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CTA Finance & Accounting practice questions

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Question 1Financial Accounting and Reporting

Under IFRS, which measurement basis is required for property, plant and equipment after initial recognition if the entity does not adopt the revaluation model?

  1. Cost less accumulated depreciation and accumulated impairment losses Correct answer.
  2. Lower of cost and net realisable value
  3. Revalued amount less subsequent depreciation only
  4. Fair value at each reporting date with changes in profit or loss

Explanation

IAS 16 allows a choice between the cost model and the revaluation model as an accounting policy applied to an entire class of assets. The cost model carries the asset at cost less accumulated depreciation and accumulated impairment losses. Net realisable value is a concept from IAS 2 inventories, not IAS 16.

Question 2Financial Accounting and Reporting

An entity issues a three-year bond at a discount. Under the effective interest method, how is interest expense recognised over the bond's life?

  1. A constant percentage of the face value each period
  2. A percentage of face value that declines as the discount unwinds
  3. A constant percentage of the carrying amount, rising as the discount is amortised Correct answer.
  4. A constant absolute amount spread evenly across periods

Explanation

The effective interest method applies a constant rate to the amortised cost carrying amount each period. Because the discount is progressively amortised, the carrying amount increases and interest expense rises over the life of the instrument. IFRS 9 requires this pattern rather than a straight-line allocation.

Question 3Financial Accounting and Reporting

Which condition must be met for an entity to present a liability as current under IAS 1?

  1. The entity intends to refinance the liability on a long-term basis before the reporting date
  2. The entity has an unconditional right to defer settlement for at least twelve months after the reporting period Correct answer.
  3. The liability arises from trade payables regardless of settlement terms
  4. The counterparty has agreed in principle to extend the maturity date

Explanation

IAS 1 classifies a liability as current unless the entity has a right at the end of the reporting period to defer settlement for at least twelve months. The right must exist at the reporting date and, following the 2020 amendments, must be substantive. Intention or negotiations alone do not support non-current classification.

Question 4Financial Accounting and Reporting

An entity recognises a provision for a court case. In the following year the case is settled for less than the provision. How is the excess provision treated?

  1. Reversed to profit or loss in the period of settlement Correct answer.
  2. Recognised as a contingent asset and disclosed only
  3. Transferred to other comprehensive income
  4. Adjusted retrospectively against opening retained earnings

Explanation

A provision is a best estimate that is reviewed at each reporting date under IAS 37. When the obligation is settled for less than the carrying amount, the difference is reversed through profit or loss in the period the estimate changes. Retrospective adjustment is not permitted because this is a change in estimate, not an error.

Question 5Financial Accounting and Reporting

Which of the following best describes the recognition threshold for an intangible asset arising from development under IAS 38?

  1. Technical feasibility and intention and ability to complete and use or sell the asset, among other criteria Correct answer.
  2. A signed customer contract guaranteeing future revenue from the asset
  3. Completion of a feasibility study approved by the board
  4. Incurrence of costs exceeding a materiality threshold set by the entity

Explanation

IAS 38 requires an entity to demonstrate technical feasibility, intention to complete, ability to use or sell, probable future economic benefits, availability of resources and reliable measurement. All six criteria must be met before development costs are capitalised. A contract or board approval alone does not satisfy the full set.

Question 6Financial Accounting and Reporting

An entity leases equipment for five years with annual payments of 100,000 due at the end of each year. The lessee's incremental borrowing rate is 5%. The present value annuity factor for five years at 5% is 4.3295. What liability does the lessee initially recognise under IFRS 16?

  1. 432,950 Correct answer.
  2. 500,000
  3. 100,000
  4. 478,000

Explanation

IFRS 16 measures the lease liability at the present value of lease payments not paid at the commencement date. Discounting 100,000 annually for five years at 5% gives 100,000 multiplied by 4.3295, equal to 432,950. The undiscounted total is not the measurement basis.

Question 7Financial Accounting and Reporting

Under IFRS 15, when does an entity recognise revenue from a performance obligation satisfied over time?

  1. When the contract is signed and the price is fixed
  2. When the goods are physically delivered to a carrier
  3. When cash is collected from the customer
  4. As control of the goods or services transfers to the customer, measured by progress toward completion Correct answer.

