Professional Documents
Culture Documents
Mock Exam - FR
Mock Exam - FR
Mock Exam - FR
Time: 3 Hours
2) Alco Ltd enters into a finance lease with a term of ten years. The details are as
follows:
- 10 annual payments of $130,000
- Residual value of $250,000 guaranteed by the lessee
- Maintenance costs to be paid by the lessee as they are incurred (estimated to be
$5,000 per annum)
The asset has a fair value of $1,850,000 at the inception of the lease.
A) $ 1,300,000
B) $ 1,600,000
C) $1,350,000
D) $1,850,000
3) Alex Ltd entered into a $20 million fixed price contract on 3 February 20X7. The
relevant cost information is displayed in the table below.
The company uses the percentage of completion method and attributes profit on the
basis of cost. It believes that the contract will be completed according to plan.
Year ending 31.12X7 31.12X8 31.12X9
$ million $ million $ million
Total contract costs in year 3 2 1.5
Estimated costs to completion 3 3 2.5
What figure for attributable profit should be recognised in the financial statements
for the year ended 31 December 20X9? (Round all calculations to the nearest $0.1
million).
A) ($0.2 million)
B) 0.42 million
C) $0.6 million
D) $2 million
4) On 1 January 20X2 an entity grants share options to each of its employees. The only
condition attached to the grant is that the employees should continue to work for the entity
until 31 December 20X6.The entity estimates that not all the employees will actually
complete the required period of service and that therefore only 54,000 options will vest.
The market price of each option was $10 at 1 January 20X2 and $15 at 31 December 20X2.
Which one of the following journal entries is required to account for the grant of the share
options for the year ended 31 December 20X2 in accordance with the requirements of IFRS
2 Share-based Payment?
Debit Credit
$ $
Equity 108,000
Liability 162,000
Equity 54,000
Equity 135,000
5) An airline grants air miles to its customers, based upon the amount that the customer
spends on flights. Customers can collect and redeem air miles in exchange for free travel.
The fair value of each air mile is estimated at $10.
During the year ended 31 December 20X3, the airline made sales of$4,500,000 and granted
10,000 air miles. Based on past experience, it expected 8,000 air miles to be redeemed.
During the year ended 31 December 20X4, 2,000 air miles were redeemed. In accordance
with IFRIC 13 Customer Loyalty Programmes, which of the following statement is correct?
6) Apex Ltd had a balance of $4,000,000 as its total equity at 1 January 20X3. During the
year ended 31 December 20X3 the company:
On 1 March 20X4 the directors declared final ordinary dividend of $200,000 for the year
ended 31 December 20X3.
What is closing balance on total equity in the statement of changes in equity for the year
ended 31 December 20X3?
A $6,000,000
B $7,000,000
C $7,200,000
D $6,250,000
7) An entity has nuclear power plant and a related decommissioning liability. The plant is
recognised under the cost model. At the end of the reporting period the entity estimates
that the net present value of the decommissioning liability has increased by $15,000. There
is no indication that the asset has suffered an impairment. In accordance with IFRIC 1
Changes in Existing Decommissioning, Restoration and Similar Liabilities which of the
following journal entries would be required to account for the change in the
decommissioning liability?
8) An entity has a nuclear power plant and a related decommissioning liability. The plant is
recognised under the revaluation model. At the end of the reporting period the entity
estimates that the net present value of the decommissioning liability has increased by
$20,000 due to technological changes. The financial statements include a revaluation
surplus of $60,000 resulting from the revaluation of the plant in previous accounting
periods. In accordance with IFRIC 1 Changes in Existing Decommissioning, Restoration and
Similar Liabilities which of the following journal entries would be required to account for the
change in the decommissioning liability?
9) Velona has received claim of $120,000 from one of its customers for defective cotton,
which was sold in the year. The customers claim is valid and Velonas lawyers have advised
that it is probable that the claim will be successful.
Velona has insured itself against such risk and the insurance company has agreed to
reimburse Velona $90,000 of the cost. How should these transactions be represented in the
statement of financial position and profit and loss?
10) XYZ ltd, a publishing company, is being sued for $2,000,000 in a libel action in respect of
a book published in January 20X1. On 31 October 20X1, at the end of the reporting period,
the directors believed that the claim had a ten per cent chance of success. On 30 November
20X1, the date the accounts were approved, the directors believed that the claim had a
twenty per cent chance of success.
A nil.
