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HKICPA QP Module 1 Accounting study materials
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HKICPA QP Module 1 Accounting practice questions

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Question 1Accounting

Under HKFRS 15 Revenue from Contracts with Customers, which step comes immediately after identifying the contract with a customer in the five-step model?

  1. Identify the performance obligations in the contract Correct answer.
  2. Determine the transaction price
  3. Allocate the transaction price to the performance obligations
  4. Recognise revenue when a performance obligation is satisfied

Explanation

The five-step model runs: identify the contract, identify the performance obligations, determine the transaction price, allocate the transaction price, then recognise revenue when (or as) obligations are satisfied. Identifying performance obligations is therefore the second step, coming before pricing and allocation.

Question 2Accounting

A company purchases plant for HK$500,000 with an estimated residual value of HK$50,000 and a useful life of 5 years. Using the straight-line method, what is the annual depreciation charge?

  1. HK$100,000
  2. HK$80,000
  3. HK$90,000 Correct answer.
  4. HK$110,000

Explanation

Straight-line depreciation spreads the depreciable amount (cost less residual value) evenly over the useful life. Here (500,000 − 50,000) ÷ 5 = HK$90,000 per year. The residual value is not depreciated because it is expected to be recovered on disposal.

Question 3Accounting

Which of the following items would normally be classified as a current liability in a statement of financial position?

  1. Trade payables due within 60 days Correct answer.
  2. Share capital subscribed and fully paid
  3. A bank loan repayable in 18 months
  4. A ten-year bond repayable in 2034

Explanation

A liability is current when it is expected to be settled in the normal operating cycle or is due within twelve months of the reporting date. Trade payables due within 60 days meet this criterion. Long-dated debt and equity items fall outside the current liability definition.

Question 4Accounting

An entity's inventory at year end cost HK$200,000 but its net realisable value is HK$175,000. At what amount should inventory be carried under HKAS 2?

  1. HK$187,500
  2. HK$25,000
  3. HK$200,000
  4. HK$175,000 Correct answer.

Explanation

HKAS 2 requires inventory to be measured at the lower of cost and net realisable value. Since NRV of HK$175,000 is below cost of HK$200,000, the inventory is written down to HK$175,000. The HK$25,000 difference is recognised as an expense.

Question 5Accounting

Which qualitative characteristic of useful financial information requires that information be capable of making a difference in users' decisions?

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

Explanation

Under the Conceptual Framework, relevance means information is capable of making a difference in decisions, which includes predictive and confirmatory value. Comparability, timeliness and verifiability are enhancing characteristics rather than the fundamental characteristic described.

Question 6Accounting

A business receives HK$12,000 in December for services that will be performed evenly over the following three months. Under accrual accounting, how much revenue should be recognised in December?

  1. HK$12,000
  2. HK$8,000
  3. HK$0 Correct answer.
  4. HK$4,000

Explanation

Under accrual accounting, revenue is recognised when the performance obligation is satisfied, not when cash is received. Because no services have been performed in December, no revenue is recognised; the HK$12,000 is a contract liability.

Question 7Accounting

Which body is responsible for issuing Hong Kong Financial Reporting Standards?

  1. The International Accounting Standards Board
  2. The Hong Kong Institute of Certified Public Accountants Correct answer.
  3. The Hong Kong Stock Exchange
  4. The Financial Reporting Council

Explanation

The HKICPA, through its Financial Reporting Standards Committee, issues HKFRSs, which are largely converged with IFRSs. The IASB issues IFRSs, not HKFRSs, and the other bodies have different regulatory roles.

Question 8Accounting

An entity issues 10,000 ordinary shares with a nominal value of HK$1 each at HK$7 per share. What amount is credited to share premium?

  1. HK$10,000
  2. HK$80,000
  3. HK$70,000
  4. HK$60,000 Correct answer.

Explanation

Share capital is credited with the nominal value (10,000 × HK$1 = HK$10,000), and the excess of issue price over nominal value is credited to share premium. That excess is 10,000 × (HK$7 − HK$1) = HK$60,000.

