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CA Sri Lanka Business Level Exam study materials
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CA Sri Lanka Business Level Exam practice questions

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Question 1Financial Reporting and Accounting

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

  1. Depreciation expense on factory machinery used in production
  2. Impairment loss on trade receivables recognised under LKAS 39
  3. Gain on disposal of a subsidiary's plant and equipment
  4. Revaluation surplus on property, plant and equipment measured under the revaluation model Correct answer.

Explanation

LKAS 1 requires revaluation surpluses on property, plant and equipment recognised under the revaluation model to be presented in other comprehensive income, with recycling to retained earnings on derecognition. Depreciation, disposal gains and receivable impairments are all recognised in profit or loss because they arise from ordinary operating or derecognition events.

Question 2Financial Reporting and Accounting

A company issues 1,000 ordinary shares with a nominal value of LKR 10 each at an issue price of LKR 25 per share, fully paid in cash. How should the excess over nominal value be treated in the financial statements?

  1. Recorded as a liability until the shares are listed
  2. Recognised as revenue in the statement of profit or loss
  3. Credited to a share premium account within equity Correct answer.
  4. Recognised as a gain in other comprehensive income

Explanation

The excess of issue proceeds over nominal value is share premium, which is presented within equity and is not a gain. It arises from a transaction with owners in their capacity as owners, so it bypasses profit or loss and OCI entirely.

Question 3Financial Reporting and Accounting

Which body is responsible for issuing Sri Lanka Accounting Standards (SLFRS and LKAS) that apply to entities preparing general purpose financial statements?

  1. The Institute of Chartered Accountants of Sri Lanka Correct answer.
  2. The Colombo Stock Exchange
  3. The Department of Inland Revenue
  4. The Securities and Exchange Commission of Sri Lanka

Explanation

The Institute of Chartered Accountants of Sri Lanka, through its standard-setting arrangements, adopts and issues SLFRS and LKAS for general purpose financial reporting. The SEC and CSE regulate listed companies and market conduct, while the Inland Revenue Department administers tax law.

Question 4Financial Reporting and Accounting

An entity sells goods for LKR 500,000 with a right of return permitting customers to return items within 30 days. Based on historical data, the entity expects 4% of goods to be returned. Under SLFRS 15, what amount of revenue should be recognised at the point of sale?

  1. LKR 480,000 Correct answer.
  2. LKR 20,000
  3. LKR 500,000
  4. LKR 0 until the return period expires

Explanation

SLFRS 15 requires revenue to be recognised only to the extent that a significant reversal is not probable, so the expected refund liability of LKR 20,000 is deducted. Revenue of LKR 480,000 is recognised together with a refund liability and a right-of-return asset. Waiting until the return period lapses would misstate the timing of the transfer of control.

Question 5Financial Reporting and Accounting

A machine costs LKR 1,200,000, has a residual value of LKR 200,000 and a useful life of 5 years. Using the straight-line method, what is the depreciation charge for the second year?

  1. LKR 240,000
  2. LKR 180,000
  3. LKR 200,000 Correct answer.
  4. LKR 220,000

Explanation

Depreciation is calculated on the depreciable amount, which is cost less residual value (LKR 1,200,000 − LKR 200,000 = LKR 1,000,000), spread over 5 years, giving LKR 200,000 per year under the straight-line method. The charge is the same in every year unless the estimate changes.

Question 6Financial Reporting and Accounting

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

  1. Costs of relocating staff to the new site
  2. Initial operating losses before the asset reaches planned capacity
  3. Directly attributable professional fees for installation Correct answer.
  4. Abnormal wastage of materials during construction

Explanation

LKAS 16 includes directly attributable costs necessary to bring the asset to the location and condition for its intended use, such as professional fees for installation. Abnormal wastage, staff relocation and initial operating losses are excluded because they are not necessary to bring the asset to that condition.

Question 7Financial Reporting and Accounting

An entity holds a financial asset measured at fair value through other comprehensive income. At the reporting date, the fair value has fallen by LKR 300,000 due to an increase in market interest rates. How should this change be treated?

