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NZ Scholarship Accounting study materials
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NZ Scholarship Accounting practice questions

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Question 1Accounting (content domains not enumerated in available source)

Under the New Zealand conceptual framework, which qualitative characteristic is enhanced when information is free from material error and bias and faithfully represents the economic substance of transactions?

  1. Faithful representation Correct answer.
  2. Comparability
  3. Timeliness
  4. Relevance

Explanation

Faithful representation requires information to be complete, neutral and free from material error, and to reflect economic substance rather than merely legal form. Relevance concerns the capacity to influence decisions, so it is a different characteristic.

Question 2Accounting (content domains not enumerated in available source)

A company issues 10,000 ordinary shares at $2.50 each, fully paid. What is the effect on the statement of financial position?

  1. Cash increases by $25,000 and a liability of $25,000 is recognised
  2. Share capital increases by $25,000 and a dividend payable of $25,000 is recognised
  3. Share capital increases by $25,000 and cash increases by $25,000 Correct answer.
  4. Share capital increases by $25,000 and retained earnings increase by $25,000

Explanation

Issuing shares for cash increases equity through share capital and increases the asset cash by the same amount, so the statement of financial position stays in balance. No liability or dividend arises because shareholders have contributed capital rather than lent funds or been declared a distribution.

Question 3Accounting (content domains not enumerated in available source)

Which of the following best describes the accounting treatment of a contingent liability that is a possible obligation whose existence will be confirmed only by uncertain future events not wholly within the entity's control?

  1. Recognise it only if the outflow is probable and measurable
  2. Derecognise it and record a corresponding asset
  3. Disclose it as a contingent liability and do not recognise it Correct answer.
  4. Recognise it in the statement of financial position at its best estimate

Explanation

A possible obligation dependent on uncertain future events outside the entity's control does not meet the definition of a liability, so it is disclosed rather than recognised. Recognition is reserved for present obligations that are probable and reliably measurable.

Question 4Accounting (content domains not enumerated in available source)

A machine costing $80,000 has an estimated residual value of $5,000 and a useful life of 5 years. Using straight-line depreciation, what is the annual depreciation charge?

  1. $16,000
  2. $5,000
  3. $15,000 Correct answer.
  4. $19,000

Explanation

Straight-line depreciation divides the depreciable amount, cost less residual value ($80,000 − $5,000 = $75,000), by the useful life of 5 years, giving $15,000 per year. Residual value is excluded because it is expected to be recovered at the end of the asset's life.

Question 5Accounting (content domains not enumerated in available source)

In a bank reconciliation, an unpresented cheque written by the business will be treated how?

  1. Added to the cash book balance
  2. Deducted from the cash book balance
  3. Deducted from the bank statement balance Correct answer.
  4. Added to the bank statement balance

Explanation

An unpresented cheque has been recorded in the cash book but has not yet cleared the bank, so the bank statement balance is higher than the true cash position. Reconciling from the bank statement therefore requires deducting the unpresented cheque amount.

Question 6Accounting (content domains not enumerated in available source)

Which inventory cost flow assumption assigns the most recent purchase costs to cost of goods sold?

  1. Specific identification
  2. First-in, first-out (FIFO)
  3. Weighted average cost
  4. Last-in, first-out (LIFO) Correct answer.

Explanation

LIFO charges the latest purchase costs against revenue, leaving older costs in closing inventory. FIFO does the opposite, charging the oldest costs to cost of goods sold.

Question 7Accounting (content domains not enumerated in available source)

Which of the following is classified as an operating activity in the statement of cash flows?

  1. Cash received from customers for goods sold Correct answer.
  2. Proceeds from the issue of debentures
  3. Payment of cash dividends to shareholders
  4. Purchase of plant and equipment

Explanation

Cash received from customers arises from the entity's principal revenue-producing activities and is therefore an operating cash flow. Financing and investing activities cover capital raising, distributions and long-term asset transactions.

Question 8Accounting (content domains not enumerated in available source)

A business has current assets of $120,000 and current liabilities of $60,000. What is the current ratio?