Question 9Accounting

Which of the following best describes the objective of general purpose financial reporting under the Conceptual Framework?

  1. To guarantee that an entity will remain a going concern
  2. To enable tax authorities to assess the taxable profits of an entity
  3. To provide financial information that is useful to existing and potential investors, lenders and other creditors in making decisions Correct answer.
  4. To measure management performance for internal bonus purposes

Explanation

The Conceptual Framework states that the objective of general purpose financial reporting 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 to the entity. It is not designed to serve tax or internal bonus purposes.

Question 10Accounting

A machine costs HK$300,000, has a useful life of 4 years and a residual value of HK$20,000. Using the reducing balance method at 40% per annum, what is the depreciation charge in year 2?

  1. HK$112,000
  2. HK$120,000
  3. HK$72,000 Correct answer.
  4. HK$100,000

Explanation

Under reducing balance, depreciation is charged on the carrying amount, not the cost less residual value. Year 1 charge is 300,000 × 40% = HK$120,000, leaving HK$180,000; year 2 charge is 180,000 × 40% = HK$72,000.

Question 11Accounting

Under HKFRS 9, a financial asset measured at amortised cost is initially recognised at which amount?

  1. Fair value through profit or loss with transaction costs expensed
  2. Nominal value less any expected credit losses
  3. The undiscounted future cash flows of the instrument
  4. Fair value plus transaction costs directly attributable to the acquisition Correct answer.

Explanation

HKFRS 9 requires initial measurement of a financial asset at fair value plus, for assets not at fair value through profit or loss, transaction costs directly attributable to the acquisition. Fair value through profit or loss assets instead expense transaction costs.

Question 12Accounting

An entity sells goods with a two-year warranty. Based on past experience, warranty claims are expected to cost HK$40,000. Under HKAS 37, how should this be treated?

  1. Recognise the cost only when a claim is actually received
  2. Disclose a contingent liability only, with no recognition
  3. Deduct HK$40,000 from revenue in the year of sale
  4. Recognise a provision of HK$40,000 because a present obligation exists and the outflow is probable and measurable Correct answer.

Explanation

HKAS 37 requires a provision where a present obligation arises from a past event, an outflow of resources is probable, and the amount can be reliably estimated. A warranty obligation from past sales meets these criteria, so HK$40,000 is provided.

Question 13Accounting

Which of the following is an example of an adjusting event after the reporting period under HKAS 10?

  1. A decline in market value of investments occurring after year end
  2. Announcement of a major business combination after year end
  3. The bankruptcy of a customer whose balance was outstanding at year end Correct answer.
  4. A fire that destroyed a major warehouse two months after year end

Explanation

An adjusting event provides evidence of conditions that existed at the reporting date. A customer's bankruptcy after year end typically confirms that the receivable was impaired at year end, so it requires adjustment. Events arising after year end without prior conditions are non-adjusting.

Question 14Accounting

An entity uses the revaluation model for a building. The carrying amount is HK$800,000 and the fair value is HK$900,000. There is a prior revaluation deficit of HK$30,000 recognised in profit or loss. How is the surplus recognised?

  1. Recognise HK$100,000 in profit or loss
  2. Recognise HK$70,000 in other comprehensive income and HK$30,000 in other comprehensive income
  3. Recognise HK$30,000 in profit or loss and HK$70,000 in other comprehensive income Correct answer.
  4. Recognise HK$100,000 in other comprehensive income

Explanation

Under HKAS 16, a revaluation surplus is recognised in other comprehensive income, except that it reverses a revaluation deficit previously recognised in profit or loss. The HK$30,000 prior deficit is reversed through profit or loss, and the remaining HK$70,000 goes to OCI.

Question 15Accounting

A company has profit before tax of HK$500,000. The tax rate is 16.5%. Non-deductible expenses are HK$20,000 and there is tax-exempt income of HK$10,000. What is the current tax charge?

