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Question 1Financial accounting and reporting (preparation and interpretation of financial statements)

Under IFRS, at what amount is an item of property, plant and equipment initially measured when acquired for cash?

  1. Its fair value at the date of acquisition, with any excess over the price paid recognised in profit or loss
  2. Its cost, including the purchase price and directly attributable costs of bringing the asset to the location and condition for its intended use Correct answer.
  3. Its replacement cost at the reporting date, reduced for accumulated depreciation
  4. Its net present value of expected future cash flows discounted at the entity's incremental borrowing rate

Explanation

IAS 16 requires initial measurement at cost, which comprises the purchase price (net of trade discounts and rebates) plus directly attributable costs such as delivery, installation and testing. Fair value, value in use and replacement cost are measurement bases used for subsequent or different purposes, not initial recognition of a cash-purchased asset.

Question 2Financial accounting and reporting (preparation and interpretation of financial statements)

An entity recognises a provision of 500,000 for a probable obligation. Its tax base for the liability is nil because the expenditure will be deductible only when paid. What is the resulting temporary difference?

  1. A taxable temporary difference of 500,000
  2. A deductible temporary difference of 500,000 Correct answer.
  3. No temporary difference because the item is a provision
  4. A deductible temporary difference of 250,000

Explanation

A liability's tax base is its carrying amount less amounts deductible in future periods, so here the tax base is nil. The carrying amount of 500,000 exceeds the tax base of nil, giving a deductible temporary difference of 500,000 that may support recognition of a deferred tax asset.

Question 3Financial accounting and reporting (preparation and interpretation of financial statements)

Which statement correctly describes the treatment of a change in accounting estimate under IAS 8?

  1. It requires disclosure as a prior period error in the statement of changes in equity
  2. It is applied prospectively by recognising its effect in the current period, or current and future periods if it affects both Correct answer.
  3. It is applied retrospectively with prior period comparatives restated
  4. It is applied retrospectively only if the effect is material to the financial statements

Explanation

IAS 8 requires changes in accounting estimates to be recognised prospectively, affecting the current period and, where relevant, future periods. Comparative information is not restated because a new estimate reflects new information about circumstances that have changed, not an error.

Question 4Financial accounting and reporting (preparation and interpretation of financial statements)

An entity issues a convertible bond with a face value of 1,000,000 for proceeds of 1,000,000. The fair value of a similar bond without the conversion option is 900,000. Under IAS 32, how is the instrument split?

  1. Equity 100,000 and liability 900,000 Correct answer.
  2. Equity 1,000,000 and no liability component
  3. Liability 950,000 and equity 50,000
  4. Liability 1,000,000 and no equity component

Explanation

IAS 32 requires the liability component to be measured first at the fair value of a similar liability without the equity feature, 900,000. The residual proceeds of 100,000 are recognised in equity as the conversion option.

Question 5Financial accounting and reporting (preparation and interpretation of financial statements)

Which item is classified as a financing activity in a statement of cash flows prepared under IAS 7?

  1. Proceeds from the issue of ordinary shares Correct answer.
  2. Purchase of property, plant and equipment for cash
  3. Cash received from customers for credit sales
  4. Interest paid on a bank overdraft, where the entity classifies interest paid as operating

Explanation

IAS 7 lists proceeds from issuing shares as a financing activity because they change the size and composition of contributed equity. Interest paid may be classified as operating or financing under the standard, so an entity electing operating classification reports it there.

Question 6Financial accounting and reporting (preparation and interpretation of financial statements)

An entity sells goods on 1 December with a right of return allowing customers to return them within 30 days. At the year end on 31 December, the entity expects returns of 4% of the 200,000 sold. Under IFRS 15, what amount of revenue is recognised at 31 December?

  1. 0
  2. 196,000
  3. 200,000
  4. 192,000 Correct answer.

Explanation

IFRS 15 requires revenue to be recognised for goods transferred to the extent it is highly probable there will not be a significant reversal. The expected return of 8,000 (4% of 200,000) is recognised as a refund liability, leaving revenue of 192,000.