  1. 1:1
  2. 0.5:1
  3. 3:1
  4. 2:1 Correct answer.

Explanation

The current ratio equals current assets divided by current liabilities, so $120,000 ÷ $60,000 = 2:1. This indicates the entity holds twice as many short-term resources as short-term obligations.

Question 9Accounting (content domains not enumerated in available source)

An entity recognises a provision for a restructuring announced in the current period. Which condition must be satisfied for recognition?

  1. A present obligation exists, an outflow of resources is probable, and the amount can be reliably estimated Correct answer.
  2. The restructuring will occur only if a future event outside the entity's control takes place
  3. The entity expects the restructuring to improve future profits
  4. A board decision has been noted but not communicated to affected parties

Explanation

A provision is recognised only when a present obligation from a past event exists, a probable outflow of economic benefits is expected, and a reliable estimate can be made. A mere intention or conditional plan does not create a present obligation.

Question 10Accounting (content domains not enumerated in available source)

An entity sells goods for $50,000 on credit with a right of return permitting customers to return goods within 30 days. Historical data indicate returns average 4%. Under the revenue standard, how should revenue be recognised at the point of sale?

  1. Recognise $48,000 revenue and a $2,000 refund liability Correct answer.
  2. Recognise $50,000 revenue and no refund liability
  3. Recognise $50,000 revenue and a $2,000 provision for doubtful debts
  4. Defer all revenue until the return period has expired

Explanation

Where a right of return exists, revenue is recognised only to the extent it is highly probable that a significant reversal will not occur, so expected returns are excluded and a refund liability recognised. Using the 4% estimate, revenue is $48,000 with a $2,000 refund liability.

Question 11Accounting (content domains not enumerated in available source)

A company revalues a building upward by $40,000 under the revaluation model. The building had no previous revaluation. How should the surplus be treated?

  1. Recognise it directly against retained earnings as a prior period adjustment
  2. Recognise it in other comprehensive income and accumulate it in a revaluation reserve Correct answer.
  3. Recognise it as a gain in profit or loss
  4. Recognise it as a liability until the building is sold

Explanation

An upward revaluation is recognised in other comprehensive income and accumulated in equity as a revaluation surplus, unless it reverses a previous downward revaluation recognised in profit or loss. It is not reported as a profit or loss gain on first revaluation.

Question 12Accounting (content domains not enumerated in available source)

An entity has taxable temporary differences arising from accelerated tax depreciation. What is the correct accounting treatment?

  1. Make no entry because the difference will reverse
  2. Recognise a deferred tax liability Correct answer.
  3. Disclose a contingent liability only
  4. Recognise a deferred tax asset

Explanation

A taxable temporary difference means future taxable amounts will exceed future accounting deductions, creating an obligation to pay tax later. This is recognised as a deferred tax liability.

Question 13Accounting (content domains not enumerated in available source)

A business has an accounts receivable balance of $90,000 and an allowance for doubtful debts of $4,500. What is the net carrying amount of receivables?

  1. $85,500 Correct answer.
  2. $94,500
  3. $4,500
  4. $90,000

Explanation

The allowance is a contra-asset that reduces gross receivables to the expected recoverable amount, so $90,000 − $4,500 = $85,500. The allowance is not added because it represents amounts expected to be uncollectible.

Question 14Accounting (content domains not enumerated in available source)

Under the equity method, how does an investor recognise its share of an associate's profit?

  1. As an increase in the investment carrying amount and income in profit or loss Correct answer.
  2. As a reduction in share capital
  3. As dividend income when cash is received
  4. As a fair value gain in other comprehensive income

Explanation

The equity method adjusts the carrying amount of the investment for the investor's share of the associate's post-acquisition profit or loss, with the corresponding amount recognised in profit or loss. Dividends received reduce the carrying amount rather than generate income.

Question 15Accounting (content domains not enumerated in available source)

Which of the following best explains why the conceptual framework requires an entity to consider substance over form?