B $400,000
C $200,000
D $2,000,000
11) The management of D Ltd has decided to shut down its plant in Western Australia and
to transfer some of its operations to its plant in Queensland. There is a detailed formal plan
for the restructuring and this has been explained to the staff who are affected. The planned
restructuring has also been communicated to the local media. At the end of the reporting
period, no costs had yet been incurred as a result of the restructuring, but these are
expected to be as follows:
A $500,000
B $850,000
C $1,400,000
D $1,150,000
12) ABC Ltd has recognised a provision for the estimated cost of decommissioning a nuclear
power station. The power station has a total estimated useful life of 20 years and started
operating fifteen years ago. The original cost of the power station was $2.0 million which
included decommissioning costs of $750,000. The power station is measured at cost.
At the end of the current reporting period, management estimates that the net present
value of the decommissioning liability has decreased by $550,000 due to improvements in
the relevant technology.
Which one of the following journal entries is required to account for the change in
decommissioning liability for this financial year in accordance with the requirements of IFRIC
1 Changes in Existing Decommissioning, Restoration and Similar Liabilities?
Debit Credit
$ $
13) LMN Ltd began operating on 1 January 20X3.The company incurred a tax loss for the
year ending 31 December 20X3 of $220,000. There were deductible temporary differences
of $70,000 nut no taxable temporary differences. The directors have assessed that it is
probable that future taxable profits will be available against which any unused tax losses can
be set. The tax rate is 30%.
Assuming that LMN Ltd uses the balance sheet liability method of tax effect accounting
which of the following statements is correct on 31 December 20X3?
C LMN Ltd should recognise a deferred tax asset of $66,000 in respect of the tax loss
and a deferred tax asset of $21,000 in respect of the deductible temporary differences
D LMN Ltd should recognise a deferred tax asset of $66,000 in respect of the tax loss
and a deferred tax liability of $21,000 in respect of the deductible temporary differences
14) David Ltd acquired a derivative on 1 January 20X3 for $2,000 cash. Transaction costs
were $200. At 31 December 20X3 the fair value of the derivative was $2,500.Which of the
following is the correct journal entry to record these transactions?
$ $
CR Cash 2,100
CR Cash 2,200
CR Cash 2,200
CR Cash 2,100
15) At 1 October 20X4 Donald Ltd held inventory with a cost of$900,000 and a fair value of
$1,100,000. In order to hedge against a fall in the fair value of its inventory below
$1,100,000 Donald acquired a derivative. At 31 December 20X4 the fair value of the entitys
inventory had fallen by $40,000 and the derivative had a value of $40,000.
At 31 December 20X4 at what value should the inventory be recognised in the financial
statements?
A $1,060,000
B $860,000
C $960,000
D $1,000,000
16) A company owns inventories of 20,000 gallons of oil which cost $400,000 on 1
December 20X3. In order to hedge the fluctuation in the market value of the oil the
company signs a futures contract to deliver 20,000 gallons of oil on 31 March 20X4 at the
futures price of $22 per gallon.
The market price of oil on 3rd December 20X3 is $23 per gallon and the futures price for
delivery on 31 March 20X4 is $24 per gallon.
What are the correct journal entries at 31 December 20X3 assuming that hedge accounting
is adopted?
$ $
B DR Inventory 40,000
C DR Inventory 60,000
17) On 1 January 20X3 Diana Ltd purchased 100%of the equity shares in Stuart Ltd. At that
date it was considered that plant owned by Stuart with a net carrying amount (book value)
of $132,000 had a fair value of $180,000. Stuart Ltd and Diana Ltd both estimate the
remaining useful life of the plant to be 6 years (residual value $0) and use the straight line
method of depreciation. The tax rate is 30%.
Which of the following is the correct journal for the consolidation adjustment in respect of
depreciation at 31 December 20X3?
$ $
A DR Depreciation expense 8,000
18) On 1 September 20X2 a parent sold inventory with a cost of $60,000to a subsidiary for
$80,000. At the period end of 31 December 20X2 30% inventory transferred was held by the
subsidiary. The tax rate is 30%.
Which of the following journals represent the correct entries which would be required in the
consolidated worksheet?
$ $
A DR Sales 80,000
CR Inventory 20,000
B DR Cost of sales 80,000
CR Sales 60,000
CR Inventory 20,000
C DR Sales 80,000
CR Inventory 6,000
CR Sales 74,000
CR Inventory 6,000
19) Justin Ltd holds a 40% investment in an associate, Mark Ltd. At 1 April 20X2 the
consolidated statement of financial position shows an investment in associate balance of
$70,000. For the year ended 31 March 20X3 the associate incurred a loss of $250,000. For
the year ended 31 March 20X4 the associate made a profit of $100,000.
