000 and credits of 179,400. Where should the 600 difference be presented while it is investigated?

  1. By adjusting the capital account permanently
  2. As a suspense account balance Correct answer.
  3. As a prior period adjustment
  4. In profit or loss as an expense

Explanation

When a trial balance does not agree, the difference is entered in a suspense account so that draft financial statements can be prepared. The suspense balance is investigated and cleared once the underlying error is found. It is not an expense and is not a prior period adjustment.

Question 10Financial reporting

Which error would still allow a trial balance to balance?

  1. Recording only the debit entry for a cash purchase
  2. Recording a payment in the bank account but not in the payables account
  3. Recording a sale of 900 as 90 in both the sales and receivables accounts Correct answer.
  4. Adding the debit column incorrectly

Explanation

A trial balance only proves that total debits equal total credits. Where the same wrong amount is posted to both sides of a transaction, the equality is preserved and the trial balance still balances. One-sided postings and addition errors break the equality and are detected.

Question 11Financial reporting

An entity sells goods on credit for 12,000 including sales tax at 20%. Sales tax is not yet remitted. What is the effect on the statement of financial position?

  1. Increase cash 12,000, increase revenue 10,000
  2. Increase receivables 12,000, increase revenue 10,000, increase tax payable 2,000 Correct answer.
  3. Increase receivables 12,000, increase revenue 12,000
  4. Increase receivables 12,000, increase tax payable 12,000

Explanation

The sales tax collected is held on behalf of the tax authority and is not revenue. Revenue is 12,000 divided by 1.20, which is 10,000, and the 2,000 tax element is a liability. The receivable from the customer is the gross 12,000.

Question 12Financial reporting

A company issues a 5% bond with a nominal value of 1,000,000 at a discount, giving an effective interest rate of 6%. Under amortised cost, how is the interest expense for the first year determined?

  1. 5% of the carrying amount at the start of the period
  2. 5% of the nominal value
  3. 6% of the carrying amount at the start of the period Correct answer.
  4. 6% of the nominal value

Explanation

Under the effective interest method, interest expense is the effective rate applied to the amortised cost carrying amount at the start of the period. Because the bond was issued at a discount, the carrying amount is below nominal, so expense exceeds the coupon and the discount is amortised over the bond's life.

Question 13Financial reporting

Which item would be classified as a non-current liability?

  1. Sales tax payable to the tax authority
  2. Accrued wages payable next month
  3. A bank loan repayable in four years Correct answer.
  4. Trade payables due in 45 days

Explanation

A liability is classified as non-current when the entity has an unconditional right to defer settlement for more than twelve months after the reporting period. A loan repayable in four years meets this test, whereas the other items fall due within the normal operating cycle or within a year.

Question 14Financial reporting

An entity pays 90,000 for 100% of another company's shares. The fair value of the acquired net assets is 75,000. How is the difference reported in consolidated financial statements?

  1. As a gain of 15,000 in profit or loss
  2. As a bargain purchase of 15,000
  3. As goodwill of 15,000 Correct answer.
  4. As an intangible asset written off immediately

Explanation

Consideration exceeding the fair value of identifiable net assets acquired is recognised as goodwill. Goodwill is an intangible asset tested for impairment rather than amortised, and it is not recognised as a gain. A bargain purchase would arise only if the consideration were below fair value.

Question 15Financial reporting

Which of the following best describes the going concern assumption?

  1. All assets are stated at their liquidation values
  2. The entity will be liquidated within twelve months
  3. The entity will continue in operation for the foreseeable future Correct answer.
  4. Revenue is recognised only when cash is received

Explanation

The going concern assumption means financial statements are prepared on the basis that the entity will continue in operation for the foreseeable future, with no intention or necessity to liquidate. If the assumption is not appropriate, the basis of preparation must be disclosed and changed.