  1. Legal form always determines the accounting treatment
  2. Form overrides substance where a contract exists
  3. Transactions should be accounted for according to their economic reality, which may differ from their legal form Correct answer.
  4. Substance matters only for tax calculations

Explanation

Faithful representation requires depicting the economic substance of transactions, which may not match their legal form, such as a sale and repurchase arrangement that is in substance a secured loan. Accounting therefore follows economic reality rather than legal labels.

Question 16Accounting (content domains not enumerated in available source)

A company has a gross profit margin of 40% and sales of $250,000. What is the cost of goods sold?

  1. $100,000
  2. $62,500
  3. $150,000 Correct answer.
  4. $250,000

Explanation

Gross profit is 40% of $250,000, equal to $100,000, so cost of goods sold is sales less gross profit, $250,000 − $100,000 = $150,000. Equivalently, the cost ratio of 60% applied to sales gives $150,000.

Question 17Accounting (content domains not enumerated in available source)

An entity enters a lease that transfers substantially all the risks and rewards incidental to ownership of the asset to the lessee. How should the lessee account for it?

  1. By recording the asset only when ownership transfers at the end of the term
  2. By disclosing the lease as a contingent liability
  3. As a short-term expense recognised as lease payments are made
  4. By recognising a right-of-use asset and a lease liability at the present value of lease payments Correct answer.

Explanation

A lease transferring substantially all risks and rewards is a finance lease, so the lessee recognises a right-of-use asset and a corresponding lease liability measured at the present value of future lease payments. Expense recognition as payments are made applies to short-term or low-value leases.

Question 18Accounting (content domains not enumerated in available source)

A company declares a final dividend after the reporting date but before the financial statements are authorised for issue. How should this be treated?

  1. Recognise a liability at the reporting date
  2. Disclose it as a non-adjusting event after the reporting date Correct answer.
  3. Recognise the dividend as a prior period adjustment
  4. Ignore it entirely because it occurred after year end

Explanation

Dividends declared after the reporting date do not create a present obligation at that date, so they are non-adjusting events. They are disclosed so users understand their significance, but no liability is recognised in the reporting period.

Question 19Accounting (content domains not enumerated in available source)

An entity's statement of financial position shows total assets of $500,000 and total liabilities of $300,000. It subsequently pays $40,000 of accounts payable in cash. What is equity immediately after the payment?

  1. $200,000 Correct answer.
  2. $260,000
  3. $240,000
  4. $160,000

Explanation

Equity equals assets less liabilities, initially $500,000 − $300,000 = $200,000. Paying a creditor reduces both cash and accounts payable by $40,000, so assets become $460,000 and liabilities $260,000, leaving equity unchanged at $200,000.

Question 20Accounting (content domains not enumerated in available source)

Under the revaluation model, a downward revaluation of an asset below its carrying amount should first be recognised where?

  1. Directly against retained earnings
  2. As a deferred tax asset
  3. In other comprehensive income as a revaluation deficit
  4. In profit or loss as an expense, except to the extent it reverses a prior revaluation surplus Correct answer.

Explanation

A downward revaluation is charged to profit or loss, except that it is debited against any existing revaluation surplus for the same asset to the extent of that surplus. Only the excess beyond the surplus is expensed.

Question 21Accounting (content domains not enumerated in available source)

A company has profit after tax of $80,000, preference dividends of $10,000 and 100,000 ordinary shares. What is basic earnings per share?

  1. $0.80
  2. $0.90
  3. $8.00
  4. $0.70 Correct answer.

Explanation

Basic EPS is profit attributable to ordinary shareholders divided by the weighted average number of ordinary shares. Profit after tax less preference dividends is $70,000, divided by 100,000 shares gives $0.70.

Question 22Accounting (content domains not enumerated in available source)

A company issues a $100,000 zero-coupon bond at a discount for proceeds of $85,000, redeemable at par in five years. How is the $15,000 difference accounted for?