A $(30,000) $40,000
B $NIL $20,000
C $NIL $10,000
D $70,000 $10,000
20) Julie Ltd has a 40% investment in an associate, ABC Ltd. During the period ended 30 June
20X2 ABC Ltd sold goods costing $150,000 to Julie Ltd for $190,000. 80% inventory
transferred is held by Julie Ltd at 30 June 20X2. The profit for the period in the financial
statements of ABC Ltd is $300,000.The tax rate is 30%.
In accordance with IAS 28 Investments in Associates and Joint Ventures what amount would
appear in the consolidated statement of profit or loss as share of profit or loss of
associate?
A $111,040
B $120,000
C $128,960
D $75,000
21) Brad Ltd has a subsidiary and also owns 40% of the equity shares in Wendy Ltd. During
the year ended 31 December 20X2 Brad Ltd sold inventory costing $25,000 to Wendy Ltd for
$40,000. At 31 December 20X2 all this inventory was still held by Wendy Ltd. The tax rate is
30%.
Which of the following represents the adjustment that is made in the consolidated
worksheet?
$ $
CR Inventory 2,000
In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets,
which one of the following journal entries would be appropriate to recognise the
impairment loss?
Debit Credit
$ $
In accordance with IAS 28 Investments in Associates and Joint Ventures what amount would
appear in the consolidated statement of profit or loss as share of profit or loss of
associate?
A $111,040
B $61,680
C $128,960
D $75,000
24) Kanchana Ltd has a subsidiary and also owns 40% of the equity shares in Amila Ltd.
During the year ended 31 December 20X2 Kanchana Ltd sold inventory costing $45,000 to
Amila Ltd for $25,000. At 31 December 20X2 90% of the inventory was still held by Amila
Ltd. The tax rate is 30%.
Which of the following represents the adjustment that is made in the consolidated
worksheet?
$ $
CR Inventory 2,000
Q25
Donna Ltd prepares consolidated financial statements. During the financial year ended 30 June 20X6,
Donna Ltd disposed of an investment in a foreign operation. Up to the date of disposal, Donna Ltd
had to translate the financial statement of the foreign operation from another currency for inclusion
in its consolidated financial statements. During prior reporting periods, $21 000 of exchange
difference gains net of tax (pre-tax exchange difference gains $30 000) had been recognised in other
comprehensive income in the consolidated financial statements of Donna Ltd. During the 20X6
reporting period, a $4200 exchange difference loss net of tax up to the date of disposal of the
foreign operation had been recognised in other comprehensive income.
a. The profit or loss would include an exchange difference gain after tax of $4200.
d. Other comprehensive income for the translation of the foreign operation would be an
exchange difference net of tax gain of $3500.
Q26)
Roberto Ltd has completed its 20X9 financial statements which reveal, in part, the following
information:
Q27)
The following information relates to Diane Ltd for the year ended 30 June 20X7: $
Bad debts are written off against the allowance for doubtful debts What is the amount of
cash collected from customers during the year ended 30 June 20X7?
a. $446 000.
b. $450 000.
c. $447 000.
d. $453 000.
Q28)
The following information relates to the activities of Naseem Ltd. Income tax may be ignored.
b. $448 100.
c. $515900.
d. $513900.
Q29)
Campion Mining Ltd has a mining site with a related decommissioning liability. The mining site
started its operations ten years ago. The mining site has a useful life of 20 years. The mining site was
established at a cost of $30 million which included decommissioning costs of $1000 000.
As at the end of this financial year, Campion Mining Ltd estimates that the net present value of the
decommissioning liability relating to establishing the mine has increased to $1.2million due to
additional technological and legal requirements. This amount is in addition to the depreciation
charges incurred for the mining site.
Assuming that Campion Ltd values the cost of establishing the mine using the cost model,
which one of the following journal entries is required to account for the additional decommissioning
liability for this financial year?
Mustafa Mining Ltd has a mining site with a related decommissioning liability. The mining site
started its operations fifteen years ago. The mining site has a useful life of 20 years. The mining site
was established at a cost of $20 million which included decommissioning costs of $2 000 000.
As at the end of this financial year, Mustafa Mining Ltd estimates that the net present value of the
decommissioning liability relating to establishing the mine has decreased to $1.2million due to
additional technological and legal requirements. This amount is in addition to the depreciation
charges incurred for the mining site.