Question 16Financial reporting

An entity uses the revaluation model for a building. The carrying amount is 400,000 and the fair value is 450,000. There is no previous revaluation. How is the increase treated?

  1. Recognised in other comprehensive income and accumulated in equity Correct answer.
  2. Recognised in profit or loss as a gain
  3. Ignored until the building is sold
  4. Recognised as a reduction in depreciation expense

Explanation

Under IAS 16, an upward revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous revaluation decrease recognised in profit or loss. It is not taken to profit or loss as a gain.

Question 17Financial reporting

A company's trade receivables are 200,000. It estimates that 3% will be irrecoverable. It already has an allowance of 4,000. What is the charge to profit or loss for the year?

  1. 10,000
  2. 4,000
  3. 6,000
  4. 2,000 Correct answer.

Explanation

The required allowance is 3% of 200,000, which is 6,000. Since an allowance of 4,000 already exists, the additional charge needed is 2,000. The expense reflects the movement in the allowance, not the closing balance.

Question 18Financial reporting

Which of the following transactions is a non-adjusting event after the reporting period under IAS 10?

  1. Evidence that an inventory item was overvalued at the year end
  2. A court judgment confirming a present obligation that existed at the year end
  3. A major fire destroying a factory two months after the year end Correct answer.
  4. Insolvency of a customer that was already in difficulty at the year end

Explanation

A fire occurring after the reporting period does not relate to conditions existing at the reporting date, so it is a non-adjusting event; only disclosure is required if material. The other items provide evidence of conditions that existed at the year end and are adjusting events.

Question 19Financial reporting

An entity recognises a provision of 100,000 for a warranty. Which condition is not required for recognition under IAS 37?

  1. A reliable estimate of the amount
  2. A present obligation arising from a past event
  3. A probable outflow of economic benefits
  4. A contractual obligation with a named counterparty Correct answer.

Explanation

IAS 37 requires a present obligation from a past event, a probable outflow of resources and a reliable estimate. The obligation may be constructive as well as legal, so a named contractual counterparty is not necessary.

Question 20Financial reporting

A company's profit before tax is 500,000. Taxable deductions exceed accounting expenses by 40,000, giving taxable profit of 460,000. The tax rate is 25%. What is the tax expense under IAS 12?

  1. 460,000
  2. 115,000 Correct answer.
  3. 125,000
  4. 100,000

Explanation

Tax expense comprises current tax plus deferred tax. Current tax is 25% of taxable profit of 460,000, giving 115,000. The 40,000 temporary difference creates a deferred tax liability of 10,000, so total tax expense is 125,000? No: the deduction reduces current tax now but reverses later, so the deferred liability restores the expense to 25% of accounting profit, which is 125,000.

Question 21Financial reporting

Under IFRS 15, a contract includes a fixed fee of 100,000 and a bonus of 20,000 payable only if a project is completed by a specified date. The entity has completed similar projects on time and considers the bonus highly probable. How should the transaction price be determined?

  1. 100,000 only, because the bonus is contingent
  2. 120,000 only when the bonus is received in cash
  3. 120,000, because the bonus is included in the transaction price Correct answer.
  4. 100,000 plus the bonus recognised as other income when received

Explanation

Variable consideration is included in the transaction price to the extent that it is highly probable a significant reversal will not occur when the uncertainty is resolved. Given the entity's track record and assessment, the bonus is included, so the transaction price is 120,000.

Question 22Financial reporting

A lessee enters a five-year lease with annual payments of 10,000 payable in arrears and an incremental borrowing rate of 8%. The present value of the payments is 39,927. What is the interest expense in year one under IFRS 16?

  1. 3,194 Correct answer.
  2. 2,000
  3. 10,000
  4. 3,994

Explanation

The lease liability is initially measured at the present value of the lease payments, 39,927. Interest for the first year is 8% of that carrying amount, which is approximately 3,194. Payments then reduce the liability, so interest falls in later years.

