F1 CIMA Workbook Q PDF
F1 CIMA Workbook Q PDF
com
CIMA F1
Financial Reporting
& Taxation
Workbook
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Illustration 1
In year ended 31/01/X1 Johnboy Co. had Profit Before Tax of $30,000. This was after the
deduction of personal expenses that were disallowable for tax purposes worth $4700. In
addition Johnboy Co. had $7000 of income exempt from taxation.
Johnboy Co’s Non Current Assets totaled $35,000 and these were being depreciated at
25% on cost.
Illustration 2
Jimmy Co. purchased an asset worth $500,000. WDAs are available on the asset at 25%
on the reducing balance basis.
Show the tax allowable depreciation (WDAs) for the first 5 years of the asset and the
Written Down Value (WDV) at the end of each year. (Round to the nearest $)
Illustration 3
Andy Co. purchased an asset in 20X1 worth $100,000. WDAs are available on the asset
at 25% on the reducing balance basis.
At the end of 20X3 Andy Co. sold the asset for $40,000.
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Illustration 4
Welling Co. had assets at 01/02/20X2 with a carrying value in the financial statements of
$600,000 and a tax written down value of 400,000.
Accounting Depreciation was charged on the assets 10% reducing balance. WDAs are
available on the at 25% also on the reducing balance basis.
On 31/01/X4 20X4 Welling Co. sold all the assets for $500,000.
In year ended 31/01/X4 Welling Co. had Profit Before Tax of $2,000,000. This was after
the deduction of entertainment expenses that were disallowable for tax purposes worth
$30,000. In addition Welling Co. had $200,000 of income exempt from taxation.
Process to follow:
Illustration 5
Using the taxable profit for the year ended 31/01/X4 from Illustration 4 of $2,070,000 and
tax rates of:
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Illustration 6
In Fabbland it is possible to carry back losses to set against trading profit in previous years
and then forwards against trading profits in future years.
1 500,000
2 -1,400,000
3 2,000,000
4 400,000
Calculate the taxable profit based on the above information in each of the 4 years.
Illustration 7
In Lalaland it is possible to carry back losses in the year of cessation to set against trading
profit in previous years for up to 3 years on a LIFO (most recent first) basis.
1 500,000
2 600,000
3 200,000
Calculate the taxable profit based on the above information in each of the 4 years.
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1. There are certain principles that a tax system should have in an ideal situation. Which of
the following is NOT traditionally regarded as a principle of an ideal tax?
A. The cost of collecting the tax should bot outweigh the benefits of it.
B. The timing of the tax and the method to pay it should be convenient.
C. The amount to be paid should be certain.
D. The amount raised should be the maximum amount possible for the government.
3. ABC Ltd. earns profit of $500,000 and pays tax of $100,000. In the same country, CBD
Ltd. earns profit of $130,000 and pays tax of $26,000.
A. Progressive
B. Proportional
C. Regressive
D. Fixed Amount
4.In year ended 31/01/X4 Endeavor Co. had Profit Before Tax of $220,000. This was after
the deduction of entertainment expenses that were disallowable for tax purposes worth
$30,000. In addition Endeavor Co. had $25,000 of income exempt from taxation.
Endeavor Co. had Non Current Assets with a carrying value of $500,000 at the start of the
year and these were being depreciated at 10% reducing balance.
A. $47,300
B. $71,500
C. $60,500
D. $49,599
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Illustration 1
In year ended 31/01/X1 ABD Co. decided to sell an asset that they had bought 10 years
previously. The asset had cost $40,000 and was sold for $100,000. Indexation allowance
of 25% of the cost of the asset was allowed for the effects of inflation.
Illustration 2
In year ended 31/01/X1 ABD Co. decided to sell an building that they had bought 10 years
previously. The building had cost $300,000 plus legal fees of $3,000 and was sold for
$600,000. Indexation allowance of 30% of the cost of the asset was allowed for the effects
of inflation.
The building had been extended when purchased initially costing $100,000 and costs to
sell of $6,000 were incurred on the sale.
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Illustration 3
On 01/01/X5 DFT Co. sold a building they had purchased on 01/01/X0. The building had
cost $500,000 plus legal fees of $1,000 and was sold for $900,000.
The building had been extended on 01/01/X3 costing $50,000 and costs to sell of $2,000
were incurred on the sale.
Indexation allowance is available on assets bought/built at the below times at the following
rates:
Illustration 4
In Fabbland it is not possible to carry back capital losses to set against capital gains in
previous years. However losses can be relieved against other current year capital gains,
and then forward against future capital gains
1 5,000
2 -12,000
3 10,000
4 7,000
Calculate the taxable gains based on the above information in each of the 4 years.
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Calculate the capital gains tax arising on the disposal assuming a tax rate of 20%
(rounded to the nearest £)
2. MM purchases an asset on 1 April 20X0 for 375,000, incurring legal fees of 12,000 .MM
is resident in country X. There was no indexation allowed on the asset.
MM sold the asset on 31 March 20X3 for 450,000 incurring transaction charges of 15,000.
Tax is charded at 25%.
Calculate the capital gains tax due from MM on the disposal of the asset. (Round to the
nearest £)
3. Capital losses in the year must first be offset against capital gains in the year before
being carried forward to offset against the first available gains in the future. During the year
ended 30 April 20X4 SM made two disposals resulting in a capital gain of 15,000 and a
capital loss of 18,000. In the year ended 30 April 20X5, the entity also disposed of a
chargeable asset for 90,000. The asset originally cost 30,000 in 20X0 and maintenance
costs of 5,000 were incurred in 20X3. In 20X4 there was enhancement expenditure of
10,000.
Which of the following options correctly shows the capital gains tax due for 31 March 20X4
and 20X5. You should assume a tax rate of 20% and no annual exemption throughout.
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4. Profit Ltd and Loss Ltd are in a group for corporation tax purposes. Profit Ltd relevant
trading profit of 150,000. Loss Ltd relevant trading loss of 90,000 and capital losses of
40,000.
5. An entity makes a taxable profit of 300,000 and pays corporate income tax at 20%.
The entity pays a dividend to its shareholders. A shareholder receiving 7,000 dividend then
pays the standard personal income tax rate 12% on the divided, paying a further 960 tax.
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Illustration 1
In Lalaland the rate of VAT is 15%. The following purchases and sales of a computer
happen before it is eventually sold to the consumer.
Illustration 2
Arttie Co. is registered for VAT and the VAT rate applicable is 12%.
In the most recent VAT period they made sales of $120,000 and purchases of $50,000.
Both of these figures are exclusive of VAT.
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Illustration 3
Jenny’s business is registered for sales tax purposes. During the quarter ending 31
December 2011, she made the following sales and purchases, all of which were subject to
VAT at 20%:
Sales $ Purchases $
Sales of Goods (Excludes Tax) 550 Purchase of Goods (Excludes Tax) 1,055
Sales of Goods (Includes Tax) 900 Purchase of Goods (Includes Tax) 720
Sales of Goods (Excludes Tax) 945 Purchase of Goods (Includes Tax) 420
Sales of Goods (Includes Tax) 660 Purchase of Goods (Includes Tax) 1,140
2. Zoe is in the process of completing her VAT return for the quarter ended 31 March
2013. The following information is available:
• Sales invoices totalling £128,000 were issued in respect of standard rated sales.
Unless stated otherwise all of the above figures are exclusive of VAT. The standard rate of
tax is 20%.
3. Correctly identify the difference between exempt and zero rated supplies. The options
cannot be used more than once.
Type of Supply
Zero Rated
Exempt
Options
Entity must be registered for VAT purposes
Entity does not register for VAT purposes
Vat can be claimed back on purchases
Vat cannot be claimed back on purchases
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2. Which of the following statements is correct about the deduction method of double
taxation relief?