  1. As an immediate loss in profit or loss
  2. As a contingent liability disclosed in the notes
  3. As a reduction in share capital
  4. As a finance cost recognised over the term using the effective interest method Correct answer.

Explanation

The discount represents interest implicit in the borrowing and is amortised over the bond's life using the effective interest method, increasing the carrying amount toward the redemption value. It is not recognised as a single upfront loss.

Question 23Accounting (content domains not enumerated in available source)

An entity uses the revaluation model for a class of assets and an impairment loss arises that exceeds any related revaluation surplus. How should the excess be treated?

  1. Recognised in other comprehensive income
  2. Recognised as a deferred tax liability
  3. Recognised in profit or loss as an impairment expense Correct answer.
  4. Recognised directly in retained earnings

Explanation

An impairment loss is first offset against any revaluation surplus relating to the same asset, with any excess charged to profit or loss. The excess beyond the surplus is therefore an expense in the period.

Question 24Accounting (content domains not enumerated in available source)

A parent sells inventory to its subsidiary at a profit, and the inventory remains unsold at year end. In consolidated financial statements, how is the unrealised profit treated?

  1. Deferred until the subsidiary is sold
  2. Recognised in full because the sale is a legal transaction
  3. Eliminated by reducing inventory and profit to reflect the group as a single economic entity Correct answer.
  4. Recognised only in the parent's separate statements

Explanation

The group is treated as a single economic entity, so intra-group profits on goods still held within the group are unrealised and must be eliminated by reducing inventory and consolidated profit. The legal sale does not justify recognising profit that has not been earned from an external party.

Question 25Accounting (content domains not enumerated in available source)

An entity recognises a deferred tax asset for unused tax losses. Which condition must be satisfied?

  1. The entity has always been profitable in prior periods
  2. It is probable that future taxable profit will be available against which the losses can be utilised Correct answer.
  3. The losses arose from a discontinued operation
  4. The tax authority has approved the carryforward in writing

Explanation

A deferred tax asset is recognised only to the extent it is probable that future taxable profits will be available to utilise the deductible temporary differences or unused losses. Without probable future taxable profit, recognition is not justified.

Question 26Accounting (content domains not enumerated in available source)

Under the Conceptual Framework, which qualitative characteristic is enhanced when information is confirmed or corrected by later events, supporting predictive value?

  1. Relevance Correct answer.
  2. Faithful representation
  3. Comparability
  4. Timeliness

Explanation

Relevance requires information capable of making a difference in decisions, which includes both confirmatory and predictive value. Feedback that confirms or corrects prior expectations demonstrates confirmatory value, a component of relevance. The other characteristics govern faithful depiction, consistency across entities, and availability in time rather than predictive confirmation.

Question 27Accounting (content domains not enumerated in available source)

An entity pays $12,000 in advance on 1 April for 12 months of insurance. Under accrual accounting, what amount is recognised as an expense for the year ended 31 December?

  1. $0
  2. $9,000 Correct answer.
  3. $3,000
  4. $12,000

Explanation

Accrual accounting recognises expense as the benefit is consumed. Nine months (April to December) of cover has expired, so 9/12 × $12,000 = $9,000 is expensed. The remaining $3,000 represents a prepayment, an asset at balance date.

Question 28Accounting (content domains not enumerated in available source)

Which item is presented within equity rather than as a liability in a statement of financial position?

  1. Redeemable preference shares where redemption is at the holder's option
  2. A bank overdraft repayable on demand
  3. Ordinary shares issued for cash Correct answer.
  4. Trade payables due in 60 days

Explanation

Ordinary shares carry no obligation to transfer cash or other resources, so they meet the equity definition and are presented in equity. Instruments redeemable at the holder's option create a present obligation and are classified as financial liabilities.

Question 29Accounting (content domains not enumerated in available source)

An entity's gross profit is $180,000 and cost of goods sold is $270,000. What is the gross profit margin?