  1. HK$86,000
  2. HK$84,150 Correct answer.
  3. HK$82,500
  4. HK$80,850

Explanation

Taxable profit is adjusted for permanent differences: 500,000 + 20,000 − 10,000 = HK$510,000. Applying 16.5% gives HK$84,150. The non-deductible expense increases taxable profit and exempt income reduces it.

Question 16Accounting

Under HKFRS 15, a contract with a customer includes a significant financing component when the timing of payments provides financing. Which factor is most relevant in assessing whether the financing component is significant?

  1. The accounting policy of the customer
  2. The currency in which the contract is denominated
  3. Whether the customer is a related party
  4. The length of time between transfer of goods or services and payment Correct answer.

Explanation

HKFRS 15 indicates that the period between transfer and payment is a key indicator of a significant financing component, together with the prevailing interest rates. Currency, related-party status and the customer's policies are not determinants of the financing component.

Question 17Accounting

Which of the following costs should be capitalised as part of the cost of a self-constructed item of property, plant and equipment under HKAS 16?

  1. General administrative overheads
  2. Costs of relocating staff to the new facility
  3. Directly attributable professional fees for the construction Correct answer.
  4. Abnormal waste of materials during construction

Explanation

HKAS 16 requires capitalisation of costs directly attributable to bringing the asset to the location and condition for its intended use, including professional fees. Abnormal waste, relocation costs and general overheads are excluded.

Question 18Accounting

An entity has 1,000,000 ordinary shares in issue. It issues 200,000 shares at full market price on 1 October during a year ending 31 December. What is the weighted average number of shares for basic EPS?

  1. 1,050,000 Correct answer.
  2. 1,200,000
  3. 1,000,000
  4. 1,100,000

Explanation

A full-market-price issue does not carry a bonus element, so shares are time-weighted. The issue is outstanding for 3 months: 1,000,000 + (200,000 × 3/12) = 1,050,000.

Question 19Accounting

Under HKAS 7, which of the following would be classified as a cash flow from investing activities?

  1. Proceeds from issuing debentures
  2. Purchase of a subsidiary's shares, net of cash acquired Correct answer.
  3. Interest paid on borrowings
  4. Cash received from customers

Explanation

Investing activities include the acquisition and disposal of long-term assets and other investments, including business combinations. Interest paid and debenture proceeds are financing, while customer receipts are operating.

Question 20Accounting

A company's inventory turnover ratio has fallen from 8 times to 5 times while sales remain constant. What is the most likely explanation?

  1. The company has reduced its trade payables
  2. The company is holding higher levels of inventory relative to cost of sales Correct answer.
  3. The company has increased its dividend payments
  4. The company has improved its collection of receivables

Explanation

Inventory turnover measures cost of sales divided by average inventory. A fall with constant sales indicates inventory levels have risen relative to cost of sales, suggesting slower movement or overstocking. The other items affect receivables, payables or equity, not inventory turnover.

Question 21Accounting

Under HKFRS 16, how does a lessee initially measure a right-of-use asset?

  1. At the present value of future lease payments only
  2. At the total undiscounted lease payments over the lease term
  3. At the amount of the lease liability plus initial direct costs and any lease payments made before commencement Correct answer.
  4. At the fair value of the underlying asset at commencement

Explanation

HKFRS 16 requires the right-of-use asset to be measured initially at the lease liability, adjusted for lease payments made at or before commencement, initial direct costs, and estimated restoration costs. It is not simply the liability or the asset's fair value.

Question 22Accounting

An entity has a defined benefit obligation with a present value of HK$2,000,000 and plan assets with a fair value of HK$2,300,000. There is a past service cost of HK$100,000 not yet recognised. What is the net defined benefit asset recognised, ignoring any asset ceiling?