  1. Recognised in other comprehensive income with no effect on profit or loss Correct answer.
  2. Recognised in profit or loss as an impairment loss
  3. Recognised directly in retained earnings as a prior period adjustment
  4. Recognised as a reduction of share capital

Explanation

For debt instruments measured at fair value through OCI, fair value changes arising from market factors such as interest rate movements are recognised in OCI. Only expected credit losses under the impairment requirements are recognised in profit or loss, and the change is not a prior period adjustment.

Question 8Financial Reporting and Accounting

A company has profit before tax of LKR 800,000. The tax rate is 30%. Depreciation expense was LKR 100,000 and capital allowances for tax purposes were LKR 160,000. What is the current tax charge for the year?

  1. LKR 198,000
  2. LKR 258,000
  3. LKR 240,000
  4. LKR 222,000 Correct answer.

Explanation

Taxable profit is accounting profit adjusted for the difference between depreciation and capital allowances: LKR 800,000 + LKR 100,000 − LKR 160,000 = LKR 740,000. Applying 30% gives a current tax charge of LKR 222,000. The temporary difference of LKR 60,000 would create a deferred tax liability.

Question 9Financial Reporting and Accounting

Under LKAS 37, how should a present obligation arising from a past event be measured when the amount cannot be reliably estimated?

  1. Recognise a contingent liability and disclose it unless the possibility of outflow is remote Correct answer.
  2. Recognise the obligation as a deferred expense in the statement of financial position
  3. Recognise a provision at the best estimate of the expenditure required to settle it
  4. Recognise a provision at the maximum possible amount to be prudent

Explanation

A provision requires a reliable estimate; where no reliable estimate can be made, no provision is recognised and the obligation is disclosed as a contingent liability unless the outflow is remote. Provisions are never measured at the maximum amount, as prudence does not permit deliberate overstatement.

Question 10Financial Reporting and Accounting

An entity leases equipment for 5 years with annual payments of LKR 100,000 payable in arrears. The interest rate implicit in the lease is 10% and the present value of the payments is LKR 379,100. Under SLFRS 16, what is the initial recognition?

  1. An operating lease expense of LKR 100,000 per year with no asset recognised
  2. A right-of-use asset of LKR 500,000 and a lease liability of LKR 379,100
  3. A lease liability of LKR 500,000 and no right-of-use asset
  4. A right-of-use asset and lease liability of LKR 379,100 Correct answer.

Explanation

SLFRS 16 requires a lessee to recognise a right-of-use asset and a lease liability measured at the present value of the lease payments not paid at the commencement date. The liability is LKR 379,100, the discounted amount, not the undiscounted LKR 500,000.

Question 11Financial Reporting and Accounting

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

  1. To demonstrate compliance with statutory reporting deadlines
  2. To determine the taxable income of an entity for the year
  3. To provide management with detailed internal cost information
  4. To provide information about the financial position and performance useful to existing and potential investors, lenders and other creditors Correct answer.

Explanation

The Conceptual Framework states that the objective of general purpose financial reporting is to provide financial information about the reporting entity useful to existing and potential investors, lenders and other creditors in making decisions about providing resources to the entity. Tax computation, internal costing and compliance deadlines are not the objective of general purpose reporting.

Question 12Financial Reporting and Accounting

An entity has an investment property measured under the fair value model. At the reporting date, the fair value has increased by LKR 250,000. How should this be recognised?

  1. As a direct adjustment to retained earnings
  2. As a revaluation surplus in other comprehensive income
  3. As a deferred credit amortised over the remaining useful life
  4. As a gain in profit or loss for the period Correct answer.

Explanation

Under LKAS 40, when the fair value model is used, changes in fair value are recognised in profit or loss in the period in which they arise. Unlike the revaluation model for property, plant and equipment, no revaluation surplus is created.

Question 13Financial Reporting and Accounting

Which of the following is an example of a non-adjusting event after the reporting period under LKAS 10?

  1. Sale of inventory after the reporting date that provides evidence of its net realisable value at that date
  2. A major fire destroying a factory building two weeks after the reporting date Correct answer.
  3. Bankruptcy of a customer after the reporting date indicating a receivable was impaired at the reporting date
  4. Settlement of a court case after the reporting date that confirms a present obligation at the reporting date

Explanation

A fire occurring after the reporting date does not provide evidence of conditions existing at the reporting date, so it is a non-adjusting event. The other items provide evidence of conditions that existed at the reporting date and are therefore adjusting events.