Question 7Financial accounting and reporting (preparation and interpretation of financial statements)

A lessee enters a four-year lease with annual payments of 100,000 in arrears and an incremental borrowing rate of 5%. The present value of the payments is approximately 354,600. What is the finance charge recognised in the first year under IFRS 16?

  1. 100,000
  2. 17,730 Correct answer.
  3. 25,000
  4. 0

Explanation

The lease liability is initially 354,600 and interest accrues at 5% over the first year, giving a finance charge of about 17,730. The payment of 100,000 then reduces the liability, with the remaining payment covering interest and capital repayment.

Question 8Financial accounting and reporting (preparation and interpretation of financial statements)

Under IAS 36, what is the correct order of steps when an impairment loss is allocated across a cash-generating unit?

  1. Reduce all assets including goodwill equally
  2. Reduce the other assets pro rata first, then reduce goodwill
  3. Reduce only the asset that has clearly suffered the loss
  4. Reduce goodwill first, then reduce the other assets pro rata to their carrying amounts Correct answer.

Explanation

IAS 36 requires an impairment loss for a cash-generating unit to be allocated first to reduce the carrying amount of any goodwill, then to the other assets pro rata to their carrying amounts. This reflects that goodwill has no independent recoverable amount and absorbs losses first.

Question 9Financial accounting and reporting (preparation and interpretation of financial statements)

Which measurement basis does the IASB Conceptual Framework identify as the most relevant for assets held primarily for their future cash-generating ability in combination with other assets?

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

Explanation

The Conceptual Framework notes that value in use provides information about the present value of the cash flows an entity expects from the asset's use and eventual disposal, which is relevant when the asset is held for combined use rather than sale. Historical cost is relevant where the asset is held for consumption or to collect contractual cash flows.

Question 10Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has an asset with a carrying amount of 800,000, a tax base of 1,000,000 and a tax rate of 25%. A deferred tax asset of 50,000 is recognised. Which statement is correct?

  1. No temporary difference exists because the asset is not yet sold
  2. A deferred tax asset of 200,000 should be recognised
  3. A taxable temporary difference of 200,000 exists and a deferred tax liability should be recognised
  4. A deductible temporary difference of 200,000 exists and the deferred tax asset equals 25% of it Correct answer.

Explanation

The carrying amount is below the tax base, so future taxable profits will be reduced by 200,000, creating a deductible temporary difference. Applying the 25% rate gives a deferred tax asset of 50,000, which is the amount already recognised.

Question 11Financial accounting and reporting (preparation and interpretation of financial statements)

Under IAS 10, which event occurring after the reporting date would require adjustment to the amounts recognised in the financial statements?

  1. A fire that destroyed a major warehouse and its inventory in January
  2. The bankruptcy of a customer whose receivable was already doubtful at the year end Correct answer.
  3. A decline in the market value of investments in the following February
  4. The announcement of a major restructuring plan in March

Explanation

IAS 10 requires adjustment where events after the reporting date provide evidence of conditions that existed at that date, such as a customer's deteriorating financial position confirming the receivable was impaired. Events that arose after the reporting date are non-adjusting and are disclosed if material.

Question 12Financial accounting and reporting (preparation and interpretation of financial statements)

An entity holds 30% of an associate and applies the equity method. The associate reports profit after tax of 400,000 and pays dividends of 100,000 during the year. What is the effect on the investor's carrying amount of the investment?

  1. Increase of 120,000
  2. Increase of 30,000
  3. Increase of 90,000 Correct answer.
  4. No change

Explanation

Under the equity method the investor recognises its share of profit (30% of 400,000 = 120,000) and reduces the carrying amount by its share of dividends received (30% of 100,000 = 30,000). The net effect is an increase of 90,000.

Question 13Financial accounting and reporting (preparation and interpretation of financial statements)

Which of the following is a required disclosure under IAS 24 for related party transactions?

  1. The nature of the related party relationship and the amount of the transactions Correct answer.
  2. The internal audit findings on related party transactions
  3. The tax rate applicable to each related party
  4. The names of all employees who are related parties

Explanation

IAS 24 requires disclosure of the nature of the related party relationship as well as information about the transactions, outstanding balances and commitments, including amounts and terms. This allows users to assess the impact of related party relationships on the financial statements.