  1. HK$200,000 Correct answer.
  2. HK$400,000
  3. HK$300,000
  4. HK$100,000

Explanation

The net defined benefit asset is plan assets less the present value of the obligation: 2,300,000 − 2,000,000 = HK$300,000. However, unrecognised past service cost of HK$100,000 reduces the surplus to HK$200,000 before considering the asset ceiling.

Question 23Accounting

A parent owns 80% of a subsidiary. During the year the parent sold goods to the subsidiary for HK$100,000 at a gross profit margin of 25%. At year end, half of these goods remain in the subsidiary's inventory. What is the unrealised profit to be eliminated on consolidation?

  1. HK$6,250
  2. HK$25,000
  3. HK$50,000
  4. HK$12,500 Correct answer.

Explanation

Unrealised profit is the gross profit on goods still held at year end. Total gross profit is 100,000 × 25% = HK$25,000, and half the goods remain, so the unrealised profit is HK$12,500. This is eliminated against consolidated inventory and profit.

Question 24Accounting

Under HKAS 36, when should an entity test goodwill for impairment?

  1. Only when there is an indication of impairment
  2. Annually, and whenever there is an indication of impairment Correct answer.
  3. Every five years regardless of indicators
  4. Only on disposal of the cash-generating unit

Explanation

HKAS 36 requires goodwill acquired in a business combination to be tested for impairment annually, and also whenever there is an indication of impairment. Other assets are tested only when indicators exist.

Question 25Accounting

An entity recognises a deferred tax liability on a temporary difference. Which of the following best explains the concept of a taxable temporary difference?

  1. A difference that is never reversed
  2. A difference arising only from tax-exempt income
  3. An amount that will be deductible in future periods when the carrying amount of an asset is recovered
  4. An amount that will be taxable in future periods when the carrying amount of an asset is recovered Correct answer.

Explanation

A taxable temporary difference arises where the carrying amount of an asset exceeds its tax base, resulting in taxable amounts in future periods when the asset is recovered. Deductible temporary differences instead give rise to future deductions and deferred tax assets.

Question 26Accounting

Under HKAS 1, which of the following items would normally be presented in other comprehensive income rather than in profit or loss?

  1. A loss on disposal of an investment property measured at fair value
  2. Depreciation of plant and equipment used in production
  3. Interest expense on a bank loan
  4. A gain on revaluation of owner-occupied property under the revaluation model Correct answer.

Explanation

HKAS 1 requires a statement of comprehensive income comprising profit or loss and other comprehensive income. Revaluation surpluses on property, plant and equipment recognised under HKAS 16 are recognised in other comprehensive income and accumulated in equity as a revaluation reserve. Depreciation, disposal losses and interest expense all arise in the ordinary course and are recognised in profit or loss.

Question 27Accounting

An entity pays HK$60,000 in advance on 1 November for insurance covering the six months to 30 April. It prepares accounts to 31 December. What is the amount of prepaid insurance reported in the statement of financial position at 31 December?

  1. HK$60,000
  2. HK$40,000 Correct answer.
  3. HK$20,000
  4. HK$10,000

Explanation

Under the accrual basis in HKAS 1, expenses are recognised in the period to which they relate. Two months (November and December) of the six-month cover have expired, so HK$20,000 is expensed and the remaining four months, HK$40,000, is carried forward as a prepayment. The prepayment is an asset because it represents a right to future insurance cover.

Question 28Accounting

Under the HK Conceptual Framework, which measurement basis reflects the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date?

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

Explanation

The Conceptual Framework describes fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It is a market-based exit price rather than an entity-specific one. Historical cost and current cost are entry-type measures, and value in use is an entity-specific present value of expected cash flows.

Question 29Accounting

An entity recognises a provision for a legal claim. Which of the following conditions must be satisfied before the provision can be recognised under HKAS 37?

  1. A constructive obligation that the entity could avoid by changing its published policy
  2. A possible obligation whose existence will be confirmed only by uncertain future events
  3. A future operating loss expected from the continuing claim
  4. A present obligation arising from a past event, a probable outflow of resources and a reliable estimate of the amount Correct answer.