Question 14Financial Reporting and Accounting

A parent owns 80% of a subsidiary. During the year, the parent sold goods costing LKR 100,000 to the subsidiary for LKR 150,000, and all the goods remain in the subsidiary's inventory at year end. What adjustment is required in the consolidated financial statements?

  1. Recognise the LKR 50,000 profit in full in consolidated profit or loss
  2. Eliminate the LKR 50,000 unrealised profit in full against inventory Correct answer.
  3. Eliminate 20% of the LKR 50,000 profit attributable to non-controlling interests
  4. Eliminate 80% of the LKR 50,000 profit only

Explanation

Intra-group sales and the related unrealised profit are eliminated in full on consolidation because the group cannot recognise profit from transactions with itself. The full LKR 50,000 is removed from inventory and profit, regardless of the non-controlling interest share.

Question 15Financial Reporting and Accounting

Under LKAS 2, which of the following costs should be excluded from the cost of inventories?

  1. Import duties payable on purchase
  2. Direct labour used in production
  3. Abnormal amounts of wasted materials Correct answer.
  4. Freight charges for bringing goods to the warehouse

Explanation

LKAS 2 excludes abnormal amounts of wasted materials, storage costs and selling costs from the cost of inventories. Freight, import duties and direct labour are costs of purchase or conversion that are included.

Question 16Financial Reporting and Accounting

An entity has trade receivables of LKR 2,000,000 at the reporting date. It estimates expected credit losses using a provision matrix and determines a loss rate of 3%. What is the journal effect of recognising the impairment under SLFRS 9?

  1. Debit trade receivables and credit impairment loss
  2. Debit loss allowance and credit trade receivables
  3. Debit retained earnings and credit trade receivables
  4. Debit impairment loss and credit loss allowance Correct answer.

Explanation

Under the expected credit loss model, the impairment is recognised by debiting impairment loss in profit or loss and crediting a loss allowance account, which is deducted from gross receivables. The gross receivable is not reduced until the amount is actually written off.

Question 17Financial Reporting and Accounting

A company's statement of financial position shows total assets of LKR 5,000,000, total liabilities of LKR 3,000,000 and share capital of LKR 1,000,000. What is the amount of retained earnings and other reserves, assuming no other equity components?

  1. LKR 4,000,000
  2. LKR 2,000,000
  3. LKR 1,000,000 Correct answer.
  4. LKR 3,000,000

Explanation

Equity equals total assets less total liabilities, which is LKR 2,000,000. With share capital of LKR 1,000,000 and no other components, the remaining retained earnings and reserves are LKR 1,000,000.

Question 18Financial Reporting and Accounting

Which of the following is a key characteristic of a liability under the Conceptual Framework?

  1. A present obligation of the entity to transfer an economic resource as a result of past events Correct answer.
  2. A resource controlled by the entity with the potential to produce economic benefits
  3. A decrease in economic benefits that has already been settled in cash
  4. An increase in equity arising from a transaction with owners

Explanation

The Conceptual Framework defines a liability as a present obligation of the entity to transfer an economic resource as a result of past events. A controlled resource with potential to produce benefits describes an asset, while increases in equity from owners are contributions.

Question 19Financial Reporting and Accounting

An entity uses the revaluation model for a building. The carrying amount is LKR 1,000,000 and the fair value is LKR 900,000. A revaluation surplus of LKR 150,000 exists in OCI for the same asset. How should the decrease be treated?

  1. Recognise the LKR 100,000 decrease in other comprehensive income against the revaluation surplus Correct answer.
  2. Recognise LKR 50,000 in profit or loss and LKR 50,000 in OCI
  3. Recognise the full LKR 100,000 decrease in profit or loss
  4. Recognise the decrease as a prior period adjustment

Explanation

Under LKAS 16, a revaluation decrease is recognised in OCI to the extent of any credit balance in the revaluation surplus for that asset. Since the existing surplus of LKR 150,000 exceeds the LKR 100,000 decrease, the entire decrease goes to OCI and no amount is charged to profit or loss.

