Practice Exam 1 PDF

14/04/2022, 19:45 Course Outline – KnowledgEquity
FR Practice Exam 1Collapse All Answers
Question 11 mark
Section A: Multiple Choice Questions – Single Option
This section has 42 questions worth 1 mark each (total of 42 marks)
At 1 July 20X3, XYZ Ltd purchased specialised tooling at a cost of $120,000. It is being depreciated over 10 years. Due to
technological advancements, the asset was deemed to be impaired by $14,000 on 30 June 20X6.
At 30 June 20X8, a formal estimate of the asset’s recoverable value was made and the asset was revalued to $45,000.
What is the adjustment to the carrying amount of the asset at 30 June 20X8?
A. Revaluation gain of $1,000

B. Impairment loss of $5,000
C. Revaluation gain of $9,000
D. Impairment loss of $11,000
You selected B - This is correct
Total Marks : 1MARKS OBTAINED 1
B is correct because there is an impairment loss of $5,000, which is calculated as follows:
Step 1: Calculate original Depreciation for 3 years (1 July 20X3 to 30 June 20X6)
$120,000 / 10 years = $12,000 per year x 3 years = $36,000.
Step 2: Calculate Carrying Amount (CA) at 30 June 20X6:
$120,000 cost
- $36,000 accumulated depreciation
= $84,000 CA before impairment
- $14,000 Impairment
= $70,000 CA after impairment
Step 3: Calculate new depreciation for 2 years from 1 July 20X6 to 30 June 20X8:
$70,000 CA / 7 years remaining = $10,000 per year x 2 years
Step 4: Calculate CA for 30 June 20X8 before revaluation
$70,000 from 30 June 20X6
= $50,000 CA before revaluation.
Step 5: Compare Revaluation to Carrying Amount
The Carrying Amount of $50,000 is $5,000 higher than the revalued amount of $45,000.
Therefore the impairment is $50,000 - $45,000 = $5,000.
Reference:
Module 7
> Part B
> 7.6 Recognising and measuring an impairment loss
> Page 388-389
Question 20 marks
At 1 July 20X3, XYZ Ltd purchased specialised tooling at a cost $120,000. It is being depreciated over 10 years. Due to
technological advancements, the asset was deemed to be impaired by $14,000 on 30 June 20X6.
https://knowledgequity.com.au/start-course/ 1/35
A formal estimate of the asset’s recoverable value was made at 30 June 20X8 and the asset was revalued to $45,000. Two years
later a formal estimate of the asset’s recoverable value was made at 30 June 20Y0 and the asset was revalued to $40,000.
The useful life of the tooling remained unchanged during this period.
What is the amount of the impairment reversal adjustment at 30 June 20Y0?
A. $4,000
B. $9,000
C. $10,000
D. $13,000
You selected D - This is incorrect. The correct answer is B
B is correct as the reversal of impairment is $9,000 ($36,000 - $27,000) since the reversal can only be written up to the lower
amount of $36,000.
This is calculated as follows:
Step 1: Calculate original Depreciation for 3 years (1 July 20X3 to 30 June 20X6)
$120,000 / 10 years = $12,000 per year x 3 years = $36,000.
Step 2: Calculate Carrying Amount (CA) at 30 June 20X6:
$120,000 cost
= $84,000 CA before impairment
- $14,000 Impairment
= $70,000 CA after impairment
Step 3: Calculate new depreciation for 2 years from 1 July 20X6 to 30 June 20X8:
$70,000 CA / 7 years remaining = $10,000 per year x 2 years
Step 4: Calculate CA for 30 June 20X8 before revaluation
$70,000 from 30 June 20X6
= $50,000 CA before revaluation.
Step 5: Compare Revaluation to Carrying Amount
The Carrying Amount of $50,000 is $5,000 higher than the revalued amount of $45,000.
Therefore the impairment is $50,000 - $45,000 = $5,000.