Explanation

HKAS 37 requires recognition of a provision when a present obligation exists as a result of a past event, an outflow of economic benefits is probable, and a reliable estimate can be made. All three criteria must be met simultaneously. A possible obligation is a contingent liability that is disclosed rather than recognised.

Question 30Accounting

An entity issues a bond with a face value of HK$1,000,000 at a discount of HK$50,000, incurring issue costs of HK$10,000. Under HKFRS 9, what is the initial carrying amount of the financial liability?

  1. HK$1,000,000
  2. HK$960,000
  3. HK$950,000
  4. HK$940,000 Correct answer.

Explanation

Under HKFRS 9, a financial liability is initially measured at fair value less transaction costs that are directly attributable to its issue. The fair value on issue is the proceeds of HK$950,000, and deducting the HK$10,000 issue costs gives an initial carrying amount of HK$940,000. The discount and the issue costs are then amortised through profit or loss using the effective interest method.

Question 31Accounting

An entity's trial balance shows revenue of HK$800,000, cost of sales of HK$500,000 and operating expenses of HK$180,000. There are no other income or expenses and the tax rate is 16.5%. What is the profit for the year?

  1. HK$120,000
  2. HK$100,300 Correct answer.
  3. HK$267,000
  4. HK$83,500

Explanation

Profit before tax is HK$800,000 less HK$500,000 less HK$180,000, which equals HK$120,000. Applying the 16.5% profits tax rate gives tax of HK$19,800 and profit for the year of HK$100,300. The calculation follows the profit or loss presentation required by HKAS 1.

Question 32Accounting

Under HKAS 2, inventory must be measured at the lower of cost and net realisable value. What does net realisable value represent?

  1. The estimated selling price less the estimated costs of completion and the costs to make the sale Correct answer.
  2. The original purchase price plus all storage costs incurred
  3. The replacement cost of the inventory at the reporting date
  4. The selling price of the inventory at the date of purchase

Explanation

HKAS 2 defines net realisable value as the estimated selling price in the ordinary course of business less the estimated costs of completion and the estimated costs necessary to make the sale. It is an entity-specific, forward-looking measure rather than a market buying price. Comparing it with cost ensures assets are not carried above the amount they are expected to realise.

Question 33Accounting

An entity acquires a trademark for HK$400,000. Legal costs of HK$30,000 are incurred to register the trademark, and HK$20,000 is spent on an advertising campaign promoting it. Under HKAS 38, what is the initial carrying amount of the intangible asset?

  1. HK$400,000
  2. HK$420,000
  3. HK$450,000
  4. HK$430,000 Correct answer.

Explanation

HKAS 38 requires an internally generated or separately acquired intangible asset to be measured initially at cost, which includes its purchase price and directly attributable costs of preparing it for its intended use. Registration costs of HK$30,000 are directly attributable and are capitalised. Advertising and promotional expenditure must be expensed as incurred because it cannot be distinguished from developing the business as a whole.

Question 34Accounting

An entity grants 1,000 share options to an employee on 1 January, with a fair value of HK$12 per option at the grant date. The vesting period is three years and the options vest only if the employee remains employed. What expense is recognised in the first year under HKFRS 2?

  1. HK$4,000 Correct answer.
  2. HK$6,000
  3. HK$0, because the options are only settled in shares
  4. HK$12,000

Explanation

HKFRS 2 requires equity-settled share-based payments to be measured at the fair value of the equity instruments at the grant date and recognised over the vesting period. The total fair value is HK$12,000, spread evenly over three years, giving HK$4,000 in year one. The corresponding credit is recognised in equity, not as a liability.

Question 35Accounting

An entity's statement of financial position shows current assets of HK$600,000, inventory of HK$200,000 and current liabilities of HK$300,000. What is the quick ratio?

  1. 0.67
  2. 2.00
  3. 1.00
  4. 1.33 Correct answer.