Question 20Financial Reporting and Accounting

A company issues 1,000 convertible bonds with a face value of LKR 1,000 each. The bonds are issued at face value and the liability component is determined to be LKR 900,000. How should the instrument be accounted for under LKAS 32?

  1. Recognise the full LKR 1,000,000 as equity
  2. Recognise a liability of LKR 100,000 and equity of LKR 900,000
  3. Recognise the full LKR 1,000,000 as a liability and no equity component
  4. Recognise a liability of LKR 900,000 and an equity component of LKR 100,000 Correct answer.

Explanation

LKAS 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, with the residual LKR 100,000 recognised in equity.

Question 21Financial Reporting and Accounting

An entity has a defined benefit obligation with a present value of LKR 4,000,000 and plan assets with a fair value of LKR 3,600,000. Under LKAS 19, how is the net defined benefit liability presented?

  1. As a reduction of retained earnings without recognition
  2. As a contingent liability disclosed only in the notes
  3. As an expense of LKR 400,000 in profit or loss
  4. As a liability of LKR 400,000 in the statement of financial position Correct answer.

Explanation

Under LKAS 19, the net defined benefit liability is the present value of the defined benefit obligation less the fair value of plan assets, giving LKR 400,000, and it is recognised in the statement of financial position. The net amount is not simply expensed in the period.

Question 22Financial Reporting and Accounting

Which of the following statements about deferred tax under LKAS 12 is correct?

  1. Deferred tax is always measured at the tax rate applying at the reporting date regardless of enacted future rates
  2. Deferred tax is recognised on all temporary differences without exception
  3. Deferred tax liabilities are recognised on taxable temporary differences, including those arising from the initial recognition of goodwill
  4. A deferred tax asset is recognised only to the extent that it is probable that taxable profit will be available against which it can be utilised Correct answer.

Explanation

LKAS 12 requires a deferred tax asset to be recognised only when it is probable that taxable profit will be available to utilise the deductible temporary difference. Certain exceptions exist, including the initial recognition of goodwill, and measurement uses rates expected to apply when the asset is realised or the liability settled.

Question 23Financial Reporting and Accounting

An entity prepares its financial statements on a going concern basis. Which condition would most directly threaten that assumption?

  1. An increase in the trade receivables collection period
  2. A decline in gross profit margin from 30% to 25%
  3. Net current liabilities and a bank facility expiring within twelve months with no renewal commitment Correct answer.
  4. A change in the estimated useful life of plant and machinery

Explanation

Going concern is assessed on the entity's ability to continue for the foreseeable future, and net current liabilities combined with an expiring facility and no renewal commitment raises substantial doubt. Margin decline, slower collections and changes in useful life estimates affect results but do not by themselves threaten the basis of preparation.

Question 24Financial Reporting and Accounting

An entity has the following: cash LKR 100,000, inventory LKR 300,000, trade receivables LKR 200,000, current liabilities LKR 250,000. What is the quick ratio?

  1. 2.40
  2. 1.20 Correct answer.
  3. 0.80
  4. 1.60

Explanation

The quick ratio excludes inventory, so quick assets are cash and receivables of LKR 300,000. Dividing by current liabilities of LKR 250,000 gives 1.20. Including inventory would give the current ratio of 2.40.

Question 25Financial Reporting and Accounting

An entity recognises a government grant related to an asset. Under LKAS 20, which of the following is an acceptable presentation method?

  1. Recognise the full grant immediately in other comprehensive income
  2. Present the grant as deferred income and recognise it in profit or loss over the useful life of the asset Correct answer.
  3. Recognise the grant as revenue when received regardless of related costs
  4. Recognise the grant as a deduction from share capital

Explanation

LKAS 20 permits grants related to assets to be presented either as deferred income recognised in profit or loss over the asset's useful life or as a deduction from the carrying amount of the asset. Immediate recognition in OCI or against share capital is not permitted.

Question 26Financial Reporting and Accounting

Under LKAS 7 Statement of Cash Flows, how should interest paid by an entity that is not a financial institution normally be classified?