Question 23Financial reporting

An entity holds a financial asset measured at fair value through other comprehensive income. The asset cost 50,000 and its fair value is now 62,000. How is the gain treated?

  1. Recognised in other comprehensive income Correct answer.
  2. Deferred until the asset is sold
  3. Recognised in profit or loss as investment income
  4. Recognised as a direct increase in share capital

Explanation

For debt instruments measured at fair value through other comprehensive income, fair value changes are recognised in other comprehensive income, with interest and impairment recognised in profit or loss. The gain is not deferred and does not affect share capital.

Question 24Financial reporting

A parent owns 80% of a subsidiary. The subsidiary reports profit after tax of 50,000. What amount is attributed to non-controlling interests?

  1. 40,000
  2. 50,000
  3. 10,000 Correct answer.
  4. 0, because the subsidiary is controlled

Explanation

Non-controlling interests share in the subsidiary's profit in proportion to their ownership. The NCI owns 20%, so 20% of 50,000, which is 10,000, is attributed to NCI and the remaining 40,000 to the parent.

Question 25Financial reporting

Under the IASB's Conceptual Framework, which measurement basis is described as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date?

  1. Current cost
  2. Historical cost
  3. Fair value Correct answer.
  4. Value in use

Explanation

The Conceptual Framework identifies fair value as the price received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Value in use is entity-specific, and current cost reflects the price that would be paid to acquire an equivalent asset today.

Question 26Financial reporting

An entity prepares financial statements on a calendar-year basis. On 20 January of the following year, before the statements are authorised for issue, a major customer that owed 150,000 is placed into liquidation with no prospect of recovery. The receivable existed at the reporting date. How should this be treated under IAS 10?

  1. As an adjusting event only if the amount is material to revenue
  2. As an adjusting event, so the receivable is written off at the reporting date Correct answer.
  3. By restating the prior year's opening retained earnings
  4. As a non-adjusting event, with disclosure only

Explanation

IAS 10 treats the insolvency of a customer that existed at the reporting date as an adjusting event because it provides evidence of conditions present at that date. The receivable should therefore be written down in the current year's financial statements, not merely disclosed.

Question 27Financial reporting

Which item should be presented within other comprehensive income rather than in profit or loss?

  1. Depreciation of a revalued factory building
  2. Impairment of goodwill
  3. Gain on remeasurement of a defined benefit pension obligation Correct answer.
  4. Loss on disposal of a subsidiary

Explanation

IAS 19 requires remeasurements of defined benefit obligations, including actuarial gains and losses, to be recognised in other comprehensive income and never recycled to profit or loss. Disposal losses, depreciation and goodwill impairment all pass through profit or loss.

Question 28Financial reporting

An entity's statement of cash flows shows cash used in investing activities of 240,000 and cash generated from operating activities of 300,000. Financing activities produced net cash outflows of 90,000. Opening cash was 50,000. What is the closing cash balance?

  1. 30,000
  2. 20,000 Correct answer.
  3. 50,000
  4. 110,000

Explanation

The net movement in cash is 300,000 operating inflow less 240,000 investing outflow less 90,000 financing outflow, giving a decrease of 30,000. Adding this to the opening balance of 50,000 produces closing cash of 20,000.

Question 29Financial reporting

A company has 500,000 ordinary shares in issue. It makes a 1-for-5 bonus issue during the year. What is the number of shares in issue after the bonus issue?

  1. 600,000 Correct answer.
  2. 400,000
  3. 525,000
  4. 625,000

Explanation

A 1-for-5 bonus issue gives existing holders one new share for every five held, so 500,000 divided by 5 equals 100,000 new shares. The total after the issue is therefore 600,000 shares, and no cash is raised.

Question 30Financial reporting

Under IAS 7, which item may be classified as an operating cash flow using the indirect method?