Explanation

IFRS 15 requires revenue to be recognised as the entity satisfies performance obligations by transferring control. For obligations satisfied over time, progress is measured using a method that depicts the transfer, such as input or output methods. Signing, collection and shipment are not the trigger.

Question 8Financial Accounting and Reporting

An entity holds a debt instrument measured at fair value through other comprehensive income. Which treatment applies when the instrument is sold?

  1. The cumulative gain or loss is recognised as a prior period adjustment
  2. The cumulative gain or loss in OCI remains in equity permanently
  3. The cumulative gain or loss in OCI is reclassified to profit or loss as a reclassification adjustment Correct answer.
  4. The cumulative gain or loss is transferred directly to share capital

Explanation

For debt instruments at fair value through OCI, IFRS 9 requires accumulated fair value movements to be recycled to profit or loss on derecognition. This differs from equity instruments designated at fair value through OCI, where recycling is prohibited. The reclassification adjustment is presented in profit or loss.

Question 9Financial Accounting and Reporting

Which of the following is the correct treatment of a change in accounting estimate under IAS 8?

  1. Applied only after approval by the financial reporting regulator
  2. Applied by adjusting opening retained earnings
  3. Applied retrospectively with restatement of comparatives
  4. Applied prospectively from the date of change, affecting current and future periods Correct answer.

Explanation

IAS 8 requires changes in accounting estimates to be recognised prospectively by affecting the current period and, where relevant, future periods. Retrospective restatement is reserved for changes in accounting policy and corrections of prior period errors. Regulatory approval is not part of the recognition criteria.

Question 10Financial Accounting and Reporting

An entity has a defined benefit plan. At year end the present value of the obligation is 1,200,000 and the fair value of plan assets is 1,050,000. What is the net defined benefit liability recognised?

  1. 0, disclosed only
  2. 2,250,000
  3. 1,200,000
  4. 150,000 Correct answer.

Explanation

IAS 19 requires the net defined benefit liability to be measured as the present value of the defined benefit obligation less the fair value of plan assets. Here 1,200,000 minus 1,050,000 equals 150,000. The gross obligation and the sum of both figures are not the recognised amount.

Question 11Financial Accounting and Reporting

Which of the following is a key difference between the direct and indirect methods of presenting operating cash flows under IAS 7?

  1. The direct method reports only investing activities
  2. The direct method discloses major classes of gross cash receipts and payments, while the indirect method reconciles profit Correct answer.
  3. The indirect method is mandatory for listed entities
  4. The direct method excludes interest paid, while the indirect method includes it

Explanation

IAS 7 encourages the direct method, which shows major classes of gross cash receipts and payments. The indirect method starts with profit or loss and adjusts for non-cash items and working capital movements. Both methods present the same total operating cash flow and neither is restricted to a particular activity category.

Question 12Financial Accounting and Reporting

An entity's inventory cost is 80,000 and its net realisable value is 72,000 at the reporting date. Under IAS 2, what amount is recognised and how is the write-down treated?

  1. 72,000, with the 8,000 write-down debited to other comprehensive income
  2. 72,000, with the 8,000 write-down recognised as an expense in profit or loss Correct answer.
  3. 80,000, with the difference disclosed in the notes
  4. 80,000, because inventory is never written down below cost

Explanation

IAS 2 requires inventory to be measured at the lower of cost and net realisable value. When NRV falls below cost, the carrying amount is reduced to 72,000 and the write-down is recognised as an expense in the period. It is not taken to other comprehensive income.

Question 13Financial Accounting and Reporting

An entity acquires a subsidiary and identifies a brand name that was internally developed by the acquiree. How is the brand treated under IFRS 3?

  1. Recognised at the acquiree's original development cost
  2. Not recognised because internally developed intangibles are always expensed
  3. Recognised at fair value as an identifiable intangible asset if it meets the separability or contractual-legal criterion Correct answer.
  4. Included within goodwill without separate measurement

Explanation

IFRS 3 requires identifiable intangible assets acquired in a business combination to be recognised at fair value, even if the acquiree had expensed them internally. The IAS 38 recognition criteria for internally generated intangibles do not apply to assets acquired in a combination. The brand is therefore recognised separately if it is separable or arises from contractual or legal rights.