Explanation

The quick ratio excludes inventory from current assets because inventory may not be readily convertible into cash. Quick assets are HK$600,000 less HK$200,000, which equals HK$400,000, divided by current liabilities of HK$300,000, giving 1.33. The ratio measures short-term liquidity without relying on inventory sales.

Question 36Accounting

Under HKAS 21, an entity's functional currency is the currency of the primary economic environment in which it operates. Which factor is most directly relevant in determining the functional currency?

  1. The currency that mainly influences sales prices for goods and services Correct answer.
  2. The currency in which the entity's share capital was originally issued
  3. The currency used by the parent company for its own reporting
  4. The currency in which the entity's bank accounts are denominated

Explanation

HKAS 21 identifies the currency that mainly influences sales prices and the currency that mainly influences labour, material and other costs as the primary indicators of functional currency. These reflect the economic environment in which the entity generates and spends cash. The currency of share capital or bank accounts is a secondary consideration at most.

Question 37Accounting

An entity enters into a lease of equipment for four years with annual payments of HK$100,000 payable in arrears. The interest rate implicit in the lease is 5% and the present value of the payments is HK$354,600. What is the finance charge recognised in the first year under HKFRS 16?

  1. HK$17,730 Correct answer.
  2. HK$5,000
  3. HK$20,000
  4. HK$25,000

Explanation

Under HKFRS 16, the lease liability is initially measured at the present value of the lease payments, HK$354,600. The finance charge for the first year is 5% of that opening liability, which is approximately HK$17,730. The payment of HK$100,000 then reduces the liability by the balance of HK$82,270.

Question 38Accounting

An entity has taxable temporary differences of HK$300,000 at the reporting date. The enacted tax rate expected to apply when the difference reverses is 16.5%. The entity expects to have sufficient future taxable profits. What is the deferred tax liability?

  1. HK$16,500
  2. HK$0, because deferred tax is only recognised for deductible differences
  3. HK$300,000
  4. HK$49,500 Correct answer.

Explanation

HKAS 12 requires a deferred tax liability to be recognised for taxable temporary differences, measured at the tax rates expected to apply when the liability is settled. The calculation is HK$300,000 multiplied by 16.5%, giving HK$49,500. Recognition assumes sufficient future taxable profit will be available.

Question 39Accounting

An entity has an asset with a carrying amount of HK$500,000. Its fair value less costs of disposal is HK$420,000 and its value in use is HK$450,000. Under HKAS 36, what is the recoverable amount and the impairment loss?

  1. Recoverable amount HK$450,000; impairment loss HK$0
  2. Recoverable amount HK$420,000; impairment loss HK$80,000
  3. Recoverable amount HK$500,000; impairment loss HK$0
  4. Recoverable amount HK$450,000; impairment loss HK$50,000 Correct answer.

Explanation

HKAS 36 defines recoverable amount as the higher of fair value less costs of disposal and value in use. The higher figure is value in use of HK$450,000, so the impairment loss is the carrying amount of HK$500,000 less HK$450,000, which equals HK$50,000. The loss is recognised immediately in profit or loss.

Question 40Accounting

A company's statement of cash flows shows profit before tax of HK$200,000, depreciation of HK$30,000 and an increase in trade receivables of HK$25,000. Ignoring tax paid, what is the net cash generated from operating activities using the indirect method?

  1. HK$230,000
  2. HK$155,000
  3. HK$255,000
  4. HK$205,000 Correct answer.

Explanation

Under HKAS 7 and the indirect method, depreciation is added back because it is a non-cash expense, and an increase in trade receivables is deducted because it represents sales not yet collected. The calculation is HK$200,000 plus HK$30,000 less HK$25,000, giving HK$205,000. The adjustment reconciles accrual profit to cash generated from operations.

Question 41Accounting

An entity has an asset with a carrying amount of HK$1,000,000 and a tax base of HK$800,000. Which statement correctly describes the resulting temporary difference?