  1. Repayment of the principal of a bank loan
  2. Proceeds from the sale of plant
  3. Dividends paid to shareholders
  4. Interest paid on borrowings, if the entity applies the permitted policy Correct answer.

Explanation

IAS 7 permits interest paid to be classified as operating or financing, provided the choice is applied consistently. Proceeds from asset sales are investing, and loan principal repayments are financing.

Question 31Financial reporting

An entity's only asset is machinery carried at 80,000. It is revalued to 95,000. There was no previous revaluation. How is the surplus recognised?

  1. In other comprehensive income and accumulated in a revaluation surplus within equity Correct answer.
  2. In profit or loss as a gain
  3. Directly in retained earnings
  4. As a deferred income liability

Explanation

Under IAS 16, an increase in carrying amount on first revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus. It is not reported in profit or loss and is not a liability.

Question 32Financial reporting

An entity has a building with a carrying amount of 300,000. It is revalued to 260,000. A revaluation surplus of 20,000 relating to this building exists in equity. How should the decrease be treated?

  1. Recognise 40,000 in profit or loss
  2. Recognise 40,000 against the surplus
  3. Recognise 20,000 against the surplus and 20,000 in profit or loss Correct answer.
  4. Recognise 40,000 in other comprehensive income

Explanation

IAS 16 requires a revaluation decrease to be charged against any existing surplus for that asset first, with the excess recognised in profit or loss. Here the 40,000 decrease is offset by the 20,000 surplus, leaving 20,000 as an expense.

Question 33Financial reporting

Under IAS 36, which amount is compared with the carrying amount to determine whether an asset is impaired?

  1. Value in use
  2. Fair value less costs of disposal
  3. The lower of fair value less costs of disposal and value in use
  4. The higher of fair value less costs of disposal and value in use Correct answer.

Explanation

IAS 36 defines recoverable amount as the higher of fair value less costs of disposal and value in use. An impairment loss arises only when carrying amount exceeds this recoverable amount.

Question 34Financial reporting

An entity recognises a provision for restructuring. Which condition is required by IAS 37 before a provision may be recognised?

  1. The restructuring is expected to improve future profits
  2. A detailed formal plan exists and a valid expectation has been raised in those affected Correct answer.
  3. The board has approved a feasibility study only
  4. A public announcement is planned but not yet made

Explanation

IAS 37 requires a constructive obligation for restructuring to arise from a detailed formal plan plus a valid expectation in those affected that the entity will carry out the restructuring. A mere board decision or plan to announce is insufficient.

Question 35Financial reporting

An entity has a present obligation from a past event. It is probable that an outflow will be required, and the amount can be estimated reliably. How should this be accounted for under IAS 37?

  1. Recognise a contingent asset
  2. Disclose as a contingent liability only
  3. Ignore until the outflow occurs
  4. Recognise a provision Correct answer.

Explanation

Where a present obligation exists, an outflow is probable and the amount can be reliably estimated, IAS 37 requires recognition of a provision. Disclosure alone is used when the outflow is only possible.

Question 36Financial reporting

An entity has profit before tax of 400,000. Non-taxable income of 30,000 is included, and taxable temporary differences reversed during the year creating an additional 10,000 of taxable profit. The tax rate is 25%. What is the tax expense for the year?

  1. 105,000
  2. 90,000
  3. 100,000
  4. 95,000 Correct answer.

Explanation

Taxable profit is 400,000 less 30,000 non-taxable income plus 10,000 reversal, giving 380,000. Applying the 25% rate gives current tax of 95,000, and with no deferred tax movement the tax expense equals this amount.

Question 37Financial reporting

Under IFRS 15, a contract contains a fixed fee of 200,000 plus a bonus of 30,000 that is highly probable to be received and can be measured reliably. The transaction price is constrained to 215,000. How should the 15,000 difference from the maximum be treated?

  1. Recognised as a contract liability
  2. Included in the transaction price as variable consideration
  3. Recognised immediately in other comprehensive income
  4. Excluded from the transaction price as constrained variable consideration Correct answer.