Question 14Financial Accounting and Reporting

Which of the following events occurring after the reporting period is an adjusting event under IAS 10?

  1. A fire that destroyed a major plant after the reporting date
  2. A major business combination announced after the reporting date
  3. A decline in market value of investments after the reporting date
  4. A court judgment after year end confirming the amount of a liability that existed at the reporting date Correct answer.

Explanation

IAS 10 distinguishes adjusting events, which provide evidence of conditions existing at the reporting date, from non-adjusting events. A judgment confirming an obligation that existed at year end provides such evidence and requires adjustment. Events arising after the reporting date do not adjust the prior year figures.

Question 15Financial Accounting and Reporting

Which of the following best describes the treatment of a government grant related to assets under IAS 20?

  1. Recognised in profit or loss over the periods in which the related asset's depreciation is charged Correct answer.
  2. Recognised only when the asset is fully depreciated
  3. Credited directly to retained earnings
  4. Recognised in full as income when the grant is received

Explanation

IAS 20 requires a government grant related to an asset to be recognised in profit or loss over the periods in which the entity recognises the related costs as expense. This is normally achieved through deferred income amortised over the asset's useful life or by deducting the grant from the asset's carrying amount. Immediate recognition or equity credit is not permitted.

Question 16Financial Accounting and Reporting

An entity reports profit before tax of 500,000. Non-deductible expenses are 40,000 and taxable temporary differences arising in the year are 60,000. The tax rate is 25%. What is the current tax charge for the year?

  1. 110,000
  2. 125,000
  3. 150,000
  4. 135,000 Correct answer.

Explanation

Current tax is based on taxable profit, which adds back non-deductible expenses and deducts taxable temporary differences. Taxable profit is 500,000 plus 40,000 minus 60,000, equal to 480,000; at 25% the charge is 135,000. Deferred tax on the temporary difference is recognised separately.

Question 17Financial Accounting and Reporting

Which of the following is the correct treatment of a share-based payment settled in equity under IFRS 2?

  1. Measured at the fair value of the services received at settlement date
  2. Recognised only when the options are exercised
  3. Remeasured at fair value at each reporting date until vesting
  4. Measured at the fair value of the equity instruments at grant date, with no subsequent remeasurement Correct answer.

Explanation

IFRS 2 requires equity-settled share-based payments to be measured at the fair value of the equity instruments at grant date. That amount is recognised over the vesting period with a corresponding increase in equity, and it is not subsequently remeasured. Cash-settled awards, by contrast, are remeasured each period.

Question 18Financial Accounting and Reporting

An entity has 1,000,000 ordinary shares and 200,000 potential ordinary shares that are dilutive. Profit attributable to ordinary shareholders is 900,000. What is the diluted earnings per share?

  1. 0.75 Correct answer.
  2. 1.08
  3. 0.90
  4. 0.83

Explanation

Diluted EPS divides adjusted profit by the weighted average number of ordinary shares plus dilutive potential shares. Here 900,000 divided by 1,200,000 equals 0.75. Basic EPS of 0.90 ignores the dilution.

Question 19Financial Accounting and Reporting

An entity changes the functional currency of a foreign operation from one currency to another. How is the change accounted for under IAS 21?

  1. Treated as a change in accounting policy requiring full retrospective application
  2. Applied retrospectively with restatement of comparatives
  3. Applied prospectively from the date of change, without restating prior periods Correct answer.
  4. Treated as a prior period error

Explanation

IAS 21 requires a change in functional currency to be accounted for prospectively from the date of change. Translation procedures are applied to the new functional currency from that date. Prior periods are not restated because the change reflects a change in underlying facts, not an error or policy choice.

Question 20Financial Accounting and Reporting

Which of the following best describes the purpose of the conceptual framework's objective of general purpose financial reporting?

  1. To provide financial information useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity Correct answer.
  2. To satisfy the information needs of government tax authorities
  3. To determine the exact market value of every asset and liability
  4. To provide a basis for calculating distributable profits

Explanation

The IASB conceptual framework identifies the objective of general purpose financial reporting as providing information useful to primary users in making resource allocation decisions. Those users are existing and potential investors, lenders and other creditors. Tax and distributable profit purposes are outside this objective.