  1. 66.7%
  2. 40.0% Correct answer.
  3. 150.0%
  4. 33.3%

Explanation

Gross profit margin equals gross profit divided by sales revenue. Sales are $180,000 + $270,000 = $450,000, so the margin is $180,000 ÷ $450,000 = 40%. The markup on cost would be 66.7%, which is a different measure.

Question 30Accounting (content domains not enumerated in available source)

Which cost is excluded from the cost of an item of property, plant and equipment acquired for cash?

  1. Initial delivery and handling costs
  2. Import duties on the equipment
  3. Costs of relocating staff to the new plant Correct answer.
  4. Site preparation costs

Explanation

The cost of an asset includes purchase price plus directly attributable costs of bringing it to the location and condition for intended use, such as duties, delivery and site preparation. Staff relocation costs are not directly attributable to making the asset ready for use and are expensed.

Question 31Accounting (content domains not enumerated in available source)

An entity uses straight-line depreciation for a machine costing $60,000 with residual value $6,000 and useful life 6 years. What is the annual depreciation charge?

  1. $6,000
  2. $9,000 Correct answer.
  3. $10,000
  4. $54,000

Explanation

Depreciation is calculated on the depreciable amount, being cost less residual value. That is $60,000 − $6,000 = $54,000, spread over six years, giving $9,000 per year.

Question 32Accounting (content domains not enumerated in available source)

Which of the following is an example of a contingent liability that is disclosed but not recognised?

  1. A present obligation for which a reliable estimate of the amount cannot be made
  2. A present obligation for which an outflow of resources is probable and can be measured reliably
  3. A possible obligation whose existence will be confirmed only by uncertain future events Correct answer.
  4. A contractual obligation to pay a supplier next month

Explanation

A possible obligation dependent on uncertain future events outside the entity's control is a contingent liability and is disclosed rather than recognised. Where an outflow is probable and measurable, a provision is recognised instead.

Question 33Accounting (content domains not enumerated in available source)

An entity's net profit after tax is $150,000. Depreciation of $30,000 and a gain on sale of equipment of $10,000 are included. Inventories increased by $25,000 and accounts payable increased by $15,000. What is net cash from operating activities?

  1. $200,000
  2. $140,000
  3. $160,000 Correct answer.
  4. $180,000

Explanation

Starting from profit, add back depreciation ($30,000), deduct the non-operating gain ($10,000), deduct the inventory increase ($25,000) and add the payables increase ($15,000). This gives $150,000 + $30,000 − $10,000 − $25,000 + $15,000 = $160,000.

Question 34Accounting (content domains not enumerated in available source)

A machine is carried at $80,000. Its fair value less costs of disposal is $65,000 and its value in use is $70,000. What impairment loss is recognised?

  1. $10,000 Correct answer.
  2. $0
  3. $5,000
  4. $15,000

Explanation

Recoverable amount is the higher of fair value less costs of disposal and value in use, so it is $70,000. The impairment loss is the carrying amount minus recoverable amount, $80,000 − $70,000 = $10,000.

Question 35Accounting (content domains not enumerated in available source)

An entity issues 10,000 ordinary shares with a $1 par value for $4.50 each. What is recorded in the share capital and share premium accounts respectively?

  1. $45,000 share capital and $0 share premium
  2. $35,000 share capital and $10,000 share premium
  3. $10,000 share capital and $45,000 share premium
  4. $10,000 share capital and $35,000 share premium Correct answer.

Explanation

Proceeds are $45,000. Only the par value of $1 per share, totalling $10,000, is credited to share capital, with the excess of $3.50 per share ($35,000) credited to share premium.

Question 36Accounting (content domains not enumerated in available source)

An entity's allowance for doubtful debts rose from $8,000 to $11,000 during the year. Bad debts written off were $4,000. What is the bad debt expense recognised for the year?

  1. $11,000
  2. $3,000
  3. $4,000
  4. $7,000 Correct answer.

Explanation

Bad debt expense comprises the write-offs plus the increase in the allowance. Write-offs of $4,000 plus the $3,000 increase in the allowance give $7,000.