Step 6: Compare 20Y0 Carrying Amount to Revalued amount of $40,000
$45,000 Recoverable value 30 June 20X8
- $18,000 Depreciation for 1 July 20X8 - 30 June 20Y0 ($45,000 recoverable value / 5 years remaining life ) x 2 years
= $27,000 Carrying Amount
This is $13,000 lower than the revalued amount of $40,000 so it looks like there needs to be a reversal of impairment.
Step 7: Determine the reversal of impairment
We cannot just reverse the $13,000. IAS 36 states that the reversal of impairment can only be written up to the LOWER of:
• its recoverable amount, as estimated at the time the reversal indicators were identified; and
• the carrying amount that the asset would be if the original impairment loss were not recognised.
So, we need to calculate the carrying amount as if there were never any impairments.
Unadjusted notional CA = $120,000 original cost – $84,000 of depreciation (7 years of $12,000 per year) = $36,000
So reversal of impairment is limited to the $36,000 carrying amount. This means the reversal is $9,000 ($36,000 – $27,000).
Reference:
Module 7
> Part B
> 7.7 Reversals of impairment losses
> Page 389-391
Question 30 marks
Entity X sells robotic vacuum cleaners for $500 each. The company has a policy which allows customers to get a full refund within
20 days if they are not completely satisfied with the product. For the month of January, Entity X sold 200 vacuum cleaners.
Past experience indicates the following:
– 30% chance that there will be no returns;
– 45% chance that there would be 50 returns;
– 15% chance that there would be 60 returns; and
– 10% chance that there would be 65 returns.
What is the revenue that should be recognised if Entity X uses the expected value method allowed by IFRS 15?
A. $19,000
B. $75,000
C. $81,000
D. $100,000
You selected A - This is incorrect. The correct answer is C
C is correct because the expected-value method the consideration is the sum of the probability-weighted amounts in a range of
possible consideration amounts.
Based on the following calculations:
Revenue from no returns: ((200-0) x $500) x 30% = $30,000
Revenue from 50 returns: ((200-50) x $500) x 45% = $33,750
$30,000 + $33,750 + $10,500 = $6,750 = $81,000.
The total revenue is therefore $81,000.
Reference:
Module 3
> Part A
> 3.1 Recognition of revenue
> Step 3: Determine the transaction price of the contract
> Page 126
Question 41 mark
Entity X sells robotic vacuum cleaners for $500 each. The company has a policy which allows customers to get a full refund within
20 days if they are not completely satisfied with the product. For the month of January, Entity X sold 200 vacuum cleaners.
Past experience indicates the following:
– 30% chance that there will be no returns;
– 45% chance that there would be 50 returns;
– 15% chance that there would be 60 returns; and
– 10% chance that there would be 65 returns.
What is the revenue that should be recognised if Entity X uses the most likely amount method allowed by IFRS 15?
A. $19,000
B. $75,000
C. $81,000
D. $100,000
B is correct because with the 'most-likely' amount method, the expected value of consideration is the amount the entity is entitled
to under the 'most likely' possible outcome.
In this case the 45% chance of 50 vacuums being returned is the most likely of all the outcomes.
So, the calculation will be based on 150 (i.e. 200 - 50) vacuums being sold: 150 x $500 = $75,000.
Reference:
Module 3
> Part A
> Page 126
Question 51 mark
The calculation of taxable profit and current tax for Sunshine Ltd was as follows:
20X1 20X2 20X3