Question 14Financial accounting and reporting (preparation and interpretation of financial statements)

An entity revalues a building upwards by 300,000 under the revaluation model. The building had previously been revalued downwards by 200,000, which was recognised in profit or loss. How should the current increase be treated?

  1. Recognise 100,000 in profit or loss and 200,000 in other comprehensive income
  2. Recognise 200,000 in profit or loss and 100,000 in other comprehensive income Correct answer.
  3. Recognise 300,000 in other comprehensive income
  4. Recognise 300,000 in profit or loss

Explanation

IAS 16 requires a revaluation increase to be recognised in other comprehensive income, except to the extent it reverses a previous decrease recognised in profit or loss. Here 200,000 reverses the earlier expense and the remaining 100,000 goes to other comprehensive income.

Question 15Financial accounting and reporting (preparation and interpretation of financial statements)

Which of the following correctly describes the accounting for a government grant relating to assets under IAS 20?

  1. The grant is recognised in profit or loss over the periods in which the entity recognises the related costs as expenses Correct answer.
  2. The grant is recognised as income immediately when received
  3. The grant is recognised only when the related asset is disposed of
  4. The grant is credited directly to retained earnings

Explanation

IAS 20 requires grants to be recognised in profit or loss over the periods in which the entity recognises the related costs as expenses, reflecting the matching principle. A grant received before the conditions are met is deferred as a liability.

Question 16Financial accounting and reporting (preparation and interpretation of financial statements)

An entity presents its financial statements in a hyperinflationary economy and applies IAS 29. Which statement is correct?

  1. All amounts in the financial statements are restated into the measuring unit current at the end of the reporting period Correct answer.
  2. Only non-current assets are restated for inflation
  3. The restatement is optional if the effect is immaterial
  4. Monetary items are restated while non-monetary items are left at historical cost

Explanation

IAS 29 requires all amounts in the financial statements to be stated in terms of the measuring unit current at the end of the reporting period. Monetary items are already expressed in current terms, while non-monetary items are restated from their historical cost or fair value dates.

Question 17Financial accounting and reporting (preparation and interpretation of financial statements)

A company has 1,000,000 ordinary shares in issue and earns profit after tax of 2,400,000. It has 200,000 convertible preference shares that would convert into 400,000 ordinary shares and would save preference dividends of 160,000. What is the diluted earnings per share (to the nearest cent)?

  1. 1.71
  2. 2.40
  3. 1.83 Correct answer.
  4. 2.00

Explanation

Diluted EPS adds back the preference dividend to profit (2,400,000 + 160,000 = 2,560,000) and adds the 400,000 new shares to the denominator (1,400,000). Dividing gives approximately 1.83 per share.

Question 18Financial accounting and reporting (preparation and interpretation of financial statements)

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

  1. When the contract is signed by both parties
  2. When the entity's progress towards complete satisfaction of the obligation can be reasonably measured Correct answer.
  3. When the customer pays the full contract price
  4. When the related costs are incurred regardless of progress

Explanation

Revenue is recognised over time as the entity satisfies the performance obligation, measured using a method that depicts progress, provided progress can be reasonably measured. Payment timing and contract signature do not determine recognition.

Question 19Financial accounting and reporting (preparation and interpretation of financial statements)

An entity recognises a defined benefit pension deficit. Which component of the pension cost is recognised in other comprehensive income under IAS 19?

  1. Remeasurements of the net defined benefit liability Correct answer.
  2. Past service cost
  3. Net interest on the net defined benefit liability
  4. Current service cost

Explanation

IAS 19 requires remeasurements, comprising actuarial gains and losses, the return on plan assets (excluding interest) and the effect of the asset ceiling, to be recognised in other comprehensive income. Service cost and net interest are recognised in profit or loss.

Question 20Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has a machine with a carrying amount of 600,000 and a remaining useful life of five years. It expects to use the machine for three more years and then sell it for 50,000. Expected cash flows from use are 150,000 per year. Using a discount rate of 10%, the present value of expected cash flows is approximately 423,000. What is the value in use?