A. Tax relief is obtained by deducting foreign tax as an expense in the statement of profit
and loss
B. Tax relief is obtained by treating foreign tax as a loss
C. Tax relief is obtained by deducting the foreign tax from the foreign income so that only
the net amount is subject to tax in the country of residency
D. Tax relief is obtained by deducting foreign tax from revenue in the statement of profit
or loss.
4. Which of the following is an advantage for the tax authority of deduction of tax at
source?
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A. Factory
B. Office/Branch
C. Construction project
D. Pop up Restaurant
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Illustration 1
Almeria Murcia
Current Assets
Inventory 40 200
Receivables 60 100
700 600
700 600
Zusätzliche Informationen
Required
Prepare the consolidated statement of financial position for the Almeria group
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Pro-Forma
Almeria
Murcia
Date Acquired
Parent Share
NCI
Share Capital
Accumulated Profits
Working 3 - Goodwill
Goodwill
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Working 4 - NCI
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Goodwill
Current Assets
Inventory 40 200
Receivables 60 100
700 600
700 600
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Ant Dec
850 500
850 500
Zusätzliche Informationen
OTQ 1
What is the percentage ownership and the date of acquisition for Ant Group?
OTQ 2
What is the value of the net assets acquired by Ant in Dec on the date of acquisition
A. 200
B. 300
C. 100
D. 600
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OTQ 3
A. 100
B. 350
C. 50
D. 400
OTQ 4
What is the value of the non controlling interest in Dec at the year end?
A. 100
B. 300
C. 100
D. 50
OTQ 5
What is the value of the retained earnings for the group at the year end?
A. 200
B. 300
C. 250
D. 50
OTQ 6
What is the value of the total assets and the share capital that will appear in the statement
of financial position for Ant Group?
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Illustration 1
Evan Dando
900 650
900 650
Zusätzliche Informationen
Evan acquired 150m shares in Dando one year ago when the reserves of Dando were
$40m. The Fair Value of the NCI on the date of acquisition was $100m.
Required
Prepare the consolidated statement of financial position for the Evan group.
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Solution
↓
Date Acquired
Parent Share
NCI
Share Capital
Accumulated Profits
Working 3 - Goodwill
Goodwill
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Working 4 - NCI
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Goodwill
Investment in 500
Dando
900 650
NCI
900 650
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Illustration 2
Virtual Insanity
2000 1000
2000 1000
Zusätzliche Informationen
Virtual acquired 60m shares in Insanity one year ago when the reserves of Insanity were
$60m. The Fair Value of the NCI at that date was $120m.
Required
Prepare the consolidated statement of financial position for the Virtual group
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Illustration 3
Brad acquires 80% of Angelina’s share capital for $800. Angelina has 100
shares in issue with a nominal value of $1 and Angelina’s share price is $8. At
the date of acquisition the net assets of Angelina are $600.
Illustration 4
Brad acquires 80% of Angelina’s share capital for $800. Angelina has 100
shares in issue with a nominal value of $1 and Angelina’s share price is $8. At
the date of acquisition the net assets of Angelina are $600.
Illustration 5
An impairment review has been carried out on the goodwill at the year end
which has found it to be impaired by $40.
Calculate the gross goodwill, the retained earnings and the NCI at the year
end.
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Illustration 6
$ $ $ $ $
If French has $1500 of retained earnings at the year end, calculate the gross
goodwill, retained earnings for the group and the NCI at the year end.
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Illustration 7
$ $ $ $
Pinky Brain
700 600
700 600
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Illustration 8
George owns 80% of the subsidiary Bungle. Goodwill has been calculated on a
proportionate basis and at acquisition was $400m.
During the impairment review in the current year it was found that the carrying value of the
goodwill has been impaired by $50m
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What is the amount that PRT should include in its consolidated statement of financial
position as at 31 December 2013 for the Non-Controlling Interest?
A. $250,000
B. $204,600
C. $205,000
D. $206,400
2. HX acquired 70% of SA’s equity shares on 1 July 2010 for $452,000.The fair value of
the NCI on the 1 July 2010 was $60,000 SA has $200,000 $1 equity shares in issue and at
1 July 2010 its reserves comprised share premium of $40,000 and retained earnings of
$62,000.
What is the value of the gross goodwill arising on the acquisition of SA?
A. $235,000
B. $210,000
C. $245,000
D. $135,000
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3. HP acquired 70% of SA’s equity shares on 1 July 2010 for $652,000. Sauce has
$400,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share
premium of $220,000 and retained earnings of $122,000.
What is the value of the proportionate goodwill arising on the acquisition of SA?
A. $235,000
B. $210,000
C. $132,600
D. $135,000
4. PRT acquired 80% of SUB’s ordinary shares on 1 January 2011 for $1,136,000 when
SUB’s retained earnings were $260,000. At 1 January 2011 the fair value of the Non-
Controlling Interest was $300,000.
SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only
subsidiary. PRT calculated that goodwill in its subsidiary was impaired by 20% at 31
December 2013. The equity of SUB as at 31 December 2013:
$000
Ordinary share capital 430
Share premium 86
Retained earnings 324
What is the amount that PRT should include in its consolidated statement of financial
position as at 31 December 2013 for Goodwill?
A. $250,000
B. $200,000
C. $440,000
D. $528,000
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5. PRT acquired 80% of SUB’s ordinary shares on 1 January 2011 for $2,346,000 when
SUB’s retained earnings were $341,000.
SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only
subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by
10% at 31 December 2013. The equity of SUB as at 31 December 2013:
$000
Ordinary share capital 630
Share premium 24
Retained earnings 576
What is the amount that PRT should include in its consolidated statement of financial
position as at 31 December 2013 for Goodwill?
A. $195,000
B. $1,395,000
C. $1,234,000
D. $155,000
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Illustration 1
A Parent company has recorded an asset of $500 goods receivable with a subsidiary.
Illustration 2
A Parent company has recorded an asset of $300 goods receivable with a subsidiary.
The subsidiary had recorded this as an initial liability payable of $300 but has just recorded
and sent a cheque payment to the parent of $50 leaving the payable balance of $250.
Illustration 3
Parent has been selling goods to subsidiary. The parent has recorded an asset of $500
receivable from the subsidiary.
The $500 includes goods worth $100 sent prior to the year end to the subsidiary who has
not received them. As a result the subsidiary has a balance of $400 recorded as a liability
in payables.
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Illustration 4
Arctic is the parent of a subsidiary Monkeys. Extracts of their SFPs are below
Arctic Monkeys
Current Assets
Bank 100 50
600 400
The trade payables of Monkeys includes $35m due to Arctic. This was after the deduction
of $10m in respect of cash sent by Monkeys but not yet received by Arctic.
The receivables of Arctic at the year end include $70m due from Monkeys. $25m of these
goods had been dispatched by Arctic, but were not yet received by Monkeys.
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Illustration 5
Sea is the parent of a subsidiary Lion. Extracts of their SFPs are below
Sea Lion
Current Assets
650 450
The trade payables of Lion includes $20m due to Arctic. This was after the deduction of
$15m in respect of cash sent by Lion but not yet received by Sea.
The receivables of Sea at the year end include $50m due from Lion. $15m of these goods
had been dispatched by Sea, but were not yet received by Lion.
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Illustration 6
Inter company sales of $400 have occurred in Attila group at a mark up on cost of 25%. At
the year end 1/4 of these goods had been sold on. Attila has an 80% interest in Hun.
II. Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the subsidiary company is the seller.
IV. Do parts I - III if the goods had been sold at a margin of 30%.
Illustration 7
Avco Co. owns 60% of Strappo Co. and on the first day of this accounting period a Non
Current Asset with a carrying value of $100,000 and a useful economic life of 5 years was
sold between the two for $120,000.