Assuming that Mustafa Ltd values the cost of establishing the mine using the cost model,
which one of the following journal entries is required to account for the additional decommissioning
liability for this financial year?
Q31. For the year ended 31 December 20Y0, Sylvia Ltd reported rent income of $250 000 in its
statement of profit or loss and other comprehensive income. Rentals are taxable on a cash basis.
Rents received, reported as taxable profit in the year received, amounted to $400 000 for 20Y0. Also
in 20Y0, Sylvia Ltd incurred an unrealised gain of $50 000 from a foreign currency transaction. The
gain was not taxable for tax purposes in 20Y0, but will be taxable when realised in the future. Sylvia
Ltds effective income tax rate was 30 per cent. Assuming that the recognition criteria are satisfied,
by what amount would the balance of the deferred tax asset increase for 20Y0?
a. $45,000
b. $15,000
c. $30,000
d. $67 500
Q32. For the year ended 30 June 20X2, Naveen Ltd had a taxable profit of $230 000. The following
comparative information was ascertained from the tax calculations of Naveen Ltd:
What is the amount of tax expense of Naveen Ltd for the year ended 30 June 20X2?
a. 84000
b. 69000
c. 64000
d. 74000
Q33.
Bhupraj Ltd sold a fixed asset for $150 000. The following data are relevant.
Which of the following journal entries should be processed to record this transaction?
d. Dr DTA $1500
Dr DTI $13500
Cr Tax payable $15000
Q34. On 31 December 20X9, SK Ltd revalue a depreciable asset to $180 000. The asset had not
previously been revalued and the revaluation was recorded in accordance with the requirements of
IAS 16 Property, Plant and Equipment. The following data are relevant:
SK Ltd expects to recover the carrying amount of the asset by using it until the end of its
useful life.
c. Dr DTL $30000
Cr Other comprehensive income (Revaluation surplus) $30 000
The following case note relates to the next two questions (questions 35 to 36) Bindhu Ltd acquired
70 per cent interest in Arunee Ltd on 1 July 20X0. During the year ended 30 June 20X1, Bindhu Ltd
sold inventory to Arunee Ltd for $9000. The original cost to Bindhu Ltd was $5000. 60% of the
inventory was still on hand as at 30 June 20X1. During the year ended 30 June 20X2, 80% of the
inventory was sold to parties external to the group.
Assume a tax rate of 30 per cent. Which of the following pro-forma journal entries would be
processed in the consolidation worksheet for the year ended 30 June 20X1
a. Dr Sale $9000
Dr DTA $720
Cr Inventory $2400
Cr COGS $6600
Cr Income tax expense $720
b. Dr Sale $9000
Dr DTA $720
Cr Inventory $2400
Cr COGS $6600
Cr DTI $720
c. Dr Sale $9000
Dr DTL $720
Cr Inventory $2400
Cr COGS $6600
Cr Income tax expense $720
d. Dr COGS $9000
Dr DTA $720
Cr Inventory $2400
Cr Sales $6600
Cr Income tax expense $720
Assume a tax rate of 30 per cent. Which of the following pro-forma journal entries would be
processed in the consolidation worksheet for the year ended 30 June 20X2
a.)
Dr DTA 210
Dr ITE 210
Cr Inv 700
b.)
Dr DTA 240
Dr ITE 240
Cr Inv 800
Dr DTA 720
Dr ITE 720
Cr Inv 2400
d.)
Dr DTA 195
Dr ITE 195
Cr Inv 650
The following case note relates to the next two questions (questions 37 to 38) Kamal Ltd acquired
100 per cent interest in Manuel Ltd on 1 July 20X0.On 30 June 20X1, Kamal Ltd sold plant to Manuel
Ltd for $190,000. The net carrying amount of the plant to Kamal Ltd was $130,000. Both companies
depreciate the plant on a straight line basis over a period of 10 years.