  1. 423,000 Correct answer.
  2. 50,000
  3. 450,000
  4. 600,000

Explanation

Value in use is the present value of the future cash flows expected from the asset, including those from its eventual disposal. The given present value of 423,000 already reflects the cash flows from use and disposal, so this is the value in use.

Question 21Financial accounting and reporting (preparation and interpretation of financial statements)

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

  1. Depreciation of plant and machinery
  2. Foreign exchange gain on trade receivables denominated in a foreign currency
  3. Impairment loss on trade receivables
  4. Gain on remeasurement of a defined benefit plan Correct answer.

Explanation

Remeasurements of defined benefit plans are recognised in other comprehensive income under IAS 19 and are never reclassified to profit or loss. Depreciation, exchange differences on monetary items and impairment losses are all recognised in profit or loss.

Question 22Financial accounting and reporting (preparation and interpretation of financial statements)

Under IAS 21, an entity with a functional currency of dollars translates the financial statements of a foreign operation whose functional currency is euros. At what rate are assets and liabilities translated?

  1. The rate at which the net investment was originally made
  2. The historical rate at the date of acquisition
  3. The closing rate at the reporting date Correct answer.
  4. The average rate for the period

Explanation

IAS 21 requires assets and liabilities of a foreign operation to be translated at the closing rate, while income and expenses are translated at rates at the dates of the transactions, often approximated by an average rate. Exchange differences are recognised in other comprehensive income.

Question 23Financial accounting and reporting (preparation and interpretation of financial statements)

A company has profit before tax of 500,000 and a tax rate of 20%. It has non-deductible expenses of 50,000 and tax-exempt income of 30,000. What is the tax expense for the year?

  1. 94,000
  2. 104,000 Correct answer.
  3. 100,000
  4. 114,000

Explanation

Taxable profit is 500,000 + 50,000 − 30,000 = 520,000, and applying the 20% rate gives a tax expense of 104,000. Non-deductible expenses increase taxable profit while exempt income reduces it.

Question 24Financial accounting and reporting (preparation and interpretation of financial statements)

Which statement about the presentation of a statement of financial position under IAS 1 is correct?

  1. An entity must present a classified statement of financial position even when it is not a going concern
  2. An entity must present current and non-current assets and liabilities as separate classifications unless a liquidity presentation is more relevant Correct answer.
  3. An entity must always present assets and liabilities in order of liquidity
  4. An entity may combine the statement of financial position with the statement of profit or loss

Explanation

IAS 1 requires a classified presentation of current and non-current items unless a presentation based on liquidity provides information that is reliable and more relevant. The going concern basis is a separate assumption that, if not appropriate, changes the basis of preparation.

Question 25Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has a loan with a carrying amount of 1,000,000 measured at amortised cost. It modifies the terms, and the present value of the modified cash flows discounted at the original effective interest rate is 950,000. The modification does not result in derecognition. What is the accounting treatment?

  1. Recognise a modification gain of 50,000 in profit or loss Correct answer.
  2. Derecognise the loan and recognise a new financial liability at fair value
  3. Recognise a modification gain of 50,000 in other comprehensive income
  4. Make no adjustment until the loan matures

Explanation

Under IFRS 9, where a modification does not lead to derecognition, the difference between the present value of the modified cash flows and the original carrying amount is recognised in profit or loss as a modification gain or loss. Here the carrying amount falls by 50,000.

Question 26Financial accounting and reporting (preparation and interpretation of financial statements)

Under IAS 7, interest paid by an entity that has no stated policy of classifying it as an operating cash flow may be presented in which section of the statement of cash flows?

  1. Operating activities or financing activities Correct answer.
  2. Investing activities only
  3. Financing activities only
  4. Operating activities or investing activities

Explanation

IAS 7 permits interest paid to be classified as either an operating cash flow or a financing cash flow, provided the choice is applied consistently. Interest received may similarly be operating or investing. The classification must be disclosed and applied consistently from period to period.