  1. A permanent difference of HK$200,000, which is never recognised for deferred tax
  2. No temporary difference arises because the asset is still in use
  3. A deductible temporary difference of HK$200,000, giving rise to a deferred tax asset
  4. A taxable temporary difference of HK$200,000, giving rise to a deferred tax liability Correct answer.

Explanation

Under HKAS 12, a temporary difference is the difference between the carrying amount of an asset and its tax base. Where the carrying amount exceeds the tax base, future taxable economic benefits will exceed the amount deductible for tax, creating a taxable temporary difference and a deferred tax liability. A deductible difference arises only where the tax base exceeds the carrying amount.

Question 42Accounting

An entity has 500,000 ordinary shares in issue throughout the year. It also has 100,000 convertible preference shares, each convertible into one ordinary share, which are dilutive. Profit attributable to ordinary shareholders is HK$900,000 and no preference dividends were paid. What is the diluted earnings per share?

  1. HK$1.67
  2. HK$0.90
  3. HK$1.80
  4. HK$1.50 Correct answer.

Explanation

Under HKAS 33, diluted earnings per share is calculated by adjusting profit and the weighted average number of shares for the dilutive effect of potential ordinary shares. The 100,000 convertible shares are added to the 500,000 ordinary shares, giving 600,000 shares, and profit of HK$900,000 divided by 600,000 gives HK$1.50. Preference dividends would be added back to profit if they had been deducted.

Question 43Accounting

Under HKFRS 15, an entity sells equipment for HK$100,000 and separately agrees to provide three years of maintenance for HK$30,000. The standalone selling price of the equipment is HK$100,000 and of the maintenance is HK$25,000. How should the transaction price be allocated?

  1. HK$100,000 to the equipment and HK$25,000 to maintenance
  2. HK$130,000 to the equipment and HK$0 to maintenance
  3. HK$104,000 to the equipment and HK$26,000 to maintenance Correct answer.
  4. HK$100,000 to the equipment and HK$30,000 to maintenance

Explanation

HKFRS 15 requires the transaction price to be allocated to performance obligations in proportion to their standalone selling prices. Total standalone selling prices are HK$125,000, so the equipment receives HK$130,000 multiplied by 100,000/125,000, which is HK$104,000. The maintenance obligation receives the remaining HK$26,000.

Question 44Accounting

A company pays HK$500,000 for 25% of the ordinary shares of another entity, giving it significant influence. During the year the investee reports profit of HK$200,000 and pays dividends of HK$80,000. Under HKAS 28, what is the carrying amount of the investment at year end?

  1. HK$550,000
  2. HK$530,000 Correct answer.
  3. HK$500,000
  4. HK$620,000

Explanation

Under the equity method in HKAS 28, the investment is initially recognised at cost and then adjusted for the investor's share of post-acquisition profit and dividends. The share of profit is HK$50,000 and the share of dividends is HK$20,000, giving HK$500,000 plus HK$50,000 less HK$20,000, which equals HK$530,000. Dividends reduce the carrying amount because they represent a distribution of the investee's net assets.

Question 45Accounting

An entity has a defined benefit obligation of HK$3,000,000 and plan assets with a fair value of HK$2,600,000. Actuarial losses of HK$150,000 arose during the year. Under HKAS 19, how are actuarial losses treated?

  1. Deferred and recognised in profit or loss over the average remaining service life
  2. Recognised as an adjustment to the opening retained earnings only
  3. Recognised in other comprehensive income without recycling to profit or loss Correct answer.
  4. Recognised immediately in profit or loss as part of employee benefit expense

Explanation

HKAS 19 requires remeasurements of the net defined benefit liability, including actuarial gains and losses, to be recognised in other comprehensive income in the period in which they arise. These amounts are not subsequently reclassified to profit or loss, although they may be transferred within equity. The net defined benefit liability of HK$400,000 is presented on the statement of financial position.

Question 46Accounting

Under HKAS 40, an entity may measure an investment property using either the fair value model or the cost model. Which statement correctly describes the fair value model?