  1. As a financing cash flow only, with no alternative treatment permitted
  2. As an operating cash flow, although it may alternatively be classified as a financing cash flow Correct answer.
  3. As a non-cash item disclosed only in the notes
  4. As an investing cash flow in all circumstances

Explanation

LKAS 7 permits interest paid to be classified as either an operating or a financing cash flow, but requires consistent application, and the operating classification is the default expectation. Interest received is similarly flexible, whereas dividends paid are normally financing. The standard does not allow interest paid to be treated as investing or as a purely non-cash disclosure.

Question 27Financial Reporting and Accounting

An entity recognises a provision for restructuring. Which cost is included in the restructuring provision under LKAS 37?

  1. Costs of retraining or relocating continuing staff
  2. Future operating losses expected from the restructured operation
  3. Costs of marketing activities undertaken after the restructuring
  4. Direct expenditure necessarily entailed by the restructuring and not associated with ongoing activities Correct answer.

Explanation

LKAS 37 restricts a restructuring provision to direct expenditures necessarily entailed by the restructuring that are not associated with the ongoing activities of the entity. Retraining, marketing and relocation of continuing staff are future operating costs and are excluded. Expected future operating losses are likewise not provided for.

Question 28Financial Reporting and Accounting

An entity's statement of changes in equity must present which of the following for each component of equity?

  1. A reconciliation of the carrying amount of each class of property, plant and equipment
  2. A reconciliation of the opening and closing carrying amount, separately disclosing each movement Correct answer.
  3. Only the closing balance of each equity component
  4. Only total comprehensive income for the period

Explanation

LKAS 1 requires a statement of changes in equity that reconciles the opening and closing carrying amount of each component of equity, disclosing separately items such as profit or loss, other comprehensive income and transactions with owners. Presenting only closing balances would not satisfy this reconciliation requirement. Reconciling property, plant and equipment belongs to the notes on non-current assets.

Question 29Financial Reporting and Accounting

An entity exchanges an item of plant for a similar item from another party, and the transaction lacks commercial substance. The old plant has a carrying amount of LKR 500,000 and a fair value of LKR 620,000. What amount should be recognised as the cost of the new plant under LKAS 16?

  1. LKR 560,000
  2. LKR 620,000
  3. LKR 500,000 Correct answer.
  4. LKR 120,000

Explanation

Where an item of property, plant and equipment is acquired in exchange for a non-monetary asset and the exchange lacks commercial substance, LKAS 16 requires the new asset to be measured at the carrying amount of the asset given up, with no gain recognised. Fair value measurement applies only when the exchange has commercial substance. Therefore the new plant is recognised at LKR 500,000.

Question 30Financial Reporting and Accounting

An entity holds 30% of an associate and exercises significant influence. The investment cost LKR 1,000,000 and the associate reported profit of LKR 400,000 for the year. What amount is recognised in the investor's profit or loss in respect of the associate under LKAS 28?

  1. Dividend income equal to dividends received
  2. Share of profit of LKR 400,000
  3. No amount until the investment is disposed of
  4. Share of profit of LKR 120,000 Correct answer.

Explanation

Under the equity method required by LKAS 28, the investor recognises its share of the associate's profit or loss, calculated as 30% of LKR 400,000, which is LKR 120,000. Dividend income is not the measurement basis for an associate in the investor's consolidated or separate equity-method presentation. The share is recognised as the profit arises, not deferred until disposal.

Question 31Financial Reporting and Accounting

Which of the following best describes the treatment of a change in accounting estimate under LKAS 8?

  1. It is treated as a prior period error and corrected against opening retained earnings
  2. It requires restatement of all prior periods presented in the financial statements
  3. It is applied prospectively by recognising its effect in the current and future periods Correct answer.
  4. It is applied retrospectively by restating prior period comparatives

Explanation

LKAS 8 requires the effect of a change in accounting estimate to be recognised prospectively, affecting the current period and, where relevant, future periods. Retrospective restatement is reserved for changes in accounting policy and corrections of prior period errors. This distinction reflects that estimates arise from new information rather than from a prior mistake.

Question 32Financial Reporting and Accounting

An entity's revenue is LKR 2,000,000, trade receivables increased by LKR 150,000 during the year and no bad debts were written off. Under the indirect method, what adjustment is made to profit for the increase in trade receivables in arriving at cash generated from operations?