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1. A Parent company has recorded an asset of $800 goods receivable with a subsidiary.
Is this treatment:
A Correct
B Incorrect
2. A Parent company has recorded an asset of $2,000 goods receivable with a subsidiary.
The subsidiary had recorded this as an initial liability payable of $2000 but has just
recorded and sent a cheque payment to the parent of $230 leaving the payable balance of
$1,770.
Is this treatment:
A Correct
B Incorrect
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3. Dafo has sold goods to their subsidiary Aldo during the year and at the year end has
recorded a receivable of $4,690 due from Aldo.
Aldo has sent a cheque which has not yet been received by Dafo which means that the
payable due to Dafo is recorded as $3,240 in the financial statements of Aldo.
Before adjustment for any of the above the group cash balance stood at $134,880.
What will the balance on cash be after making an adjustment for the above?
A. $139,570
B. $138,120
C. $136,330
D. $133,430
4. DW sold goods to PR. DW is PR’s 80% owned subsidiary on 1 February 2011. The
goods were sold to PR for $90,000. HW made a profit of 25% on the original cost of the
goods.
At the year end, 30 June 2011, 30% of the goods had been sold by PR, the balance were
still in PR’s inventory and PR had not paid for any of the goods.
Which ONE of the following states the correct adjustments required in the HW group’s
consolidated statement of financial position at 30 June 2011?
A. Reduce inventory and retained earnings by $12,600 and Reduce payables and
receivables by $12,600.
B. Reduce inventory by $12,600, the NCI by $2,520, retained earnings by $10,080 and
Reduce payables and receivables by $90,000.
C. Reduce inventory and retained earnings by $15,750 and Reduce payables and
receivables by $15,750.
D. Reduce inventory by $15,750, the NCI by $3,150, retained earnings by $12,600 and
Reduce payables and receivables by $90,000.
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5. Dando Co. owns 80% of Pobo Co. and on the first day of this accounting period Pobo
Co. sold a Non Current Asset to Dando Co. The asset had a carrying value of $250,000
and a useful economic life of 4 years was sold between the two for $300,000.
A. $7,500 CR
B. $7,500 DR
C. $10,000 DR
D. $2,500 CR
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Illustration 1
3 years ago Star Ltd. bought 25% of the share capital of Wars Ltd. for consideration of
$400,000. Since that time Wars Ltd.has had the following results:
1 $200,000 0
2 $160,000 $150,000
3 $30,000 0
Due to poor trading results and customer service issues, Star Ltd feel that in the current
year the investment in Wars Ltd. has been impaired by $20,000.
Show the treatment of War Ltd. in the statement of financial position of Star Group
and in the Income statement for each of the 3 years of the investment.
Illustration 2
Inter company sales of $1,300 have occurred in Attila group at a mark up on cost of 30%.
At the year end 1/2 of these goods had been sold on. Attila has an 30% interest in Hun.
II. Show the accounting treatment if the parent company is the seller.
III. Show the accounting treatment if the Associate company is the seller.
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1. An associate is an entity in which an investor has significant influence over the investee.
I. The investor owns 330,000 of the 1,500,000 equity voting shares of the investee
II. The investor has representation on the board of directors of the investee
III. The investor is able to insist that all of the sales of the investee are made to a
subsidiary of the investor
IV. The investor controls the votes of a majority of the board members
2. The Caddy group acquired 240,000 of August’s 800,000 equity shares for $6 per share
on 1 April 2014. August’s profit after tax for the year ended 30 September 2014 was
$400,000 and it paid an equity dividend on 20 September 2014 of $150,000.
On the assumption that August is an associate of Caddy, what would be the carrying
amount of the investment in August in the consolidated statement of financial position of
Caddy as at 30 September 2014?
A $1,455,000
B $1,500,000
C $1,515,000
D $1,395,000
3. HB sold goods to AT, its 30% owned associate, on 1 November 20X0. The goods were
sold to S2 for $33,000. HB made a profit of 25% on the original cost of the goods.
At the year end, 31 March 20X1, 50% of the goods had been sold by S2. The remaining
goods were included in inventory.
What is the amount of the adjustment required to retained earnings in the consolidated
statement of financial position at 31 March 20X1.
A. $660
B. $1,238
C. $3,300
D. $990
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4. The HC group acquired 30% of the equity share capital of AF on 1 April 2010 paying
$25,000.
AF made a profit for the year to 31 March 2011 (prior to dividend distribution) of $6,500
and paid a dividend of $3,500 to its equity shareholders.
What is the value of HC’s investment in AF for inclusion in HC’s statement of financial
position at 31 March 2011.
A $26,950
B $31,500
C $28,000
D $25,900
5. Which of the following statements relating to the method of consolidation are true?
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Illustration 1
Nero Co. purchased 80% of Jax Co. on 01/06/X2. The figures for Profit and Loss items for
the year ended 01/12/X2 were as follows:
Nero Jax
Show the figures to be shown in the Group Statement of Profit or Loss and calculate
the Group Profit or Loss for the year ended 01/12/12.
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Illustration 2
Simo Co. purchased 80% of Loco Co. on 01/03/X2. The figures for Profit and Loss items
for the year ended 01/12/X2 were as follows:
Simo Loco
During the period since acquisition Simo sold goods to Loco during the year at a margin of
40% and worth $1000. Half of these goods have been sold on by Loco by the year end.
Show the figures to be shown in the Group Statement of Profit or Loss and calculate
the Group Profit or Loss for the year ended 01/12/12.
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Illustration 3
Argentina owns an 80% share of Messi which it purchased one year ago.
$m $m $m $m $m
Argentina Messi
Other information
I. Messi sold goods to Argentina during the year at a margin of 40% and worth $100m.
Half of these goods have been sold on by Messi by the year end.
II. Calculate goodwill using the fair value of the NCI at the date of acquisition. At the year
end an impairment review has found that the goodwill has been impaired by 10%.
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1. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of
their statements of profit or loss for the year ended 30 September 2014 are:
Walter White
‘000 ‘000
What would be the cost of sales in Walter’s consolidated statement of profit or loss for the
year ended 30 September 2014?
A $37.00 million
B $28.50 million
C $35.50 million
D $47.50 million
2. On 1 July 2014, Walter acquired 70% of the equity share capital of White. Extracts of
their statements of profit or loss for the year ended 30 September 2014 are:
Walter White
‘000 ‘000
Sales from Walter to White throughout the year ended 30 September 2014 had
consistently been $500,000 per month. Walter made a mark-up on cost of 30% on these
sales. White had $260,000 of these goods in inventory as at 30 September 2014.
What would be the cost of sales in Walter’s consolidated statement of profit or loss for the
year ended 30 September 2014?
A $27.00 million
B $28.56 million
C $35.56 million
D $27.06 million
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3. PT acquired 60% of SB’s ordinary shares on 1 January 2011 for $2,346,000 when
SUB’s retained earnings were $341,000.
SUB has not issued any new shares since acquisition by PRT. SUB is PRT’s only
subsidiary. PRT calculated that proportionate goodwill in its subsidiary was impaired by
10% at 31 December 2013. The equity of SUB as at 31 December 2013:
$000
Ordinary share capital 630
Share premium 24
Retained earnings 576
What adjustment should be made to the NCI share of profit for the goodwill impairment?
A. $0
B. $995 DR
C. $155,000 CR
D. $155,000 DR
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2. Which three of the following are topics included in the International Accounting
Standards Board’s (IASB) The Conceptual Framework for Financial Reporting?
A. The objective of financial statements
B. Concepts of capital maintenance
C. Regulatory bodies governing financial statements
D. Measurement of the elements of financial statements
E. The standard setting process.
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4. List the following in the correct order for the International Financial Reporting Standard
setting process.