Assume a tax rate of 30 per cent. Which of the following pro-forma journal entries would be
processed in the consolidation worksheet for the year ended 30 June 20X1
Dr DTA $18,000
Cr Plant $60,000
Cr ITE $18,000
Dr Depreciation $6,000
Dr DTA $18,000
Cr Plant $60,000
Cr Acc.Depreciation $6,000
Cr ITE $18,000
C Dr Other Income $60,000
Dr Acc.Depreciation $6,000
Dr DTA $18,000
Cr Plant $60,000
Cr Depreciation $6,000
Cr ITE $18,000
Dr Depreciation $6,000
Dr ITE $18,000
Cr Plant $60,000
Cr Acc.Depreciation $6,000
Cr DTA $18,000
Assume a tax rate of 30 per cent. Which of the following pro-forma journal entries would be
processed in the consolidation worksheet for the year ended 30 June 20X2
Dr DTA $14,400
Dr Acc.Depreciation $12,000
Dr ITE $1,800
Cr Plant $60,000
Cr Depreciation $6,000
Dr DTA $14,400
Dr Acc.Depreciation $12,000
Dr ITE $1,800
Cr Plant $60,000
Cr Depreciation $6,000
C Dr Plant $37,800
Dr DTA $14,400
Dr Acc.Depreciation $12,000
Dr ITE $1,800
Cr Depreciation $6,000
D Dr Plant $37,800
Dr ITE $14,400
Dr Acc.Depreciation $12,000
Dr DTA $1,800
Cr Depreciation $6,000
The following case note relates to the next two questions (questions 39 to 40) Lily Ltd acquired
100 per cent interest in Emine Ltd on 1 July 20X1. One 1Jan20X2 , Emine Ltd sold plant to Lily Ltd for
$120,000. The net carrying amount of the plant to Emine Ltd was $160,000. Both companies
depreciate the plant on a straight line basis over a period of 4 years.
Assume a tax rate of 30 per cent. Which of the following pro-forma journal entries would be
processed in the consolidation worksheet for the year ended 30 June 20X2.
A Dr Plant $40,000
Dr Depreciation $5,000
Cr DTL $10,500
Cr Acc.Depreciation $5,000
Dr Depreciation $5,000
Cr Plant $40,000
Cr DTL $10,500
Cr Acc.Depreciation $5,000
C Dr Plant $40,000
Dr Acc.Depreciation $5,000
Cr DTL $10,500
Cr Depreciation $5,000
D Dr Plant $40,000
Dr DTL $10,500
Dr Depreciation $5,000
Cr Acc.Depreciation $5,000
Assume a tax rate of 30 per cent. Which of the following pro-forma journal entries would be
processed in the consolidation worksheet for the year ended 30 June 20X3.
Dr Depreciation $10,000
Cr Plant $24,500
Cr DTL $7,500
Cr Acc.Depreciation $15,000
B Dr Plant $40,000
Dr Depreciation $10,000
Cr DTL $7,500
Cr Acc.Depreciation $15,000
C Dr Plant $40,000
Dr Depreciation $10,000
` Cr DTL $3,000
Cr Acc.Depreciation $15,000
D Dr Plant $40,000
Dr Acc.Depreciation $10,000
Cr DTL $7,500
Cr Depreciation $15,000
Q 41
Which of the following is true in relation to the balance sheet liability method of accounting for
Income Taxes:
Q 42
a) Where the carrying amount of an asset exceeds the tax base of an asset, a DTL is disclosed in the
Statement of Financial Position;
b) Where the carrying amount of a liability is less than the tax base for a liability a DTA is disclosed
in the Statement of Financial Position;
c) Where the carrying amount of an asset is less than the tax base of an asset a DTA is disclosed in
the Statement of Financial Position;
d) Where the carrying amount is the same amount as the tax base for an asset or liability, no DTA
or DTL is disclosed in the Statement of Financial Position.
Q 43
The tax base of a depreciable asset is the amount that will be deductible for tax purposes against any
taxable benefits received when the entity recovers the carrying amount of an asset. Which of the
following statements is false:
a) Recovery of the carrying amount can be via use or sale which may have different recoverable
amounts;
b) The tax base for an asset may differ where the recovery methods deployed have different tax
treatments;
c) Any tax depreciation recouped on sale of the asset is not taxable;
d) If the asset is recovered in use, there is no question of a capital gain arising.
Q 44
a) With the exception of impairment of goodwill, IAS36 does not regard impairment losses as
permanent write-downs;
b) An indication of an impairment loss has reversed is occurs when the market value for the
assets has increased significantly during the period;
c) Any asset can only be written up to the lower of its recoverable amount as estimated now and
the carrying amount if the original impairment was not recognised;
d) The revaluation journal will be to profit and loss if the impairment was to profit and loss and as
a revaluation amount for an asset previously valued at a revalued amount like fair value.