  1. Deduct LKR 150,000 Correct answer.
  2. Add LKR 2,000,000
  3. No adjustment is required
  4. Add LKR 150,000

Explanation

Under the indirect method, an increase in trade receivables indicates that revenue recognised exceeds cash collected, so profit must be reduced by LKR 150,000 to derive cash generated from operations. A decrease in receivables would be added back. Revenue itself is not an adjustment line.

Question 33Financial Reporting and Accounting

Under LKAS 38, which of the following costs incurred on an internally generated brand should be recognised as an intangible asset?

  1. Costs of a market research study to assess brand awareness
  2. Costs of registering the brand name with the relevant authority that meet the recognition criteria Correct answer.
  3. Costs of an employee training programme to promote the brand
  4. Costs of advertising the brand to build market recognition

Explanation

LKAS 38 prohibits recognising internally generated brands, mastheads, publishing titles and customer lists as intangible assets, and expenditure on advertising, training and research is expensed. However, registration costs that meet the recognition criteria are capitalised as part of the cost of the intangible asset once it is recognised. The prohibition targets the internally generated brand itself, not qualifying registration expenditure.

Question 34Financial Reporting and Accounting

An entity issues 10,000 ordinary shares with a nominal value of LKR 10 each at LKR 25 per share, fully paid. What is the amount credited to share premium?

  1. LKR 25,000
  2. LKR 250,000
  3. LKR 100,000
  4. LKR 150,000 Correct answer.

Explanation

The share capital account is credited with the nominal value of LKR 100,000 (10,000 shares at LKR 10), and the excess of issue proceeds over nominal value is credited to share premium. The excess is LKR 15 per share, giving LKR 150,000. The full proceeds of LKR 250,000 are not credited to a single equity account.

Question 35Financial Reporting and Accounting

Under LKAS 21, an entity's functional currency is determined by which of the following?

  1. The currency in which its financial statements are presented
  2. The currency specified by the tax authority of the country of incorporation
  3. The currency of the primary economic environment in which it operates Correct answer.
  4. The currency in which the majority of its shareholders invested

Explanation

LKAS 21 defines functional currency as the currency of the primary economic environment in which the entity operates, considering factors such as the currency that mainly influences sales prices and costs. Presentation currency is a separate choice and may differ from the functional currency. Shareholder investment currency and tax requirements do not determine the functional currency.

Question 36Financial Reporting and Accounting

An entity has a building with a carrying amount of LKR 2,000,000, a remaining useful life of 10 years and a residual value of nil. At the start of the year the entity revises the remaining useful life to 5 years. What is the depreciation charge for the year under LKAS 16?

  1. LKR 200,000
  2. LKR 100,000
  3. LKR 400,000 Correct answer.
  4. LKR 250,000

Explanation

A change in useful life is a change in accounting estimate applied prospectively. The carrying amount of LKR 2,000,000 is depreciated over the revised remaining life of 5 years, giving LKR 400,000 for the year. The original 10-year rate is no longer applied once the estimate is revised.

Question 37Financial Reporting and Accounting

Which of the following is the correct treatment of a contingent asset under LKAS 37?

  1. It is neither recognised nor disclosed under any circumstances
  2. It is recognised as an asset when it is probable that the inflow will occur
  3. It is recognised immediately when the related claim is filed
  4. It is disclosed where an inflow of economic benefits is probable, and recognised only when realisation is virtually certain Correct answer.

Explanation

LKAS 37 prohibits recognising a contingent asset, because recognition could result in income being recognised that may never be realised. Where an inflow is probable, the contingent asset is disclosed, and it is recognised only when the inflow is virtually certain. Filing a claim does not by itself create a recognised asset.

Question 38Financial Reporting and Accounting

An entity applies the fair value model to an investment property. It also owns owner-occupied property measured under the cost model. Which statement is correct under LKAS 40?

  1. The entity may measure investment property at fair value while measuring owner-occupied property under LKAS 16 Correct answer.
  2. Investment property must always be measured at cost because owner-occupied property is at cost
  3. All investment property must be measured using the same model as owner-occupied property
  4. Fair value changes on investment property are recognised in other comprehensive income

Explanation

LKAS 40 governs investment property separately from LKAS 16, so an entity may apply the fair value model to investment property while measuring owner-occupied property under the cost model. Fair value changes on investment property are recognised in profit or loss. Consistency with owner-occupied property measurement is not required.