Question 27Financial accounting and reporting (preparation and interpretation of financial statements)

An entity purchases inventory for 50,000 on credit terms of 2/10, net 30 and uses the gross method. It pays within the discount period. What amount is recorded as the cost of the inventory at initial recognition under IAS 2?

  1. 49,000
  2. 50,000 Correct answer.
  3. 51,000
  4. 48,000

Explanation

IAS 2 requires inventory to be measured at cost, and trade discounts are deducted but settlement (cash) discounts are not. Under the gross method the purchase is recorded at the full invoice price of 50,000. The 1,000 discount is recognised as a reduction of the payable when payment is made.

Question 28Financial accounting and reporting (preparation and interpretation of financial statements)

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

  1. 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 Correct answer.
  2. To provide management with internal information for planning and control decisions
  3. To demonstrate stewardship by reporting the entity's compliance with statutory requirements
  4. To enable tax authorities to compute the taxable profit of the reporting entity accurately

Explanation

The Conceptual Framework states that the objective is to provide financial information useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity. Those decisions include buying, selling or holding equity and debt instruments and providing or settling loans. Management's stewardship role is encompassed within this decision-usefulness objective rather than being a separate primary objective.

Question 29Financial accounting and reporting (preparation and interpretation of financial statements)

An entity issues 100,000 irredeemable preference shares with a fixed dividend of 5 per share per year, classified as equity. Profit after tax is 800,000. What is the basic earnings figure used in the numerator of basic EPS under IAS 33?

  1. 750,000 Correct answer.
  2. 300,000
  3. 500,000
  4. 800,000

Explanation

IAS 33 requires the numerator to be profit after tax less amounts attributable to preference shareholders, including any preference dividends. The annual preference dividend is 100,000 shares x 5 = 500,000, so the numerator is 800,000 - 500,000 = 300,000.

Question 30Financial accounting and reporting (preparation and interpretation of financial statements)

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

  1. Initial operating losses incurred while demand builds up
  2. The cost of training employees to operate the asset
  3. The cost of site preparation and installation Correct answer.
  4. The cost of relocating staff to the new facility

Explanation

IAS 16 includes in cost the purchase price plus directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating as intended, which includes site preparation and installation. Costs of relocating staff, initial operating losses and staff training are explicitly excluded.

Question 31Financial accounting and reporting (preparation and interpretation of financial statements)

An entity's only asset is a building with a carrying amount of 900,000. A professional valuer reports a fair value of 950,000 less costs to sell of 20,000. Value in use is estimated at 910,000. What is the recoverable amount under IAS 36?

  1. 910,000 Correct answer.
  2. 900,000
  3. 950,000
  4. 930,000

Explanation

Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value less costs of disposal is 950,000 - 20,000 = 930,000, and value in use is 910,000, so the recoverable amount is 930,000. No impairment arises because carrying amount of 900,000 is below recoverable amount.

Question 32Financial accounting and reporting (preparation and interpretation of financial statements)

Under IFRS 16, how does a lessee initially measure the lease liability?

  1. At the amount of the first lease payment plus any initial direct costs
  2. At the fair value of the underlying asset at the commencement date
  3. At the total undiscounted lease payments over the lease term
  4. At the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or the lessee's incremental borrowing rate Correct answer.

Explanation

IFRS 16 requires the lease liability to be measured at the present value of lease payments not paid at the commencement date. The discount rate is the interest rate implicit in the lease if it can be readily determined, otherwise the lessee's incremental borrowing rate. The right-of-use asset is then adjusted for initial direct costs and prepayments.

Question 33Financial accounting and reporting (preparation and interpretation of financial statements)

An entity recognises a provision for a court case. Which of the following is the correct treatment of the related reimbursement from an insurer that is virtually certain to be received?

  1. Deduct the reimbursement from the provision so that only the net amount is presented
  2. Recognise the reimbursement directly in other comprehensive income
  3. Recognise the reimbursement as a contingent asset and disclose it only
  4. Recognise the reimbursement as a separate asset, and present the expense net of the reimbursement in the statement of profit or loss Correct answer.