  1. The property is measured at the lower of cost and net realisable value
  2. Changes in fair value are recognised in profit or loss in the period in which they arise Correct answer.
  3. Changes in fair value are recognised in other comprehensive income as a revaluation reserve
  4. The property is depreciated and tested for impairment in the same way as owner-occupied property

Explanation

Under the fair value model in HKAS 40, investment property is measured at fair value at each reporting date and any change in fair value is recognised in profit or loss. The property is not depreciated because its fair value reflects its current condition and market value. The cost model instead applies HKAS 16 depreciation and HKAS 36 impairment requirements.

Question 47Accounting

An entity has profit before tax of HK$400,000. Included in this figure is a non-taxable government grant of HK$50,000 and non-deductible entertainment expenses of HK$30,000. The tax rate is 16.5%. What is the current tax charge?

  1. HK$62,700 Correct answer.
  2. HK$57,750
  3. HK$79,200
  4. HK$66,000

Explanation

Current tax is calculated on taxable profit, which adjusts accounting profit for items that are never taxable or deductible. Taxable profit is HK$400,000 less the HK$50,000 non-taxable grant plus the HK$30,000 non-deductible expenses, giving HK$380,000. Applying 16.5% gives a current tax charge of HK$62,700.

Question 48Accounting

A parent owns 75% of a subsidiary. During the year the parent sold inventory to the subsidiary for HK$200,000 at a mark-up of 25% on cost. At year end the subsidiary still held half of these goods. What adjustment is needed in the consolidated financial statements?

  1. Reduce consolidated profit by HK$40,000 and reduce inventory by HK$40,000
  2. No adjustment is required because the sale was at arm's length
  3. Reduce consolidated profit by HK$50,000 and reduce inventory by HK$50,000
  4. Reduce consolidated profit by HK$20,000 and reduce inventory by HK$20,000 Correct answer.

Explanation

Unrealised profit on intragroup sales must be eliminated in full in consolidated financial statements, regardless of the non-controlling interest. Cost of the goods sold was HK$160,000, so the profit element is HK$40,000 in total, and half of the goods remain in inventory, giving unrealised profit of HK$20,000. Consolidated profit and inventory are both reduced by that amount.

Question 49Accounting

An entity has a building carried under the revaluation model with a carrying amount of HK$600,000. A revaluation to HK$500,000 reverses a previously recognised revaluation surplus of HK$40,000 remaining in equity. How is the decrease recognised?

  1. HK$40,000 in other comprehensive income and HK$60,000 in profit or loss Correct answer.
  2. HK$40,000 in profit or loss and HK$60,000 in other comprehensive income
  3. HK$100,000 in other comprehensive income
  4. HK$100,000 in profit or loss

Explanation

Under HKAS 16, a decrease in carrying amount is recognised in other comprehensive income to the extent of any credit balance in the revaluation surplus for that asset, and any excess is recognised in profit or loss. The HK$100,000 decrease first eliminates the HK$40,000 surplus in other comprehensive income. The remaining HK$60,000 is charged to profit or loss.

Question 50Accounting

An entity prepares financial statements for the year ended 31 December. On 15 February, before the financial statements are authorised for issue, a major customer that owed HK$300,000 at the year end is placed into liquidation with no prospect of recovery. Which treatment is correct under HKAS 10?

  1. Recognise an adjusting event and write off the receivable in the year-end financial statements Correct answer.
  2. Recognise the write-off in the following year's financial statements only
  3. Ignore the event because it occurred after the reporting period
  4. Disclose the liquidation as a non-adjusting event without changing the receivable

Explanation

HKAS 10 requires adjusting events, which provide evidence of conditions that existed at the end of the reporting period, to be reflected in the financial statements. The customer's financial difficulties existed at the year end, and the subsequent liquidation confirms the condition, so the receivable is written off. Non-adjusting events instead reflect conditions that arose after the reporting period.