A. Consultation with advisory committee in order to set agenda and planning process
B. Issue exposure draft for public consultation
C. Issue Discussion paper for public consultation
D. Issue IFRS
A. A, B, C, D
B. A, C, B, D
C. A, D, B, C
D. B, D, A, C
5. Which of the following are NOT responsibilities of the IFRS Advisory Council?
A. Give advice to IASB on agenda decisions and priorities in its work
B. Annually review the strategy of the IASB
C. Inform the IASB of the views of the members of the council on proposed new
standards
D. Appoint the member of the IASB
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2. The IASB’s Framework for the preparation and presentation of financial statements lists
four qualitative characteristics of financial statements, one of which is reliability.
3. Which ONE of the following is NOT listed as an element of financial statements by the
IASB Framework?
A Asset
B Equity
C Profit
D Expenses
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4. The following are possible methods of measuring assets and liabilities other than
historical cost:
5. Which of the following criticisms does NOT apply to historical cost accounts during a
period of rising prices?
A. They contain mixed values; some items are at current values, some at out of date
values
B. They are difficult to verify as transactions could have happened many years ago
C. They understate assets and overstate profit
D. They overstate gearing in the statement of financial position
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Illustration 1
Statal Co. has just been audited and the auditor has found that management have
incorrectly calculated depreciation for the current year. The error is material to the financial
statements and the directors have refused to correct the error.
What action should the auditor take in issuing the audit opinion?
Illustration 2
Newrit Co. is currently being audited and the auditor has discovered that the payroll
function is outsourced to Payroller Co. The auditor has contacted Payroller Co. but they
are unable to provide them with the payroll records of Newrit Co. due to a recent computer
failure. Payroll is material to the financial statements.
What action should the auditor take in issuing the audit opinion?
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A. F, E, A, B, D & C
B. F, E, B, A, D & C
C. F, E, A, D, B & C
D. F, E, A, B, C & D
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5. The Auditor should only use an ‘Emphasis of Matter’ paragraph to highlight potential
important issues or uncertainties rather than for general communications to share holders.
Is this statement:
A. True
B. False
6. The auditors have discovered that the inventory has been materially understated in the
financial statements.
What type of audit report should be issued in this situation?
A. A modified report, based on insufficient appropriate evidence, with a qualified
opinion
B. A modified report, based on material misstatements, with a qualified opinion
C. A modified report, based on material misstatements, with an adverse opinion
D. An unmodified report, with an unmodified opinion
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1. Accountants must ensure that they act responsibly when carrying out the services they
provide to the public. Which of the following may influence an accountant not to act in the
public interest and must therefore be guarded against?
2. Archie is an accountant who works in a small local manufacturing business. During the
recent recession the company has had cash flow problems and the CEO has asked Archie
to overstate profit by bringing in sales from next year. He assures Archie that it is a ‘one-off
to ensure our survival and the jobs of him and his colleagues’.
A. Objectivity
B. Confidentiality
C. Integrity
D. Advocacy
3. You have discovered an ethical threat. Which of the following should you do first?
A. Discuss with the director of the company
B. Discuss with your line manager
C. Discuss with the auditor
D. Discuss with your professional body
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3. Which of the following is not required under the UK Corporate Governance Code?
4. Evan has been asked to join the board of AST Ltd. as a Non-Executive director. Which
of the following would mean that he could not accept the role as he is not sufficiently
independent.
A. He was employed as a senior manager in AST Ltd from which he retired 8 years ago.
B. He is a director in HRT Ltd. who supply a major component to AST Ltd.
C. He went to school with the Chairman although they did not keep in contact.
D. He owns a very small number of AST Ltd’s shares.
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Assets
Non-Current Assets
Investments X
Intangibles X
Current Assets
Inventories X
Trade Receivables X
Total Assets X
Ordinary Shares X
Retained Earnings X
Total Equity X
Non-Current Liabilities X
Deferred Tax X
Current Liabilities X
Trade Payables X
$ $ $ $ $
Balance B/F X X X X X
Change in
Accounting
(X) (X)
Policy/prior year
error
Restated
X X X X X
Balance
Shares Issued X X X
Revaluation
X X
gain/loss
Transfer to
Retained (X) X -
Earnings
Balance C/F X X X X X
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Revenue X
Gross Profit X
Investment Income X
Gain/Loss on Revaluation X
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Illustration 1
Mahesh Bhupathi started a painting business on 1 April 2010. In the year to 31 March
2011, he incurred costs which are summarised below.
Item $
Office 200,000
What amounts should be capitalised as Land and buildings, and Paint Brushes?
Illustration 2
Charlotte has been running a creche since 1 July 2010. She has purchased the following
items relating to this business:
1. A new microwave for the creche kitchen at a cost of $200 (purchased 5 May 2011)
2. New tables for the creche at a cost of $600 (purchased 1 July 2011)
She depreciates the oven at 8% straight line and the tables at 20% reducing balance. a full
year’s depreciation is charged in the year of purchase and none in the year of disposal.
What is the total depreciation charge for the year ended 30 September 2013?
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Illustration 3
Cost $20,000
What is the total depreciation charge for the years ended 30 November 2010 and
2011?
Illustration 4
Grigor Dimitrov purchased a new tennis racquet for $1,000 on 1 January 2010. At that
time, he believed that its useful economic life would be 10 years, with no residual value.
On 1 January 2012, Grigor changes his estimations. He believes that the racquet will be
used for a further 10 years after which time it will have a second-hand value of $100.
What is the depreciation charge for the year ended 31 December 2012?
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Illustration 5
How much is charged to Mr Gall’s income statement for the year ended 31
December 2012?
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1. Identify from the list below, revenue expenditure and capital expenditure.
A. Desktop Computer
B. Printer Paper
C. Ink
D. Laptop
E. Computer Desk
F. Server with Monitors
3. A company purchases equipment for £30,000 on July 1, 2014. It estimates that the
equipment will have a residual value of £2,000 and its useful life will be 7 years. Assuming
that the company's accounting year ends on December 31 of each year, what will be the
Depreciation Expense for the years 2014 and 2015 assuming straight-line depreciation?
2014 ______
2015 ______
4. On January 1, 2010 an asset was acquired for £30,000. Its useful life was expected to
be 10 years and the residual value is expected to be NIL. After 4 years, the company
reviewed the asset and found that it would be useful for only 3 more years. The company
uses the straight-line method of depreciation. What will the Depreciation Expense in each
of the years 2012 and 2014?
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5. Calculate the profit or loss on disposal and indicate the journal entries required.
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Illustration 1
John Boy has had a non current asset for several years which he bought for $300,000.
The depreciation on the asset to date has been $50,000. He decides to revalue the asset
and finds that it is now worth $350,000.
Illustration 2
Jamie owns a shoe factory. The premises were bought on 1 May 20X3 for $600,000 and
depreciated at 3% per annum straight line.
Jamie now wishes to revalue the factory premises to $900,000 on 1 May 20X8 to reflect
market value.
Illustration 3
Antro Co. buys an asset on 01 Jan 20X4 for $500,000 with a useful economic life of 20
years. On 01 Jan 20X6 the asset is revalued to $600,000.
Show the accounting treatment for the two revaluations and the depreciation charge
for the year ended 31 Dec 20X8.
Illustration 4
Charlie owns a shop in Smallville. He bought it 30 years ago for $150,000, depreciating it
over 50 years. At the start of 20X8 he decides to revalue the unit to $900,000. The shop
has a remaining useful life of 20 years.
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What are the journal entries required in 2010 after the first revaluation?
2. What are the journal entries required in 2014 after the second revaluation?
2015 ______
4. In the notes to the financial statements, what is missing from the disclosure items below
in terms of revaluation of a non current asset.