Explanation

IAS 37 requires a reimbursement to be recognised as a separate asset only when it is virtually certain to be received, and the amount recognised for the asset must not exceed the amount of the provision. The expense relating to the provision may be presented net of the reimbursement in the statement of profit or loss. Offsetting against the provision itself in the statement of financial position is not permitted.

Question 34Financial accounting and reporting (preparation and interpretation of financial statements)

An entity acquires a patent for 200,000 on 1 January and expects to use it for 10 years, after which it will have no value. At the start of year 3, a competitor launches a superior product and the entity estimates remaining useful life is now 2 years. What is the amortisation charge for year 3?

  1. 80,000 Correct answer.
  2. 20,000
  3. 100,000
  4. 60,000

Explanation

Amortisation for years 1 and 2 is 20,000 each, leaving a carrying amount of 160,000 at the start of year 3. A change in useful life is a change in accounting estimate applied prospectively, so 160,000 is amortised over the revised remaining 2 years, giving 80,000 per year.

Question 35Financial accounting and reporting (preparation and interpretation of financial statements)

Under IFRS 15, an entity sells equipment for 1,000,000 with a three-year maintenance contract included. Standalone selling prices are 900,000 for the equipment and 300,000 for maintenance. How much revenue is allocated to the equipment?

  1. 1,000,000
  2. 300,000
  3. 900,000
  4. 750,000 Correct answer.

Explanation

The transaction price of 1,000,000 is allocated to performance obligations in proportion to standalone selling prices. Total standalone selling price is 1,200,000, so the equipment receives 1,000,000 x 900,000/1,200,000 = 750,000. The remaining 250,000 is allocated to maintenance and recognised over time.

Question 36Financial accounting and reporting (preparation and interpretation of financial statements)

An entity leases a machine under a five-year lease with annual payments of 60,000 payable in advance. The incremental borrowing rate is 6% and the present value of five payments in advance at 6% is 267,900. What is the right-of-use asset at commencement, before any adjustments, and the interest expense in year 1?

  1. Right-of-use asset 300,000; interest expense 18,000
  2. Right-of-use asset 252,740; interest expense 15,164
  3. Right-of-use asset 267,900; interest expense 16,074
  4. Right-of-use asset 267,900; interest expense 12,474 Correct answer.

Explanation

The right-of-use asset is initially measured at the lease liability of 267,900. Because the first payment is made at commencement, the liability after that payment equals 267,900 less 60,000 = 207,900, and interest at 6% is 12,474. Interest is charged on the outstanding liability after the payment at the commencement date.

Question 37Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has taxable temporary differences of 400,000 and deductible temporary differences of 150,000. The tax rate is 25% and all differences are expected to reverse in the same period. What is the net deferred tax position?

  1. Deferred tax asset of 62,500
  2. Deferred tax liability of 100,000
  3. Deferred tax liability of 62,500 Correct answer.
  4. Deferred tax asset of 37,500

Explanation

A taxable temporary difference creates a deferred tax liability of 400,000 x 25% = 100,000, and a deductible temporary difference creates a deferred tax asset of 150,000 x 25% = 37,500. Under IAS 12 these may be offset when they relate to the same tax authority and the same taxable entity, giving a net liability of 62,500.

Question 38Financial accounting and reporting (preparation and interpretation of financial statements)

Under IAS 21, an entity with a functional currency of euros translates the financial statements of a subsidiary whose functional currency is a foreign currency. At what rate are the subsidiary's share capital and retained earnings translated?

  1. Share capital at the closing rate; retained earnings at the average rate
  2. Both at the closing rate at the reporting date
  3. Both at the average rate for the reporting period
  4. Share capital at the historical rate; retained earnings at a balancing figure derived from the translated statements Correct answer.

Explanation

IAS 21 requires assets and liabilities to be translated at the closing rate and income and expenses at rates at the dates of the transactions, often approximated by the average rate. Share capital and other equity items are translated at the historical rate, and retained earnings arise as a balancing figure. The resulting exchange differences are recognised in other comprehensive income.