Explanation

IFRS 15 requires variable consideration to be included only to the extent that it is highly probable that a significant reversal will not occur. The constrained portion of 15,000 is therefore excluded from the transaction price.

Question 38Financial reporting

A lessee recognises a lease liability of 43,000 and a right-of-use asset for a five-year lease. During the first year, interest on the liability is 2,500. How is the interest treated in the lessee's financial statements?

  1. Capitalised into the right-of-use asset
  2. Recognised in other comprehensive income
  3. Deducted directly from the lease liability with no income statement effect
  4. Recognised as a finance cost in profit or loss Correct answer.

Explanation

Under IFRS 16, the lease liability is measured at amortised cost using the effective interest method, and the interest is recognised as a finance cost in profit or loss. Only initial direct costs are capitalised into the right-of-use asset.

Question 39Financial reporting

An entity holds a debt instrument measured at fair value through other comprehensive income. The asset cost 100,000 and its fair value at year end is 118,000. How is the 18,000 gain recognised?

  1. As a deferred gain in liabilities
  2. Directly in retained earnings without disclosure
  3. In profit or loss as a fair value gain
  4. In other comprehensive income, with the asset carried at fair value Correct answer.

Explanation

Under IFRS 9, fair value gains on debt instruments measured at fair value through other comprehensive income are recognised in other comprehensive income, while the asset is carried at fair value. Interest income and impairment are still recognised in profit or loss.

Question 40Financial reporting

A parent owns 75% of a subsidiary. The subsidiary reports profit after tax of 80,000 and pays no dividends. What amount is attributed to non-controlling interests in the consolidated statement of profit or loss?

  1. 80,000
  2. 60,000
  3. 20,000 Correct answer.
  4. 0

Explanation

Non-controlling interests share in the subsidiary's profit in proportion to their ownership. The NCI holds 25%, so 25% of 80,000, which is 20,000, is attributed to them.

Question 41Financial reporting

A parent sells goods to its subsidiary for 60,000, earning a profit of 12,000. At year end, half of these goods remain in the subsidiary's inventory. What adjustment is needed on consolidation?

  1. Eliminate the full 12,000 profit
  2. Eliminate the unrealised profit of 12,000
  3. Eliminate the unrealised profit of 6,000 Correct answer.
  4. Make no adjustment because the sale is at arm's length

Explanation

IFRS consolidation requires elimination of unrealised profit on intragroup sales to the extent the goods remain in inventory. Half of the goods remain, so half of the 12,000 profit, which is 6,000, is unrealised and eliminated.

Question 42Financial reporting

A company issues 200,000 ordinary shares of 1 nominal value at 4.00 each. How should the excess over nominal value be recorded?

  1. As share premium within equity Correct answer.
  2. As a liability
  3. As retained earnings
  4. As revenue in profit or loss

Explanation

Where shares are issued above nominal value, the excess is credited to share premium, which is a component of equity. It is not a gain in profit or loss and does not represent a liability.

Question 43Financial reporting

An entity's trial balance shows total debits of 250,000 and total credits of 249,200. Where should the 800 difference be recorded?

  1. Directly in retained earnings
  2. As a provision for liabilities
  3. In a suspense account pending investigation Correct answer.
  4. As a sundry expense in profit or loss

Explanation

Where a trial balance does not balance, the difference is entered in a suspense account while the cause is investigated. It should not be written off to profit or loss or equity until the reason is identified.

Question 44Financial reporting

Which error would cause a trial balance to balance even though the accounting records are incorrect?

  1. Recording a sale of 500 as 5,000 in the sales account only
  2. Recording a sale of 500 only in the sales account
  3. Recording a sale of 500 as 50 in both the sales and receivables accounts Correct answer.
  4. Recording a sale of 500 only in the receivables account

Explanation

An error of original entry where the same wrong amount is entered in both the debit and credit accounts preserves the double entry, so the trial balance still balances. One-sided errors create an imbalance.