Q 45
Value in use is defined at the present value of future cash flows expected to be derived from an
asset or CGU. Which of the following is incorrect:
a) In calculating value in use, you need to estimate the cash inflows and outflows from the asset
or CGUs use, including its ultimate disposal;
b) Future cash flows are discounted to present value by using an appropriate discount rate that
reflects the riskiness of the cash flows;
c) Each parameter and factor utilised in calculating value in use may change over time and be
influenced by the economic environment;
d) When the risks and uncertainties associated with cash flows is factored into the cash flows and
not the discount rate, this is known as the traditional approach in IAS36 Appendix A
Part B (Total of 20 marks)
Q1 (10 Marks)
Part A - 2 Marks
Diane Ltd purchased an asset on 1/1/20X3 for $110 000. The following data are relevant for the
financial year ending 31 December 20X4:
the asset was being depreciated over 10 years for tax purposes and 5 years for
accounting purposes
the asset was revalued on 31/12/X4 to $120 000
capital gains tax cost base of asset is $125 000
capital gains are calculated by deducting the capital gains tax cost base from the sale
proceeds
the asset is expected to be recovered through use until the asset was revalued
the tax rate, including tax on taxable capital gains, is 30%.
a )Prepare the journal entry(ies) to recognise the deferred tax effects immediately prior to
the revaluation.
Part B (3 Marks)
Additional facts
On 5 April 20X4, management of Diane received an offer from another entity to sell the
asset for $180 000. Management agreed to accept the offer and sold the asset. Diane has an
accounting policy of not transferring amounts out of the revaluation surplus to retained earnings on
the disposal of property, plant and equipment.
c )Prepare the tax journal entry to account for the sale of the asset. Ignore the effect of
depreciation for the period.
Part C ( 5Marks)
Kathleen Ltd has the following accounting profit (loss) before tax:
31 December 20X0 $60 000
31 December 20X1 ($100 000)
31 December 20X2 $150 000
At the end of 31 December 20X0, the entity had a deferred tax liability with a
credit balance of $18 000, reflecting a taxable temporary difference of $60 000 for
interest receivable, which reverses in 20X1.
The tax rate is 30%. The entity expects to be able to recoup the tax loss.
Complete the following table, and prepare the journal entries for the Kathleen
Ltd for the year ending 31 December 20X0, 31 December 20X1, 31 December
20X2 .
20X0 20X1 20X2
$ $ $
Accounting profit (loss) before tax
Taxable temporary difference
Interest Receivable
Taxable profit (loss) before deduction
of carried forward tax loss
Less: Credit for tax loss carried forward
Taxable profit (tax loss)
Q2 (Part A) 2 Marks
Mugu Ltd Owns 80% Ted Ltd.On 1 July 20X8, Mugu Ltd sold inventory to Ted Ltd for $100 000. The
cost of the inventory to Mugu Ltd was $70 000. The Ted Ltd will use the inventory as items of plant.
It was estimated that the useful life of the plant was five years with a scrap value of $2000 at the end
of that period. Assume a straight-line depreciation basis and a tax rate of 30 per cent.
Required
Prepare consolidation worksheet entries (including tax effect entries) for the financial
years ending 30 June 20X9 and 30 June 20Y0 to account for this transaction from the groups point
of view.
Q2(Part B) 2 Marks
Christina Ltd issues 1000 convertible notes on 1 Jan 20X8. The notes have a three-year term and are
issued at par with a face value of $1,000 per note, yielding proceeds of $1,000,000. Interest is
payable in ADVANCE at a coupon rate of 5%. Each note is convertible into 100 ordinary shares at any
time up to maturity. At that date the notes are issued, the prevailing market rate of interest for debt
with a similar risk but without conversion options is 10% .The holder of the convertible notes has
notified Christina Ltd, that he is not interested in converting the notes into equity.
Mugu Limited purchased an asset with a related decommissioning liability on 1 January 20X5.
The asset has a useful life of 20 years. The initial cost was $120 000. This included an amount for
decommissioning costs of $12 000, which represented $37 115 in estimated cash flows payable in 20
years discounted at a risk-adjusted rate of 5 per cent. Mugus financial year ends on 31 December.
On 31 December 20Y0 (6 years after the purchase of the asset) the discount rate has not changed.
However, the entity estimates that, as a result of changes in technological requirements, the NPV of
the decommissioning liability has increased to $30 000.
a) Prepare the journal entry(ies) to account for the change in the liability.
Q3 b)
Assume now that the decommissioning liability decreased to $10 000, rather than increased to
$30 000.
Q3 c)
Using the same facts as for Q3, except now assume that on 31 December 20Y0, Mugu Limited
revalues the asset to $125 000.