Question 21Financial Accounting and Reporting

An entity revalues a building upward by 200,000. There is no previous revaluation deficit. How is the surplus treated under IAS 16?

  1. Recognised in other comprehensive income and accumulated in equity as a revaluation surplus Correct answer.
  2. Recognised as a reduction of the building's depreciable amount
  3. Recognised as a deferred tax asset
  4. Recognised immediately in profit or loss

Explanation

Under IAS 16 an upward revaluation is recognised in other comprehensive income and accumulated in equity under the heading of revaluation surplus. The surplus is not taken to profit or loss unless it reverses a previously recognised deficit. It is not a deferred tax item.

Question 22Financial Accounting and Reporting

An entity is a lessor of a machine under a finance lease. How is the net investment in the lease initially measured?

  1. At the fair value of the machine plus initial direct costs
  2. At the gross investment discounted at the interest rate implicit in the lease Correct answer.
  3. At the undiscounted total of lease payments
  4. At the carrying amount of the machine less any unguaranteed residual value

Explanation

IFRS 16 requires a lessor to recognise a finance lease as a net investment equal to the gross investment discounted at the interest rate implicit in the lease. The gross investment comprises lease payments plus any unguaranteed residual value. Undiscounted totals and carrying amounts are not the measurement basis.

Question 23Financial Accounting and Reporting

Which of the following is the correct treatment of borrowing costs directly attributable to the acquisition or construction of a qualifying asset under IAS 23?

  1. Expensed immediately as finance costs
  2. Recognised in other comprehensive income
  3. Deducted from the asset's residual value
  4. Capitalised as part of the cost of the asset Correct answer.

Explanation

IAS 23 requires borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset to be capitalised as part of the asset's cost. Other borrowing costs are expensed. Capitalisation ceases when substantially all activities necessary to prepare the asset for use are complete.

Question 24Financial Accounting and Reporting

An entity has an asset with a carrying amount of 500,000 and a recoverable amount of 430,000. It had previously recognised a revaluation surplus of 40,000 on the same asset. How is the impairment loss allocated under IAS 36?

  1. 40,000 in profit or loss and 30,000 in other comprehensive income
  2. 70,000 entirely against the revaluation surplus
  3. 70,000 entirely in profit or loss
  4. 40,000 against the revaluation surplus in OCI and 30,000 in profit or loss Correct answer.

Explanation

When an asset is carried under the revaluation model, an impairment loss is first offset against any related revaluation surplus in other comprehensive income. Any excess is recognised in profit or loss. Here 40,000 reduces the surplus and the remaining 30,000 is charged to profit or loss.

Question 25Financial Accounting and Reporting

Which of the following items is presented within other comprehensive income rather than profit or loss?

  1. Interest expense on a bank loan
  2. Cost of goods sold
  3. Depreciation of owner-occupied buildings
  4. Gains on remeasuring an equity instrument designated at fair value through OCI Correct answer.

Explanation

IFRS 9 permits an irrevocable election at initial recognition to present fair value changes of equity instruments in other comprehensive income. Those gains are never recycled to profit or loss. Depreciation, interest expense and cost of goods sold are all recognised in profit or loss.

Question 26Financial Accounting and Reporting

Under IAS 1, which of the following items must be presented separately in the statement of profit or loss and other comprehensive income?

  1. Finance costs Correct answer.
  2. Distribution costs
  3. Administrative expenses
  4. Selling expenses

Explanation

IAS 1 requires separate presentation of finance costs because they reflect the cost of financing and are analysed separately from operating expenses. Selling, administrative and distribution costs are typically aggregated as operating expense categories rather than mandatorily separated line items.

Question 27Financial Accounting and Reporting

An entity issues 10,000 ordinary shares with a nominal value of 1 each at a price of 5 per share. How is the excess over nominal value presented in the financial statements?

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

Explanation

The excess of issue proceeds over nominal value is share premium, which is recognised within equity as a capital contribution. It is not income because it arises from transactions with owners in their capacity as owners.

Question 28Financial Accounting and Reporting

An entity purchases equipment for 120,000 with an estimated residual value of 20,000 and a useful life of 5 years. Using straight-line depreciation, what is the annual depreciation charge?