Question 45Financial reporting

An entity sells goods on credit for 24,000 including sales tax at 20%. The tax is not yet paid to the tax authority. What is the effect on the statement of financial position?

  1. Increase receivables by 24,000 and decrease equity by 4,000
  2. Increase receivables by 24,000 and increase revenue by 24,000
  3. Increase receivables by 20,000 and increase a tax liability by 4,000
  4. Increase receivables by 24,000 and increase a tax liability by 4,000 Correct answer.

Explanation

The receivable includes the tax charged, so receivables increase by 24,000. Revenue is recorded net at 20,000, and the 4,000 tax collected is a liability owed to the tax authority.

Question 46Financial reporting

An entity issues a bond with a nominal value of 500,000 at a discount, giving proceeds of 480,000. The coupon rate is 4% and the effective interest rate is 5%. Under the amortised cost method, how is the discount treated over the life of the bond?

  1. Recognised immediately as an expense
  2. Recognised in other comprehensive income
  3. Recognised as a deduction from share premium
  4. Amortised to finance costs over the bond's life Correct answer.

Explanation

Under IFRS 9, a financial liability measured at amortised cost is initially recognised at fair value less transaction costs, and any discount is amortised to finance cost over the term using the effective interest method. It is not expensed immediately.

Question 47Financial reporting

Which item meets the definition of a non-current liability?

  1. Accrued wages payable next month
  2. A bank loan repayable in three years Correct answer.
  3. Sales tax payable next quarter
  4. Trade payables due in 30 days

Explanation

A liability is classified as non-current where the entity has an unconditional right to defer settlement for at least twelve months after the reporting date. A loan repayable in three years meets this criterion, unlike short-term payables.

Question 48Financial reporting

An entity pays 300,000 to acquire 100% of another company. The fair value of the acquired net assets is 260,000. How should the difference be treated in the consolidated financial statements?

  1. Recognised as a gain in profit or loss
  2. Recognised as goodwill of 40,000 Correct answer.
  3. Recognised as a reduction in share capital
  4. Recognised as a bargain purchase gain of 40,000

Explanation

Under IFRS 3, consideration transferred in excess of the fair value of identifiable net assets acquired is recognised as goodwill. It is not expensed immediately and is tested annually for impairment.

Question 49Financial reporting

An entity reports profit before tax of 1,000,000. It has an unused tax loss carried forward of 200,000 that it expects to utilise against future taxable profits. The tax rate is 20%. What is the deferred tax effect?

  1. Recognise a deferred tax liability of 40,000
  2. Recognise a deferred tax asset of 40,000 Correct answer.
  3. No deferred tax is recognised because the loss is unused
  4. Recognise a current tax asset of 40,000

Explanation

An unused tax loss that can be carried forward creates a deductible temporary difference, giving rise to a deferred tax asset where it is probable that future taxable profit will be available. At 20%, the deferred tax asset is 40,000.

Question 50Financial reporting

An entity's statement of financial position shows total assets of 500,000 and total liabilities of 180,000. The entity later issues 10,000 ordinary shares at a price of 3.00 each. Under the IASB Conceptual Framework, what is the effect of the share issue on the elements of the financial statements?

  1. Assets increase by 30,000 and profit for the period increases by 30,000
  2. Equity increases by 30,000 with no change in total assets
  3. Assets increase by 30,000 and liabilities decrease by 30,000
  4. Assets increase by 30,000 and equity increases by 30,000 Correct answer.

Explanation

The Conceptual Framework defines equity as the residual interest in the assets after deducting all liabilities. Issuing shares for cash increases the asset cash by 30,000 and increases equity by the same amount, so the accounting equation stays in balance. The share issue is a transaction with owners, not income, so it does not affect profit or liabilities.