Question 39Financial Reporting and Accounting

Under LKAS 36, an entity identifies a cash-generating unit. Which of the following is the correct order for testing impairment?

  1. Test individual assets first, then the cash-generating unit only if individual assets are impaired
  2. Test the cash-generating unit whenever it is not possible to estimate the recoverable amount of an individual asset Correct answer.
  3. Test the cash-generating unit only when goodwill is present
  4. Test goodwill and corporate assets allocated to the unit before testing the other assets of the unit

Explanation

LKAS 36 requires impairment testing at the level of the cash-generating unit when it is not possible to estimate the recoverable amount of an individual asset. The unit is the smallest identifiable group of assets that generates largely independent cash inflows. Goodwill and corporate assets are allocated to units for testing, but their presence is not the trigger for unit-level testing.

Question 40Financial Reporting and Accounting

Which of the following is a required disclosure under LKAS 24 Related Party Disclosures?

  1. The detailed trading results of all subsidiaries
  2. The personal tax affairs of the entity's directors
  3. The compensation of key management personnel in total and by category Correct answer.
  4. The names of all employees earning above a specified threshold

Explanation

LKAS 24 requires disclosure of the total compensation of key management personnel and of each of the categories of short-term employee benefits, post-employment benefits, other long-term benefits, termination benefits and share-based payment. Personal tax affairs and individual employee earnings are not required disclosures. Trading results of subsidiaries are addressed by consolidation standards, not LKAS 24.

Question 41Financial Reporting and Accounting

An entity has an asset with a carrying amount of LKR 800,000. Its fair value less costs of disposal is LKR 740,000 and its value in use is LKR 760,000. What is the impairment loss under LKAS 36?

  1. Nil
  2. LKR 20,000
  3. LKR 40,000 Correct answer.
  4. LKR 60,000

Explanation

Recoverable amount is the higher of fair value less costs of disposal and value in use, which is LKR 760,000. The impairment loss is the carrying amount of LKR 800,000 less the recoverable amount of LKR 760,000, giving LKR 40,000. Using the lower fair value figure would overstate the loss.

Question 42Financial Reporting and Accounting

Under LKAS 19, which of the following is included in the remeasurement of the net defined benefit liability?

  1. Benefits paid to plan members
  2. Actuarial gains and losses arising from changes in actuarial assumptions Correct answer.
  3. Current service cost
  4. Interest income on plan assets

Explanation

LKAS 19 requires remeasurements, including actuarial gains and losses, to be recognised in other comprehensive income and not reclassified to profit or loss. Current service cost and net interest are recognised in profit or loss. Benefits paid reduce both the obligation and plan assets and do not form part of remeasurement.

Question 43Financial Reporting and Accounting

An entity sells goods with a right of return allowing customers to return items within 30 days. Under LKAS 115, how should revenue be recognised at the date of sale?

  1. Revenue is recognised only when the return period has expired
  2. Revenue is deferred entirely until the goods are paid for in cash
  3. Revenue is recognised in full, with no adjustment for the right of return
  4. Revenue is recognised for the amount expected to be entitled, with a refund liability for the expected returns Correct answer.

Explanation

LKAS 115 requires revenue to be recognised for consideration to which the entity expects to be entitled, accounting for variable consideration such as a right of return. A refund liability is recognised for the amount expected to be refunded and a return asset for the expected recovered goods. Revenue is not deferred until the return period expires.

Question 44Financial Reporting and Accounting

Under LKAS 12, a deferred tax asset arising from unused tax losses should be recognised to the extent that it is probable that future taxable profit will be available. Which of the following supports recognition?

  1. The entity has sufficient taxable temporary differences that will reverse in the same period as the unused tax losses Correct answer.
  2. The entity has a history of tax losses and no evidence of future taxable profit
  3. The entity has no reliable forecast of future taxable profits
  4. The entity expects to cease trading within the next financial year

Explanation

LKAS 12 permits recognition of a deferred tax asset for unused tax losses where there are sufficient taxable temporary differences whose reversal is expected in the same period as the loss carry-forward, or other convincing evidence of future taxable profit. A history of losses and uncertain forecasts weigh against recognition. Ceasing to trade undermines the basis for recovery.