  1. 20,000 Correct answer.
  2. 16,000
  3. 28,000
  4. 24,000

Explanation

Straight-line depreciation equals depreciable amount divided by useful life. The depreciable amount is cost less residual value, so (120,000 - 20,000) / 5 = 20,000 per year.

Question 29Financial Accounting and Reporting

Under IAS 7, which of the following cash flows is classified as an investing activity?

  1. Cash paid to suppliers
  2. Cash received from customers
  3. Proceeds from issuing bonds
  4. Purchase of property, plant and equipment Correct answer.

Explanation

Investing activities are acquisitions and disposals of long-term assets and other investments not classified as cash equivalents. Buying property, plant and equipment is a classic investing outflow, while customer receipts and supplier payments are operating and bond proceeds are financing.

Question 30Financial Accounting and Reporting

An entity pays 60,000 in advance for one year of insurance on 1 April and its reporting date is 31 December. What amount is recognised as a prepayment at year end?

  1. 45,000
  2. 0
  3. 15,000 Correct answer.
  4. 60,000

Explanation

Nine months of the twelve-month policy have expired by 31 December, leaving three months unexpired. The prepayment is 60,000 x 3/12 = 15,000, with 45,000 expensed.

Question 31Financial Accounting and Reporting

Under IAS 16, which of the following costs is included in the initial measurement of an item of property, plant and equipment?

  1. Costs of opening a new facility
  2. Costs of introducing a new product
  3. Initial delivery and handling costs Correct answer.
  4. Costs of conducting business in a new location

Explanation

IAS 16 includes costs directly attributable to bringing the asset to the location and condition necessary for its intended use, such as delivery and handling. Costs of opening a facility, launching a product or relocating operations are explicitly excluded.

Question 32Financial Accounting and Reporting

An entity has trade receivables of 200,000 and an allowance for expected credit losses of 8,000. What is the net carrying amount of trade receivables presented in the statement of financial position?

  1. 200,000
  2. 208,000
  3. 8,000
  4. 192,000 Correct answer.

Explanation

Trade receivables are presented net of the loss allowance under IFRS 9, so 200,000 - 8,000 = 192,000. The allowance is a contra-asset rather than a separate liability.

Question 33Financial Accounting and Reporting

Which of the following best describes the objective of the statement of financial position under the conceptual framework?

  1. To show the entity's financial position at a point in time Correct answer.
  2. To explain changes in equity over a period
  3. To show cash generated over a period
  4. To show the entity's performance over a period

Explanation

The statement of financial position reports assets, liabilities and equity at a specific date, providing a snapshot of financial position. Performance and cash generation are reported by the statement of profit or loss and the statement of cash flows respectively.

Question 34Financial Accounting and Reporting

An entity sells goods on credit for 50,000 with a right of return permitting customers to return goods within 30 days. Based on historical data, 4% of goods are expected to be returned. Under IFRS 15, what amount of revenue is recognised at the transaction date?

  1. 48,000 Correct answer.
  2. 46,000
  3. 52,000
  4. 50,000

Explanation

Revenue for goods expected to be returned is not recognised because control of those goods is not expected to transfer. Expected returns of 4% of 50,000 equal 2,000, so revenue recognised is 48,000, with a refund liability and a right-of-return asset recognised.

Question 35Financial Accounting and Reporting

An entity has a machine with a carrying amount of 300,000, a remaining useful life of 5 years and no residual value. At the start of year 2, the useful life is revised to a total of 8 years from acquisition. What is the depreciation charge for year 2 under IAS 8?

  1. 50,000
  2. 40,000
  3. 37,500 Correct answer.
  4. 60,000

Explanation

A change in useful life is a change in accounting estimate applied prospectively. After one year of depreciation at 60,000, the carrying amount is 240,000 spread over the remaining 7 years of the revised 8-year life, giving 34,286 if the revision is treated as a total life from acquisition; the standard approach spreads the carrying amount over the remaining useful life of 6 years, giving 40,000. The key principle is prospective application to the carrying amount over the remaining revised life.

Question 36Financial Accounting and Reporting

An entity has taxable temporary differences of 80,000 and deductible temporary differences of 30,000. The tax rate is 25%. What deferred tax liability is recognised, assuming the deductible differences are expected to reverse against taxable profits?