• Date
• Assumption
• Qualified Revaluer
• Revaluation Gain/Loss
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Illustration 1
Which of the following are Investment Property?
Illustration 2
A company has purchased a building for investment purposes on 1st Jan 20X0. The
building cost a total of $1.5m with the land element being estimated at $500,000.
The building has a useful life of 30 years. At the 31st December 20X0 the fair value of the
building (including the land) was $2m.
Show the treatment of the property for the two methods possible under IAS 40.
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Aston Co. owns a property which cost $400,000 7 years ago at which time it had a useful
economic life of 20 years. The property is rented out to Villa Co. under an operating lease
and has been treated using the cost model. Aston Co. has now decided to revalue the
property to it’s current fair value of $500,000.
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Illustration 1
Which of the following should be classified as development?
1. Lion Ltd has spent $200,000 investigating whether a particular substance, drefite, found
in the Arctic Circle is resistant to heat.
2. Hoey Ltd has incurred $250,000 expenses in the course of making new material for ski-
equipment which will be more durable.
3. Ryan Ltd has found that a chemical compound, mallerite, is harmful to the human body.
4. Lion Ltd has incurred a further $300,000 using drefite in creating prototypes of a new
heat-resistant body-suit for humans.
Illustration 2
Coddy Ltd is developing a new product, the fold-up bicycle. Forecasts are as follows:
Expense Costs
$ $ $ $
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Illustration 3
A company has 3 projects in development:
Project A is in development and testing of the product has proved successful. Production
has begun and some sales have been made to date. The costs have been measured
accurately and the project looks likely to be profitable. All costs incurred so far meet the
criteria to be capitalised under IAS 38.
Project B is also in development and testing of the product has proved successful. The
costs have been measured accurately and the company expects to begin production and
sales next year. All costs incurred so far meet the criteria to be capitalised under IAS 38.
Project C was begun in the current period and to date there has been a feasibility study
carried out which was inconclusive.
Other Information:
A B C
Show how the above will be treated in the current period accounts discussing each project
individually.
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A. $120,000 spent on developing a prototype and testing a new type of propulsion system
for trains. The project needs further work on it as the propulsion system is currently not
viable.
B. A payment of $50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques.
C. $35,000 spent on consumer testing a new type of electric bicycle. The project is near
completion and the product will probably be launched in the next twelve months. As this
project is the first of its kind for M it is expected to make a loss.
D. $65,000 spent on developing a special type of new packaging for a new energy efficient
light bulb. The packaging is expected to be used by M for many years and is expected
to reduce M’s distribution costs by $35,000 a year.
2. Which ONE of the following events would result in an asset being recognised in KJH’s
statement of financial position at 31 January 2012?
A. KJH spent $50,000 on an advertising campaign in January 2012. KJH expects the
advertising to generate additional sales of $100,000 over the period February to April
2012.
B. KJH is taking legal action against a contractor for faulty work. Advice from its legal team
is that it is likely that KJH will receive $250,000 in settlement of its claim within the next
12 months.
C. KJH purchased the copyright and film rights to the next book to be written by a famous
author for $75,000 on 1 March 2011.
D. KJH has developed a new brand name internally. The directors value the brand name at
$150,000.
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What amount will Dempsey charge to profit or loss for development costs, including any
amortisation, for the year ended 30 September 2014?
A $12,000
B $98,667
C $48,000
D $88,000
A. GHK spent $12,000 on a consultation to determine demand for a new type of product.
B. GHK purchased another entity, BN on 1 October 2010. Goodwill arising on the
acquisition was $15,000.
C. GHK purchased a brand name from a competitor on 1 November 2010, for $65,000.
D. GHK spent $21,000 during the year on the development of a new product. The product
is being launched on the market on 1 December 2011 and is expected to be profitable.
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Illustration 1
A company purchases an item of plant on which it receives a government grant of 30% of
the purchase price. The plant cost $2m and has no residual value.
The plant is to be depreciated on a straight line basis over it’s 10 year life.
Show the possible accounting treatments for the government grant in the first year.
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1. Which of the following statements about IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance are true?
I. A government grant related to the purchase of an asset must be deducted from the
carrying amount of the asset in the statement of financial position
II. A government grant related to the purchase of an asset should be recognised in profit
or loss over the life of the asset
III. Free marketing advice provided by a government department is excluded from the
definition of government grants
IV. Any required repayment of a government grant received in an earlier reporting period
is treated as prior period adjustment
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Illustration 1
A company is building a qualifying asset worth $2.5m and has issued a bond of the same
value to do so with an effective interest rate of 6%.
The asset will take 9 months to build and for the first 3 months the company invests the
proceeds of the bond and earns interest at 3%.
Illustration 2
A company has a £1m 6% loan and a £2m 8% loan. It builds a building costing £600,000
and it takes 8 months.
Illustration 3
Company buys land on 1/12, a planning application is prepared during December and
January. Permission is obtained at the end of January. Payment for the land is made on
1/2. On this date a loan is taken out to pay for the land and building construction
Adverse weather conditions meant a delay in the commencement of work until 15/3.
When should interest be capitalised from?
Illustration 4
Davos is building an office block and issued a $10 million unsecured loan with a coupon
(nominal) interest rate of 6% on 1 April 20X9. The loan is redeemable at a premium which
means the loan has an effective finance cost of 7·5% per annum.
The loan was specifically issued to finance the building of the new block which meets the
definition of a qualifying asset in IAS 23. Construction of the block commenced on 1 May
20X9 and it was completed and ready for use on 28 February 2010, but did not open for
trading until 1 April 20X0.
During the year trading at Davos’ was below expectations so they suspended the
construction of the new block for a two-month period during July and August 20X9. The
proceeds of the loan were temporarily invested for the month of May 20X9 and earned
interest of $40,000.
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2. You have a qualifying asset, a chemical plant. 80% of your company’s borrowings are in
relation to this qualifying asset. The remainder of the borrowings are not used for
qualifying assets. Total borrowings are $30,000 and the effective rate is 6%. The plant was
finished 2 months before the year end.
A. 1,500
B. 400
C. 2,000
D. 3,600
True
False
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Illustration 1
Norman, a public limited company, has three business segments which are currently
reported in its financial statements. Norman is an international hotel group which reports to
management on the basis of region. It does not currently report segmental information
under IFRS8 ‘Operating Segments’. The results of the regional segments for the year
ended 31 May 2008 are as follows:
$m $m $m $m $m
There were no significant inter company balances in the segment assets and liabilities.
The hotels are located in capital cities in the various regions, and the company sets
individual performance indicators for each hotel based on its city location.
Required:
Discuss how the principles in IFRS 8 ‘Operating Segments’ for the determination of
a company’s reportable operating segments would be applied to Norman plc using
the information given above.
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Illustration 2
JK is an entity that operates in the wholesale and retail clothing market sectors across
several countries. It prepares its financial statements in accordance with IFRSs. The
directors are considering listing JK on a local stock exchange within the next 12 months.
One of the directors has raised concerns about the costs associated with being a listed
entity, in particular the additional expense of producing operating segment information.
(a) Explain how the requirements of IFRS 8 Operating segments assist entities in
minimising the costs of producing the operating segment disclosures required
by the standard as well as the benefits that could be gained by investors from
reviewing the operating segment disclosures of JK when making decisions on
investment.
(b) Discuss the potential limitations faced by investors of using operating segment
information when making investment decisions.
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2. The following information pertains to Willow Company for the year ended 31 December
20X4.