Question 39Financial accounting and reporting (preparation and interpretation of financial statements)

An entity's defined benefit obligation at the year end is 5,000,000 and the fair value of plan assets is 4,600,000. The net interest on the net defined benefit liability for the year is 40,000 and current service cost is 300,000. Ignoring other items, what is the net defined benefit liability at the year end and the amount recognised in profit or loss?

  1. Liability 360,000; profit or loss charge 340,000
  2. Liability 400,000; profit or loss charge 40,000
  3. Liability 400,000; profit or loss charge 340,000 Correct answer.
  4. Liability 400,000; profit or loss charge 300,000

Explanation

The net defined benefit liability is the obligation of 5,000,000 less plan assets of 4,600,000, which is 400,000. Under IAS 19, current service cost and net interest on the net defined benefit liability are both recognised in profit or loss, giving 300,000 + 40,000 = 340,000. Remeasurements are recognised in other comprehensive income.

Question 40Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has 500,000 ordinary shares in issue throughout the year. On 1 October it issued 100,000 shares at full market price. What is the weighted average number of ordinary shares for the year under IAS 33?

  1. 500,000
  2. 525,000 Correct answer.
  3. 550,000
  4. 600,000

Explanation

Shares issued at full market price are weighted from the date of issue because they bring in new resources. The issue on 1 October is outstanding for 3 months of 12, so the weighting is 100,000 x 3/12 = 25,000. Weighted average shares are therefore 500,000 + 25,000 = 525,000.

Question 41Financial accounting and reporting (preparation and interpretation of financial statements)

Under IAS 1, when may an entity present an item of income or expense as 'extraordinary'?

  1. Never; IAS 1 prohibits the presentation of any items as extraordinary Correct answer.
  2. Only when the item is both unusual in nature and infrequent in occurrence
  3. Only when the item arises from a natural disaster
  4. When the item exceeds 10% of profit before tax

Explanation

IAS 1 explicitly prohibits the presentation of any items of income or expense as extraordinary items, either on the face of the statement of profit or loss or in the notes. Material items are instead disclosed by their nature and amount. Entities may present additional subtotals, but not extraordinary items.

Question 42Financial accounting and reporting (preparation and interpretation of financial statements)

An entity holds a 25% interest in an associate acquired for 2,000,000. In the first year the associate reports profit of 800,000 and pays dividends of 200,000. What is the carrying amount of the investment at the year end under the equity method?

  1. 2,200,000
  2. 2,150,000 Correct answer.
  3. 1,950,000
  4. 2,000,000

Explanation

Under the equity method the investor recognises its share of profit of 800,000 x 25% = 200,000 and reduces the carrying amount by its share of dividends of 200,000 x 25% = 50,000. The carrying amount is 2,000,000 + 200,000 - 50,000 = 2,150,000. Dividends received are not recognised as income under the equity method.

Question 43Financial accounting and reporting (preparation and interpretation of financial statements)

An entity provides a 12-month warranty on products sold. Based on experience, warranty claims average 2% of sales. Sales for the year are 5,000,000 and claims already paid in the year are 60,000. What is the warranty provision at the year end, assuming no opening balance?

  1. 100,000
  2. 60,000
  3. 160,000
  4. 40,000 Correct answer.

Explanation

A warranty obligation arising from past sales is a present obligation giving rise to a provision measured at the best estimate of the expenditure required to settle it. The expected cost is 2% of 5,000,000 = 100,000, and claims of 60,000 have been settled, leaving a provision of 40,000.

Question 44Financial accounting and reporting (preparation and interpretation of financial statements)

Which of the following is a disclosure required by IFRS 13 for recurring fair value measurements categorised within Level 3 of the fair value hierarchy?

  1. The historical cost of the asset being measured at fair value
  2. The profit or loss effect of each individual valuation input
  3. The names of the individual counterparties to the transactions
  4. A description of the valuation techniques and significant unobservable inputs used Correct answer.

Explanation

IFRS 13 requires entities with recurring Level 3 fair value measurements to disclose the valuation techniques and the significant unobservable inputs used, together with quantitative sensitivity information. Disclosing counterparty names or historical cost is not required by IFRS 13. The disclosure objective is to help users assess the valuation techniques and inputs used.