  1. 7,500
  2. 20,000
  3. 12,500 Correct answer.
  4. 27,500

Explanation

Deferred tax is measured on the net temporary difference where offset is permitted: (80,000 - 30,000) x 25% = 12,500 liability. Deductible differences reduce the net taxable temporary difference when reversal against future profits is probable.

Question 37Financial Accounting and Reporting

An entity has profit before tax of 400,000. The tax rate is 25%. Non-taxable income is 20,000 and non-deductible expenses are 12,000. What is the current tax expense?

  1. 98,000 Correct answer.
  2. 92,000
  3. 102,000
  4. 100,000

Explanation

Taxable profit is accounting profit adjusted for permanent differences: 400,000 - 20,000 + 12,000 = 392,000. Current tax at 25% is 98,000.

Question 38Financial Accounting and Reporting

An entity has a defined contribution plan. During the year it recognises an expense of 90,000 and pays 70,000 in contributions. How is the unpaid amount presented?

  1. As a contingent asset
  2. As a reduction of equity
  3. As a deferred tax asset
  4. As a liability Correct answer.

Explanation

Under IAS 19, an entity recognises a liability for contributions due but unpaid to a defined contribution plan. The obligation arises because the entity has received employee services and owes the remaining contributions.

Question 39Financial Accounting and Reporting

An entity acquires a patent for 150,000 with a legal life of 15 years but expects to benefit economically for only 10 years. Under IAS 38, over what period should the patent be amortised?

  1. 5 years
  2. 15 years
  3. 10 years Correct answer.
  4. No amortisation is required

Explanation

An intangible asset with a finite useful life is amortised over its useful life, which is the shorter of the legal and economic lives when they differ. The economic life of 10 years reflects the period over which benefits are expected.

Question 40Financial Accounting and Reporting

An entity issues a convertible bond with a face value of 1,000,000 for proceeds of 1,000,000. The fair value of the liability component without conversion rights is 900,000. Under IFRS 9, how is the equity component measured at initial recognition?

  1. 900,000
  2. 0
  3. 100,000 Correct answer.
  4. 1,000,000

Explanation

A compound instrument is split into its liability and equity components. The liability is measured first at fair value of 900,000 and the equity component is the residual of 1,000,000 - 900,000 = 100,000.

Question 41Financial Accounting and Reporting

An entity has a building measured under the revaluation model. The carrying amount is 800,000 and the fair value at the reporting date is 700,000. There was no previous revaluation surplus. How is the decrease recognised under IAS 16?

  1. In profit or loss as an expense Correct answer.
  2. As a deferred tax adjustment only
  3. As a reduction of retained earnings
  4. In other comprehensive income as a revaluation reserve

Explanation

A revaluation decrease is recognised in profit or loss unless it reverses a previous revaluation surplus for the same asset. With no prior surplus, the full decrease of 100,000 is expensed.

Question 42Financial Accounting and Reporting

An entity has 500,000 ordinary shares and 50,000 potential ordinary shares that are anti-dilutive. Profit attributable to ordinary shareholders is 250,000. What is diluted earnings per share under IAS 33?

  1. 0.40
  2. 0.50 Correct answer.
  3. 0.45
  4. 0.55

Explanation

Anti-dilutive potential ordinary shares are excluded from the diluted EPS calculation because including them would increase EPS. Diluted EPS therefore equals basic EPS of 250,000 / 500,000 = 0.50.

Question 43Financial Accounting and Reporting

An entity has a foreign operation whose functional currency is the euro while the parent's functional currency is the dollar. The operation's assets and liabilities are translated at the closing rate. How are the resulting exchange differences recognised?

  1. In other comprehensive income and never reclassified
  2. In other comprehensive income and reclassified to profit or loss on disposal Correct answer.
  3. As an adjustment to the cost of the net investment
  4. In profit or loss as they arise

Explanation

IAS 21 requires translation differences on a foreign operation to be recognised in other comprehensive income as a separate component of equity. On disposal of the operation, the cumulative amount is reclassified to profit or loss as part of the gain or loss on disposal.

Question 44Financial Accounting and Reporting

An entity has a contract with a customer that is modified to add a distinct good at a price that does not reflect its stand-alone selling price. Under IFRS 15, how is the modification accounted for?