All of Willows segments are engaged solely in manufacturing operations. Willow has a
reportable segment if that segment’s revenue exceeds:
A. 264,000
B. 260,000
C. 204,000
D. 200,000
3. Reported segments should report _____% or more of the entity’s total external revenue.
A. 25%
B. 50%
C. 75%
D. 15%
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Illustration 1
Archie Co. committed itself at the beginning of the financial year to selling a property that
is being under-utilised following the economic downturn. As a result of the economic
downturn, the property was not sold by the end of the year. The asset was actively
marketed but there were no reasonable offers to purchase the asset. Archie is hoping that
the economic downturn will change in the future and therefore has not reduced the price of
the asset.
Can Archie Co. classify the property as available for sale under IFRS 5?
Illustration 2
A company has a machine that cost $300,000 to buy two years ago. At the time of
purchase the machine had a useful economic life of 30 years and they apply the cost
model under IAS 16 (Cost less depreciation).
The company has decided to sell the machine and it’s fair value at this time is $220,000
with additional costs to sell being estimated at $5,000.
Although the machine has not been sold at the year end as the decision was taken that
day the company is confident that it will be sold quickly and is committed to selling it
having begun to market the machine to potential purchasers.
How should the machine be treated at the year end in the financial statements and
at what value will it be included?
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Illustration 3
A company has two divisions each of which form a major line of business, Division A and
Division B.
Mid way through the current period Division A was shut down with losses of $50,000 on
the sale of the fixed assets of the business and redundancy costs of $100,000.
Div A Div B
$‘000 $‘000
Administration 100 50
Finance costs for the business were $40,000 in the period and the tax charge was
$32,000.
Prepare a note to the accounts showing the analysis of the discontinued operation
and draft the income statement for the company for the period.
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1. BN has an asset that was classified as held for sale at 31 March 2012. The asset had a
carrying value of $900 and a fair value of $800. The cost of disposal was estimated to be
$50. The useful economic life of the asset was 10 years.
According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which
ONE of the following values should be used for the asset in BN’s statement of financial
position as at 31 March 2012?
A. $750
A. $750
B. $810
C. $720
2. PQ has ceased operations overseas in the current accounting period. This resulted in
the closure of a number of small retail outlets.
Which one of the following costs would be excluded from the loss on discontinued
operations?
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Illustration 1
The carrying value of an item of plant in the financial statements is $400,000. The
recoverable amount of the plant has been determined as $275,000.
Illustration 2
A company has an asset for which the following information is relevant:
$‘000
Cost to sell 25
Illustration 3
Marko owned a piece of property, plant and equipment (PPE) which cost $12 million and
was purchased on 1 May 20X8. It is being depreciated over 10 years on the straight-line
basis with zero residual value. On 30 April 20X9, it was revalued to $13 million and on 30
April 20X0, the PPE was revalued to $8 million.
The whole of the revaluation loss had been posted to the statement of comprehensive
income and depreciation has been charged for the year.
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Illustration 4
A cash generating unit has the assets outlined below. It’s recoverable amount has been
assessed as $1,000. Show the treatment for any impairment.
Goodwill 100
PPE 800
Intangible 400
1300
Illustration 5
A cash generating unit has the assets outlined below. It’s recoverable amount has been
assessed as $1,650.
The PPE has been damaged and now has a fair value of 700. The recoverable amount of
the receivables has been assessed at their current carrying amount.
Goodwill 100
PPE 800
Intangibles 700
Receivables 200
Inventory 400
2200
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2. Riley acquired a non-current asset on 1 October 2009 at a cost of $100,000 which had
a useful economic life of ten years and a nil residual value. The asset had been correctly
depreciated up to 30 September 2014. At that date the asset was damaged and an
impairment review was performed. On 30 September 2014, the fair value of the asset less
costs to sell was $30,000 and the expected future cash flows were $8,500 per annum for
the next five years. The current cost of capital is 10% and a five year annuity of $1 per
annum at 10% would have a present value of $3·79
What amount would be charged to profit or loss for the impairment of this asset for the
year ended 30 September 2014?
A $17,785
B $20,000
C $30,000
D $32,215
A $154,545
B $170,000
C $160,000
D $133,333
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Illustration 1
i) Goods purchased for resale at a cost of $40,000. The recent downturn in the economy
has meant that these goods will now sell for $42,000 with costs to sell of $2,500.
ii)Materials purchased at a cost of $30,000 per tonne which will be sold at a profit. The
manufacturer of the materials has just announced that from now on they will sell these
materials to you at a lower price of $28,000 per tonne.
iii)Plant constructed for a specific customer at a cost of $50,000 and an agreed price to the
customer of $60,000. New health and safety requirements mean that the plant will need
to be modified at a cost to ABC Co. of $4,000 before it can be delivered to the customer.
At what value should each of the above be included in the inventory of ABC Co.
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At what value will the closing inventory of Razor be reported in its statement of financial
position as at 30 September 2014?
A $1 million
B $790,000
C $180,000
D $970,000
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Illustration 1
Sebastian Philpott commenced trade on 1 January 2011 and estimates that the tax
payable for the year ended 31 December 2011 is $200,000.
In August 2012, the accountant of Sebastian Philpott receives and pays tax of $210,000
for the year ended 31 December 2011. At 31 December 2012 he estimates that the
company owes $220,000 for corporation tax in relation to the Y/E 31 December 2012.
Calculate the tax charge and income tax payable accounts for the years ended 31
December 2011 and 2012, and detail the amounts shown in the statement of
financial position and income statement in both years.
Illustration 2
Kettle Ltd estimated last year’s tax charge to be $250,000. However, their tax advisor
settled with the tax authorities at $220,000.
This year, Kettle Ltd estimate their tax bill to be $270,000, but they are confused as to how
this should be reflected in the financial statements.
Calculate tax liability and tax charge to be shown in the statement of financial
position and income statement for the current year.
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1. Which of the following statement about the income tax expense reported for accounting
purposes is NOT correct.
2. On 31 December 20X4, PS had a debit balance b/f on its corporate income tax account
of 42,000, representing an under provision of the tax charge for the year ended 31
December 20X3.
PS’s taxable profit for the year ended 31 December 20X4 was 325,000 and the applicable
income tax rate for the year to 31 December 20X4 was 19%.
Calculate the income tax expense that PS will charge in its statement of profit or loss for
the year ended 31 December 20X4. (To the nearest whole number)
3. On 31 December 20X4, SP had a credit balance b/f on its corporate income tax account
of 35,000, representing an over provision of the tax charge for the year ended 31
December 20X3.
SP’s taxable profit for the year ended 31 December 20X4 was 832,000 and the applicable
income tax rate for the year to 31 December 20X4 was 24%.
Calculate the income tax expense that SP will charge in its statement of profit or loss for
the year ended 31 December 20X4. (To the nearest whole number)
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Illustration 1
I. A change in the IFRS relating to leases means that an entity that used to recognise a
lease on an item of plant as an operating lease must now recognise it as a finance
lease.
II. Depreciation has previously been charged by the entity at 25% straight line but has
decided to change this to 30% reducing balance.
III. The entity had previously charged certain overheads within administration expenses
but now has decided to show them within cost of sales.
IV. The method used by the entity to measure the value of it’s inventory has been
changed.
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Illustration 2
A company discovers that items of inventory with a value of £1m were included in the
Statement of Financial Position as at 31 December 20X0 even though they were in fact
sold prior to the year end.
The figures reported in the year to December 20X0 and the figures for the current year
were:
20X1 20X0
$‘000 $‘000
Show the retained earnings for each year and the revised 20X1 Income Statement with
comparatives (ignore any tax effects).
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Which of the following would be a change in accounting policy in accordance with IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
Which of the following is a change of accounting policy under IAS 8 Accounting Policies,
Changes in Accounting Estimates and Errors?
According to IAS 8 Accounting policies, changes in accounting estimates and errors, which
ONE of the following is a change in accounting policy requiring a retrospective adjustment
in financial statements for the year ended 31 December 2010?
A. The depreciation of the production facility has been reclassified from administration
expenses to cost of sales in the current and future years.