Question 37Accounting (content domains not enumerated in available source)

A company has 200,000 ordinary shares and 50,000 potential ordinary shares from convertible notes. Profit after tax is $300,000 and the after-tax interest saving on the notes is $20,000. What is diluted earnings per share?

  1. $1.50
  2. $1.20
  3. $1.60
  4. $1.28 Correct answer.

Explanation

Diluted EPS adjusts both earnings and the share count. Earnings become $300,000 + $20,000 = $320,000 and shares become 250,000, giving $320,000 ÷ 250,000 = $1.28.

Question 38Accounting (content domains not enumerated in available source)

An entity recognises a deferred tax liability of $30,000 on a revaluation surplus. How is this deferred tax normally treated in the financial statements?

  1. Deducted directly from share capital
  2. Recognised in other comprehensive income together with the revaluation Correct answer.
  3. Recognised in profit or loss as tax expense
  4. Disclosed only in the notes with no journal entry

Explanation

Deferred tax follows the item that gave rise to it. Because the revaluation surplus is recognised in other comprehensive income, the related deferred tax is also recognised in other comprehensive income.

Question 39Accounting (content domains not enumerated in available source)

A lessee classifies a lease as a finance lease. Which effect does this have on the lessee's statement of financial position at commencement?

  1. The leased asset is recognised but no liability is recorded
  2. No asset or liability is recognised and rentals are expensed as paid
  3. A right-of-use asset and a lease liability are recognised Correct answer.
  4. Only a lease liability is recognised with rentals expensed

Explanation

A finance lease transfers substantially all risks and rewards of ownership, so the lessee recognises the leased asset and the obligation to make lease payments. The liability is subsequently measured using the interest method.

Question 40Accounting (content domains not enumerated in available source)

A company's trade receivables days increased from 45 to 62 while credit terms remained 30 days. Which interpretation is most consistent with this trend?

  1. The entity has shortened its credit terms to customers
  2. The entity is collecting receivables faster and holding less working capital
  3. The entity has reduced its sales revenue significantly
  4. The entity is taking longer to collect cash, increasing the risk of bad debts Correct answer.

Explanation

A rising receivables collection period means cash is being collected more slowly relative to sales. This lengthens the operating cash cycle and raises exposure to credit losses.

Question 41Accounting (content domains not enumerated in available source)

An entity uses the revaluation model for land. A revaluation surplus of $50,000 is recognised, and in a later period the same land is revalued downward by $70,000. How is the downward revaluation treated?

  1. Recognise $70,000 as an expense in profit or loss
  2. Recognise $50,000 against the revaluation surplus and $20,000 as an expense Correct answer.
  3. Recognise $70,000 in other comprehensive income
  4. Recognise $20,000 against the revaluation surplus and $50,000 as an expense

Explanation

A decrease is first offset against any existing revaluation surplus for that asset, with the excess charged to profit or loss. The $50,000 surplus absorbs part of the decrease, and the remaining $20,000 is expensed.

Question 42Accounting (content domains not enumerated in available source)

In a consolidation, a subsidiary sold goods to the parent at a profit of $20,000 and the parent still holds all the goods at year end. What adjustment is required in the consolidated financial statements?

  1. Recognise the profit as revenue of the group
  2. Increase consolidated inventory by $20,000
  3. No adjustment because the sale occurred at arm's length
  4. Eliminate the unrealised profit by reducing inventory and profit Correct answer.

Explanation

Profits on intragroup sales are unrealised from the group's perspective until the goods are sold externally. The unrealised profit is eliminated by reducing inventory and consolidated profit.

Question 43Accounting (content domains not enumerated in available source)

An entity's inventory cost is $50,000, its net realisable value is $46,000 and its replacement cost is $44,000. At what amount should inventory be measured?

  1. $44,000
  2. $46,000 Correct answer.
  3. $50,000
  4. $48,000

Explanation

Inventory is measured at the lower of cost and net realisable value. Since net realisable value of $46,000 is below cost of $50,000, the write-down to $46,000 is required.