  1. As a separate contract
  2. As a cumulative catch-up adjustment to revenue
  3. As a prospective adjustment to the transaction price only
  4. As a termination of the old contract and creation of a new one Correct answer.

Explanation

When a modification adds distinct goods at a price that is not their stand-alone selling price, the modification is accounted for as a termination of the existing contract and creation of a new contract. The new contract includes the remaining performance obligations and the additional consideration.

Question 45Financial Accounting and Reporting

An entity has an asset with a carrying amount of 600,000. The recoverable amount is 520,000. A previously recognised impairment loss of 40,000 related to the same asset. Under IAS 36, what is the reversal of impairment recognised?

  1. 120,000
  2. 40,000 Correct answer.
  3. 80,000
  4. 0

Explanation

An impairment reversal is limited to the amount that would restore the carrying amount to what it would have been without the prior impairment, so the reversal cannot exceed the 40,000 previously recognised. The remaining 40,000 of the increase is not recognised.

Question 46Financial Accounting and Reporting

An entity is the lessee of a 4-year lease with annual payments of 50,000 payable in advance. The incremental borrowing rate is 6%. Which of the following best describes the initial measurement of the lease liability?

  1. The present value of four payments discounted at 6%, including the first payment
  2. The undiscounted sum of four payments
  3. The fair value of the leased asset at inception
  4. The present value of four payments discounted at 6%, with the first payment excluded Correct answer.

Explanation

Lease payments made at or before the commencement date are not included in the lease liability because they are paid immediately. The liability is the present value of the remaining payments, discounted using the rate implicit in the lease or the incremental borrowing rate.

Question 47Financial Accounting and Reporting

An entity has a defined benefit obligation of 2,000,000 and plan assets of 1,700,000 at the reporting date. The net defined benefit liability is 300,000. The asset ceiling does not apply. Actuarial losses of 50,000 arose during the year. Under IAS 19, how are the actuarial losses recognised?

  1. In other comprehensive income and not reclassified to profit or loss Correct answer.
  2. In profit or loss as an employee benefit expense
  3. In other comprehensive income and reclassified to profit or loss on settlement
  4. As an adjustment to the net defined benefit liability through retained earnings

Explanation

IAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognised in other comprehensive income. These amounts are not reclassified to profit or loss in subsequent periods.

Question 48Financial Accounting and Reporting

An entity has a non-controlling interest measured at fair value at acquisition. Goodwill is 200,000 and the NCI at acquisition is 80,000. The parent later acquires half of the NCI for 50,000. Under IFRS 10, how is the difference between the consideration and the carrying amount of the NCI acquired accounted for?

  1. As a gain or loss in profit or loss
  2. As goodwill
  3. As an adjustment within equity attributable to owners of the parent Correct answer.
  4. As a reduction of the NCI at fair value

Explanation

A change in ownership interest that does not result in loss of control is an equity transaction. Any difference between the consideration paid and the carrying amount of the NCI acquired is recognised directly in equity attributable to owners of the parent, with no goodwill or gain or loss recognised.

Question 49Financial Accounting and Reporting

An entity has a financial liability measured at amortised cost with an effective interest rate of 8% and a coupon of 5%. The carrying amount at the start of the year is 950,000. What is the finance cost for the year under IFRS 9?

  1. 80,000
  2. 47,500
  3. 76,000 Correct answer.
  4. 38,000

Explanation

The finance cost under the effective interest method is the carrying amount multiplied by the effective interest rate: 950,000 x 8% = 76,000. The coupon of 5% determines cash paid, not the finance cost.

Question 50Financial Accounting and Reporting

An entity prepares interim financial statements under IAS 34. It incurs a major repair cost in the first quarter that benefits the whole year. How should the cost be treated in the interim report?

  1. Deferred and recognised evenly over the four quarters
  2. Excluded from interim reporting until the annual report
  3. Recognised in the quarter in which the cash is paid only
  4. Recognised in full in the first quarter Correct answer.

Explanation

IAS 34 requires costs to be recognised in interim periods on the same basis as in annual financial statements. A cost that does not meet the definition of an asset is expensed when incurred, so the repair cost is recognised in full in the first quarter rather than smoothed.