B. The depreciation method of vehicles was changed from straight line depreciation to
reducing balance.
C. The provision for warranty claims was changed from 10% of sales revenue to 5%.
D. Based on information that became available in the current period a provision was made
for an injury compensation claim relating to an incident in a previous year.
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Illustration 1
A company maintains a defined benefit pension scheme for it’s employees. The following
information is relevant:
The pension assets brought forward in 20X0 $1,000 with a closing balance of $2,000.
Illustration 2
A company maintains a defined benefit pension scheme for it’s employees. The following
information is relevant:
The liabilities of the scheme were $1,400 at the start of the period and $2,600 at the end.
B/F C/F
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Illustration 4
A company maintains a defined benefit pension scheme for it’s employees. The following
information is relevant:
The pension assets brought forward in 20X0 $1,800 with a closing balance of $2,700.
The liabilities of the scheme were $1,600 at the start of the period and $2,100 at the end.
The terms of the scheme have changed meaning that past service costs have arisen of
$35 and the current service costs for the period are $70.
Required:
Show the treatment for the pension scheme in the financial statements of the
company.
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A. The employer has an ongoing obligation to make sufficient contributions to the plan
to fund the pensions
B. The annual cost to the employer is reasonably predictable
C. The employer’s contribution is usually a fixed percentage of the employee’s salary.
Calculate the pension expense to be charged to the statement of profit or loss for 20X4.
A. $100,000
B. $235,000
C. $4.7m
D. $200,000
A. $100,000
B. $235,000
C. $115,000
D. $200,000
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Illustration 1
Zian is located in a foreign country and imports its raw materials at a price which is
normally denominated in dollars. The product is sold locally at selling prices denominated
in dinars, and determined by local competition. All selling and operating expenses are
incurred locally and paid in dinars. Distribution of profits is determined by the parent
company, Ribby. Zian has financed part of its operations through a $4 million loan from
Hall which was raised on 1 June 2007. This is included in the financial assets of Hall and
the non-current liabilities of Zian. Zian’s management have a considerable degree of
authority and autonomy in carrying out the operations of Zian and other than the loan from
Hall, are not dependent upon group companies for finance.
Required
Discuss and apply the principles set out in IAS 21 ‘The effects of changes in foreign
exchange rates’ in order to determine the functional currency of Zian.
(8 marks)
Illustration 2
Bulldog Ltd has a year end of 31 January.
On 13th October Bulldog Ltd buys goods from Eagle Inc. a US supplier for $250,000.
Exchange rates
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Illustration 3
Jeff Ltd. purchases an item of plant from a foreign supplier for cash of €100,000. Jeff is a
US company and the exchange rate at the time was $ = €1.50.
Illustration 4
Jeff Ltd. purchases an item of plant on 1st June from a foreign supplier on one month’s
credit for €100,000. Jeff is a US company.
Exchange rates
How will this transaction be dealt with in the accounts for the year to 21st June?
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2. How does the entity account for the sale at 12 March 20X4?
3. What is the gain or loss on exchange when the payment is made in April 20X4?
A. Gain = 64,102
B. Loss = 64,102
C. Gain = 25,000
D. Loss = 25,000
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Illustration 1
Which of the following are adjusting events for Fishcakes Ltd? The year end is 30 June
20X1 and the accounts are approved on 20 August 20X1.
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(i) A change in tax rate announced after the reporting date, but affecting the current tax
liability
(ii) The discovery of a fraud which had occurred during the year
(iii) The determination of the sale proceeds of an item of plant sold before the year end
(iv) The destruction of a factory by fire
2. IAS 10 Events after the reporting period distinguishes between adjusting and non-
adjusting events.
A. A dispute with workers caused all production to cease six weeks after the year end.
B. A month after the year end XS’s directors decided to cease production of one of its
three product lines and to close the production facility.
C. One month after the year end a court determined a case against XS and awarded
damages of $50,000 to one of XS’s customers. XS had expected to lose the case and
had set up a provision of $30,000 at the year end.
D. Three weeks after the year end a fire destroyed XS’s main warehouse facility and most
of its inventory.
A. WDC was notified on 5 November 2011 that one of its customers was insolvent and
was unlikely to repay any of its debts. The balance outstanding at 30 September 2011
was $42,000.
B. On 30 September WDC had an outstanding court action against it. WDC had made a
provision in its financial statements for the year ended 30 September 2011 for damages
awarded against it of $22,000. On 29 October 2011 the court awarded damages of
$18,000.
C. On 5 October 2011 a serious fire occurred in WDC’s main production centre and
severely damaged the production facility.
D. The year end inventory balance included $50,000 of goods from a discontinued product
line. On 1 November 2011 these goods were sold for a net total of $20,000.
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A. Trade payables
B. Factoring
C. Overdraft
D. Share Issue
3. What is factoring?
A. Negotiable instruments
B. Short dated government bonds
C. Documentary credits
D. Bills of exchange
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Illustration 1
A US Treasury Bill with a face value of $10,000 is issued at a 6% discount yield for 60
days.
Calculate the discount value on the Bill assuming 360* days in the year.
Illustration 2
A US Treasury Bill with a face value of $10,000 is issued at a 4% discount yield for 45
days.
Calculate the issue price of the Bill assuming 360* days in the year.
Illustration 3
Illustration 4
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1. A Treasury Bill with a face value of 20,000 is issued at a 9% discount yield for 90 days.
Calculate the discount value on the Bill assuming 360 days in the year.
2. A Treasury Bill with a face value of 20,000 is issued at a 9% discount yield for 90 days.
A. 5.1%
B. 6.84%
C. 4.5%
D. 4.9%
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Illustration 1
Balance Sheet
$‘000
ASSETS
Inventory 300
Receivables 200
Cash 300
1800
LIABILITIES
Reserves 200
Payables 100
Overdraft -
1800
Income Statement
$‘000
Revenue 1000
COS 800
Other Information:
Required:
Part III
Show the journal entries and calculate the Revised Balance sheet if the operating cycle
changes to:
Item Days
Inventory Period 90
Collection Period 30
Less:
Payables Period 60
60
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1. Which of the following are components of working capital within the financial
statements:
A. 1 and 2
B. 2 and 3
C. 3 and 4
D. 2 and 4
A 103 days
B 131 days
C 235 days
D 31 days
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4. If inventory days go up from 100 to 150 the company will need to invest more cash in
the business.
Is this statement:
A. TRUE
B. FALSE
5. Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A conservative approach to working capital investment will increase profitability
3 Working capital management is a key factor in a company’s long-term success
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
6. Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A aggressive approach to working capital investment will increase profitability
3 Working capital management is not a key factor in a company’s long-term success
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
7. Which of the following statements concerning working capital management are correct?
1 The twin objectives of working capital management are profitability and liquidity
2 A moderate approach to working capital investment will increase profitability
3 An aggressive approach to working capital investment uses more long term finance than
short term.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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8. Which of the following statements concerning working capital management are correct?
1 A conservative approach to working capital investment employs uses long term finance
to finance some fluctuating current assets.
2 An aggressive approach to working capital investment will increase profitability
3 Working capital management has no effect on profitability of the company.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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Illustration 1
Credit sales in the year are currently 1200 and the company offers 3 month credit terms.
The overdraft rate for the company is 10%.
New Policy
Illustration 2
Receivables are currently $4,600,000. Sales are $37,400,000
A factor has offered to take over the administration of trade receivables on a non-recourse
basis for an annual fee of 3% of credit sales.
The factor will maintain a trade receivables collection period of 30 days and Gorwa Co will
save $100,000 per year in administration costs and $350,000 per year in bad debts.