Question 44Accounting (content domains not enumerated in available source)

Under the equity method, an investor's share of an associate's dividend is treated in which way?

  1. Added to the cost of the investment
  2. Deducted from the carrying amount of the investment Correct answer.
  3. Recognised as dividend income in profit or loss
  4. Recognised in other comprehensive income

Explanation

Under the equity method the investment carrying amount is adjusted for the investor's share of post-acquisition profits and reduced by dividends received. Dividends are therefore a return of the carrying amount, not income.

Question 45Accounting (content domains not enumerated in available source)

An entity has a defined benefit obligation of $500,000 and plan assets of $460,000 at year end. Actuarial losses of $25,000 arose during the year. Under IAS 19, how are the actuarial losses recognised?

  1. Recognised immediately in profit or loss as an operating expense
  2. Offset against the plan assets with no separate recognition
  3. Recognised immediately in other comprehensive income Correct answer.
  4. Deferred and amortised over the average remaining service life

Explanation

IAS 19 requires remeasurements, including actuarial gains and losses, to be recognised immediately in other comprehensive income. They are not subsequently recycled to profit or loss.

Question 46Accounting (content domains not enumerated in available source)

An entity enters a sale and leaseback transaction. The transfer qualifies as a sale and the leaseback is a finance lease. Which accounting treatment applies?

  1. Recognise only the rights retained and the gain relating to those rights over the lease term Correct answer.
  2. Derecognise the asset but defer all gain until the lease ends
  3. Recognise the full gain on the sale immediately in profit or loss
  4. Recognise the asset at the sale proceeds with no gain or loss

Explanation

Where the transfer is a sale and the leaseback is a finance lease, the seller retains substantially all rights of use. The entity recognises only the rights retained in the asset and recognises gain only to the extent it relates to those retained rights.

Question 47Accounting (content domains not enumerated in available source)

An entity issues a convertible bond with a face value of $100,000 for proceeds of $100,000. The liability component measured without the conversion option is $92,000. How is the instrument presented?

  1. $100,000 equity and no liability
  2. $8,000 liability and $92,000 equity
  3. $100,000 liability and no equity
  4. $92,000 liability and $8,000 equity Correct answer.

Explanation

A compound instrument is split into its liability and equity components. The liability is measured first at $92,000, and the residual of $8,000 is recognised in equity as the conversion option.

Question 48Accounting (content domains not enumerated in available source)

An entity changes an accounting policy for inventory valuation. Which statement best describes the required presentation of the change?

  1. Apply the change only to transactions occurring after the reporting date
  2. Apply the change prospectively with no adjustment to opening balances
  3. Apply retrospectively, restating comparatives and adjusting opening retained earnings Correct answer.
  4. Disclose the change without adjusting prior period figures

Explanation

A voluntary change in accounting policy is applied retrospectively unless transitional provisions apply. Prior period comparatives are restated and the cumulative effect adjusts opening retained earnings.

Question 49Accounting (content domains not enumerated in available source)

An entity recognises revenue from a construction contract using the percentage of completion method. Costs incurred to date are $300,000, estimated total costs are $500,000 and the contract price is $600,000. What revenue is recognised to date?

  1. $600,000
  2. $300,000
  3. $400,000
  4. $360,000 Correct answer.

Explanation

Progress is measured by costs incurred relative to total expected costs, giving 60%. Revenue recognised is 60% × $600,000 = $360,000, matched to the stage of completion.

Question 50Accounting (content domains not enumerated in available source)

Which event after the reporting date is classified as an adjusting event requiring changes to the amounts recognised?

  1. A major business combination announced after year end
  2. Bankruptcy of a customer whose receivable existed at balance date Correct answer.
  3. A fire destroying a warehouse after year end
  4. A decline in market prices after year end with no prior indication

Explanation

An adjusting event provides evidence of conditions existing at the reporting date. A customer's bankruptcy confirms the receivable was impaired at balance date, so the allowance is adjusted.