Question 45Financial Reporting and Accounting

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

  1. Impairment loss on trade receivables
  2. Depreciation of plant and machinery
  3. Gain on disposal of a subsidiary
  4. Revaluation surplus on property, plant and equipment under the revaluation model Correct answer.

Explanation

A revaluation surplus on property, plant and equipment under LKAS 16 is recognised in other comprehensive income and accumulated in equity as a revaluation reserve, unless it reverses a previous deficit recognised in profit or loss. Gains on disposal, impairment losses on receivables and depreciation are recognised in profit or loss.

Question 46Financial Reporting and Accounting

An entity's financial statements are approved for issue on 31 March 20X2 and the reporting date is 31 December 20X1. On 15 February 20X2 a major customer that owed LKR 500,000 was placed into liquidation. Which treatment applies under LKAS 10?

  1. Non-adjusting event disclosed in the notes only
  2. Adjusting event, because it provides evidence of conditions existing at the reporting date
  3. Adjusting event only if the customer had been in financial difficulty at the reporting date Correct answer.
  4. Non-adjusting event, because it occurred after the reporting date

Explanation

A customer's insolvency after the reporting date is an adjusting event only where it provides evidence of conditions that existed at the reporting date, such as prior financial difficulty affecting recoverability. If the customer's circumstances deteriorated only after the reporting date, the event is non-adjusting. The timing of the approval of the financial statements does not itself decide the classification.

Question 47Financial Reporting and Accounting

Which of the following best describes the accounting treatment of a finance lease under LKAS 17 from the lessee's perspective?

  1. The leased asset is recognised only at the end of the lease term
  2. The leased asset and the corresponding lease liability are recognised at the lower of fair value and the present value of minimum lease payments Correct answer.
  3. The lease liability is measured at the undiscounted total of future lease payments
  4. The lease payments are recognised as an expense on a straight-line basis over the lease term

Explanation

Under LKAS 17, a finance lease is recognised by the lessee by recording an asset and a liability at the lower of the fair value of the leased asset and the present value of the minimum lease payments. The asset is depreciated and the liability is reduced using the effective interest method. Straight-line expensing is the operating lease approach.

Question 48Financial Reporting and Accounting

An entity's taxable temporary difference is LKR 300,000 and the tax rate is 30%. The difference is expected to reverse in future periods. What is the deferred tax liability and where is it presented?

  1. LKR 90,000 presented as a current liability
  2. LKR 300,000 presented as a non-current liability
  3. Nil, because temporary differences are not recognised
  4. LKR 90,000 presented as a non-current liability Correct answer.

Explanation

A taxable temporary difference of LKR 300,000 multiplied by the 30% tax rate gives a deferred tax liability of LKR 90,000. LKAS 1 requires deferred tax liabilities to be presented as non-current, since the entity does not have an unconditional right to defer settlement within twelve months. Temporary differences are recognised, not ignored.

Question 49Financial Reporting and Accounting

Which of the following is the correct treatment of a bonus issue of shares?

  1. It reduces the number of shares in issue
  2. It increases share capital and reduces reserves, with no change in total equity Correct answer.
  3. It is recognised as a cash inflow in the statement of cash flows
  4. It increases total equity by the nominal value of the bonus shares

Explanation

A bonus issue capitalises reserves by issuing shares to existing shareholders without consideration, increasing share capital and reducing reserves by the same amount. Total equity is unchanged and no cash flow arises. The number of shares in issue increases rather than decreases.

Question 50Financial Reporting and Accounting

An entity has an investment in a subsidiary classified as held for sale. Under LKRS 5, how should the investment be measured?

  1. At cost, with continued depreciation
  2. At the lower of carrying amount and fair value less costs to sell, with no depreciation Correct answer.
  3. At fair value, with gains recognised in other comprehensive income
  4. At the higher of carrying amount and fair value less costs to sell

Explanation

LKRS 5 requires a non-current asset or disposal group classified as held for sale to be measured at the lower of its carrying amount and fair value less costs to sell. Once classified as held for sale, the asset is not depreciated. The higher of the two measures would not reflect the impairment principle.