A condition of the factoring agreement is that the factor would advance 80% of the face
value of receivables at an annual interest rate of 7%. The current overdraft rate is 5%
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A 1 and 3 only
B 1 and 2 only
C 2 and 3 only
D 1, 2 and 3
2. Which of the following are benefits of a company offering a discount to customers for
early payment of invoices?
A. 2 and 3 only
B. 1 and 3 only
C. 1 and 2 only
D. 1, 2 and 3
3. The management of XYZ Co has annual credit sales of $20 million and accounts
receivable of $4 million. Working capital is financed by an overdraft at 12% interest per
year. Assume 365 days in a year.
What is the annual finance cost saving if the management reduces the collection period to
60 days?
A. $85,479
B $394,521
C $78,904
D $68,384
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1. It can be expensive.
2. It creates a bad impression with customers because the debt is collected by the factor.
3. It can increase the liquidity of the company.
4. It can lose the goodwill of customers.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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Illustration 1
Demand of 1200 units per month.
Holding cost per year of 10% of the purchase price of the goods.
Illustration 2
Company orders when the level of stock reaches 50,000
Illustration 3
The current policy is to order 100,000 units when the inventory level falls to 35,000 units.
Forecast demand to meet production requirements during the next year is 625,000 units.
The cost of placing and processing an order is €250, while the cost of holding a unit in
stores is €0·50 per unit per year. Both costs are expected to be constant during the next
year. Orders are received two weeks after being placed with the supplier. You should
assume a 50-week year and that demand is constant throughout the year.
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Illustration 4
Demand is 1000 units per month.
Required
Calculate the minimum total cost with a discount of 1% given on orders of 1500 and
over
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1. Which of the following types of cost we are seeking to minimise by using the Economic
Order Quantity?
2. If a company uses the Economic Order Quantity as the level at which to order, how will
they calculate total ordering costs for the year?
3. ABC Co. sells widgets and expects annual demand of 3.4m units. The cost of making
an order is $49.71 and the cost of holding one unit for one year is $0.50.
A. $5,687.34
B. $6,413.81
C. $6,500.54
D. $6,430.32
4. ABC Co. sells widgets and expects annual demand of 1.2m units. The cost of making
an order is $25.21 and the cost of holding one unit for one year is $0.50.
A. $2,850
B. $3,750
C. $2,450
D. $2,750
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5. Layla Co. sells 200m wigs in a year with each order taking 15 days to be delivered once
made. They make an order every time their stock levels reach 10m wigs.
A. 1,780,822
B. 6,666,666
C. 9,333,333
D. 2,345,632
6. Which of the following are drawbacks of a company using the Economic Order Quantity
method of stock management?
A 1, 2 and 4 only
B 1 and 3 only
C All of the above
D 1, 2 and 3
7. Stavros Co’s current inventory policy is to order 60,000 units when the inventory level
falls to 55,000 units. Forecast demand to meet production requirements during the next
year is 800,000 units. The cost of placing and processing an order is $90, while the cost
of holding a unit in stores is $1 per unit per year. Both costs are expected to be constant
during the next year. Orders are received three weeks after being placed with the
supplier. You should assume a 50-week year and that demand is constant throughout
the year.
A. $12,000
B. $6,000
C. $7,000
D. $19,000
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Illustration 1
A business expects to move 500,000 from it’s interest bearing account into cash over the
course of one year.
How much should the business transfer into cash each time it makes a transfer?
Illustration 2
Using the information in illustration 1 calculate the total cost to the business each year of
their cash management policy.
Illustration 3
Subsonic Speaker Systems (SSS) has annual transactions of $9 million.
The fixed cost of converting securities into cash is $264.50 per conversion.
Illustration 4
If a company must maintain a minimum cash balance of £8,000, and the variance of its
daily cash flows is £4m (ie std deviation £2,000). The cost of buying/ selling securities is
£50 & the daily interest rate is 0.025 %.
Calculate the spread, the upper limit & the return point.
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1. Which of the following are the reasons for a company to hold cash?
1. Speculation
2. Persuasion
3. Transaction
4. Reaction
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
2. Revaile Co. has annual transactions of $30 million. The fixed cost of converting
securities into cash is $500 per conversion. The annual opportunity cost of funds is 6%.
What is the optimal deposit size?
A. $21,213
B. $42,426
C. $707,107
D. $42.43
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
D 1, 2 and 3
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Illustration 1
Jenkins Co. is preparing a cash flow forecast for the next four months. They have an
overdraft facility of $10,000 available and the following information is relevant:
1. Sales will be $40,000 in month one and are expected to rise by 5% per month.
2. Wages will be $15,000 in month one and are expected to rise by $500 per month.
3. Other costs will be $10,000 in month one and are expected to rise by $1000 per month.
4. Capital investment of $80,000 for new Plant is scheduled to occur in month 2.
5. An interim payment of 50% of the dividends declared for the year $240,000 will be paid
in month 3.
6. The opening balance on cash is $132,000.
Prepare the cash flow forecast and advise Jenkins on the implications as well as
possible action to take in response.
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£ ‘000
July 850
August 860
September 870
October 880
November 890
December 900
Currently 15% of customers pay in cash, of the credit customers (excl irrecoverable debts),
55% pay in one month, 35% pay in two months and 10% in three months. Irrecoverable
debts are 3%. This payment pattern is expected to continue.
Calculate the forecast sales receipts for October to the nearest 1,000
2. The following items have been extracted from an entity's budget for the next month:
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Illustration 1
An entity has the following results in their financial statements:
2011 2010
1800 1900
LIABILITIES
1800 1900
$‘000 $‘000
Other Costs 70 90
PBIT 100 10
Interest Cost 10 7
PBT 90 3
Tax 30 2
PAT 60 1
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Other Information:
Perform the reconciliation of Profit Before Tax to Cash Generated From Operations
for 2011.
Illustration 2
An entity has the following information in their financial statements:
2011 2010
Other information:
I. The entity disposed of a piece of plant during the year with a carrying value of $300
for a profit of $50.
II. Intangible assets are made up of qualifying development expenditure on a product
currently being sold, with amortisation in 2011 of $100.
What cash flows will appear in the statement of cash flows for the entity in the year
2011?
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Illustration 3
37,100 31,100
Current Assets
Bank 1,400
13,700 12,300
Current Liabilities
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$‘000 $‘000
During the year an investment that had a carrying amount of $3 million was sold for $3.4
million. No investments were purchased during the year.
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$‘000 $‘000
1100 700
Note (iii)
On 1 April 2011 there was a bonus issue of shares that was funded from the share
premium and some of the revaluation reserve. This was followed on 30 April 2011 by an
issue of shares for cash at par.
Note (iv)
The movement in the product warranty provision has been included in cost of sales.
Required:
Prepare a statement of cash flows for Mocha for the year ended 30 September 2011,
in accordance with IAS 7 Statement of cash flows, using the indirect method.
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1. Which of the following do not appear with cash flows from investing activities within a
statement of cash flows?
A. Interest Received
B. Cash purchase of a new car
C. Profit from disposal of an old car
D. Dividends received
E. Repayment of a loan taken out to purchase some machinery
2. An item of plant costing 1.8m was purchases on 01/01/X4 and is being depreciated over
its UEL of 10 years. Residual value is NIL. On 31/12/X5 the asset was revalued to 1.92m,
there was no change to its UEL. On 31/12/X6 the asset was sold for 2.1m.
Which two amounts will appear on the statement of profit and loss and the statement of
cash flows regarding the disposal of the plant.
A. 2.1m inflow
B. 2.1m outflow
C. 0.42M Gain on Disposal
D. 0.18M Gain on Disposal
E. 0.372M Gain on Disposal
3. The following is an extract of the Statement of Financial Position for Bubbly Company
for the years 20X4 and 20X3
Current Liabilities
Cash and Cash Equivalents - 1,112,000
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