Question 45Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has current assets of 800,000, current liabilities of 500,000, inventory of 300,000 and a bank overdraft of 100,000 repayable on demand. What is the quick (acid-test) ratio?

  1. 0.60
  2. 1.60
  3. 0.50
  4. 1.00 Correct answer.

Explanation

The quick ratio excludes inventory from current assets but keeps the overdraft in current liabilities because it is repayable on demand. Quick assets are 800,000 - 300,000 = 500,000 and current liabilities are 500,000, giving a ratio of 1.00.

Question 46Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has profit before tax of 900,000. The tax rate is 25%. Non-deductible expenses are 80,000 and there is tax-exempt income of 20,000. What is the tax expense for the year?

  1. 200,000
  2. 225,000
  3. 250,000
  4. 240,000 Correct answer.

Explanation

Taxable profit is accounting profit adjusted for permanent differences: 900,000 + 80,000 - 20,000 = 960,000. Tax at 25% is 240,000. Permanent differences affect the effective tax rate but do not create deferred tax.

Question 47Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has an asset with a carrying amount of 1,200,000 and a tax base of 900,000. The tax rate is 20%. The asset will be recovered through use. What is the deferred tax consequence and how is it presented?

  1. Deferred tax asset of 60,000, presented as current
  2. Deferred tax liability of 60,000, presented as non-current Correct answer.
  3. Deferred tax liability of 240,000, presented as current
  4. No deferred tax arises because the difference is temporary

Explanation

A carrying amount greater than the tax base creates a taxable temporary difference of 300,000, giving a deferred tax liability of 300,000 x 20% = 60,000. Under IAS 1, deferred tax assets and liabilities are not classified as current and are presented as non-current.

Question 48Financial accounting and reporting (preparation and interpretation of financial statements)

An entity issues a convertible bond with a face value of 1,000,000 for proceeds of 1,000,000. The liability component measured without the conversion option has a present value of 900,000. Under IAS 32, how is the instrument accounted for at initial recognition?

  1. Liability of 1,000,000 only, with the conversion option disclosed as a contingent liability
  2. Liability of 900,000 and equity of 100,000, with no gain or loss on initial recognition Correct answer.
  3. Liability of 900,000 and a gain of 100,000 recognised in profit or loss
  4. Equity of 1,000,000 only, with the liability recognised when the bond matures

Explanation

IAS 32 requires a compound instrument to be split into its liability and equity components. The liability is measured first at the fair value of a similar instrument without the conversion option, 900,000, and the residual 100,000 is recognised in equity as an option reserve. No gain or loss arises on initial recognition of the components.

Question 49Financial accounting and reporting (preparation and interpretation of financial statements)

An entity has a defined benefit plan with a net liability of 1,000,000 at the start of the year and 1,300,000 at the year end. During the year it paid contributions of 200,000 and recognised a current service cost of 250,000. Actuarial gains on the obligation were 100,000 and the return on plan assets was equal to the interest included in the net interest calculation. What is the net interest cost on the net defined benefit liability for the year, assuming a discount rate of 5%?

  1. 50,000 Correct answer.
  2. 65,000
  3. 15,000
  4. 40,000

Explanation

IAS 19 determines net interest by applying the discount rate to the net defined benefit liability at the start of the period. Applying 5% to the opening net liability of 1,000,000 gives 50,000. Contributions and service cost during the year do not affect the net interest calculation.

Question 50Financial accounting and reporting (preparation and interpretation of financial statements)

An entity with a functional currency of dollars has a receivable of 100,000 units of a foreign currency when the rate is 1.20 units per dollar. At the year end the rate is 1.25 units per dollar and the receivable is still outstanding. What is the exchange difference recognised in profit or loss?

  1. A loss of 3,333 Correct answer.
  2. A loss of 4,167
  3. A gain of 4,167
  4. A gain of 3,333

Explanation

The receivable is initially 100,000/1.20 = 83,333 dollars and is retranslated at the closing rate to 100,000/1.25 = 80,000 dollars. The dollar has strengthened, so the entity records a loss of 3,333. Monetary items are retranslated at the closing rate with differences recognised in profit or loss under IAS 21.