Accounting profit (loss) before tax ($5,000) $3,500 $8,000
Less: Additional tax depreciation ($500) ($500) ($500)
Taxable profit (loss) before utilising unused tax loss ($5,500) $3,000 $7,500
Less: Tax losses recouped $0 ($3,000) ($2,500)
Taxable profit (loss) ($5,500) $0 $5,000
Current tax payable $0 $0 $1,250
Sunshine Ltd operates in a country that has very lenient tax laws. The tax rate is 25% and tax losses can be carried forward
indefinitely. However, carry-back of tax losses is not permitted.
On 1 January 20X1, Sunshine purchased an asset for $10,000. Management estimated that the asset has a useful life of 5 years. The
asset is depreciated at 25% for tax purposes.
At the end of each year, management was unable to establish the probability of the company making future taxable profits, except
for the reversal of taxable temporary differences.
Which of the following tax-effect journals for 20X1 is correct?
A. DR Deferred tax asset $125 | CR Current tax income $125

B. DR Deferred tax expense $150 | CR Deferred tax liability $150
C. DR Deferred tax expense $1,250 | CR Current tax income $1,250
D. DR Deferred tax asset $1,375 | CR Deferred tax income $1,375
You selected A - This is correct
A is correct because the probability criterion requires the recognition of DTA only to the extent that it is probable that there would
be future taxable profits against which the DTA can be utilised.
At the end of 20X1, the only taxable profits that could be proved related to the future reversal of taxable temporary difference of
$500 for the extra depreciation.
BE CAREFUL HERE: The tax rate in this question is only 25%.
$500 taxable temporary difference x 25% = $125 DTL.
Hence the DTA that is recognised is limited to the amount of $125.
The correct journal is:
Dr DTA 125
Cr Current tax income 125
Reference:
Module 4
> Part B
> 4.6 Recovery of tax losses
> Table 4.9
> Page 186-187
Question 60 marks
20X1 20X2 20X3

indefinitely. However, carry-back of tax losses is not permitted. On 1 January 20X1, Sunshine purchased an asset for $10,000.
Management estimated that the asset has a useful life of 5 years. The asset is depreciated at 25% for tax purposes.
What is the movement in the deferred tax liability account in 20X2?
A. $0
B. $125
C. $500
D. $750
You selected C - This is incorrect. The correct answer is B
B is correct because the only movement in taxable temporary differences related to $500 for extra tax depreciation.
BE CAREFUL HERE: The tax rate in this question is only 25%.
$500 taxable temporary difference x 25% = $125 movement.
Reference:
Module 4
> Part A
> 4.3 Deferred tax
> Step 1: Determining the tax base of assets and liabilities
> Page 166-172
Question 71 mark
On 1 January 20X1, Happy Ltd purchased a widget-producing asset for $500,000. The asset is depreciated over a useful life of 10
years for accounting purposes and at a rate of 15% for tax purposes.
Happy Ltd accounts for the asset using the revaluation model.
The CGT cost base is $520,000.
The tax rate is 30% and capital gains tax is applicable.
In 20X5, there was an increase in the demand for widgets and a shortage of supply of both widgets and the asset that produces it.
Accordingly, on 31 December 20X5, the asset had a fair value of $600,000.
What is the deferred tax asset (DTA) or deferred tax liability (DTL) balance applicable to the asset in 20X5, prior to any
revaluation adjustments?
A. DTL $37,500
B. DTA $42,000
C. DTA $125,000
D. DTL $140,000
A is correct because the DTL = $37,500 ($125,000 x 30%)
Step 1: Determine depreciation
Accounting depreciation: $500,000 original cost / 10 years = 50,000 per year.
5 years of depreciation = $250,000 (5 years x $50,000)
Tax depreciation: $500,000 original cost x 15% per year = $75,000 per year.
Step 2: Determine the asset carrying amount prior to revaluation.
500,000 Original Cost
less ($250,000) Accumulated Accounting Depreciation (calculated in Step 1)
= $250,000 Carrying Amount (CA)
Step 3: Determine the tax base prior to revaluation.
$500,000 Original Tax Cost
less ($375,000) Accumulated Tax Depreciation (calculated in Step 1)
= $125,000 Tax Base (TB).
Step 4: Work out the Temporary Difference
CA - TB = TD
$250,000 - $125,000 = $125,000 Temporary difference
Step 5: Work out the Deferred Tax:
$125,000 Temporary Difference x 30% tax rate = $37,500.
This is a DTL because it is a taxable temporary difference, and the carrying amount is greater than the tax base.
You will pay less tax now (because of higher tax depreciation which lowers taxable profit) but you will pay more tax later when it
reverses. So, you have a present obligation to pay more tax later.
Reference:
Module 4
> Part C
> 4.8 Recognition of deferred tax on revaluation
> Table 4.7
> Page 166-172,193
Question 81 mark
The tax rate is 30% and capital gains tax is applicable.
In 20X5, there was an increase in the demand for widgets and a shortage of supply of both widgets and the asset that produces it.
Accordingly, on 31 December 20X5, the asset had a fair value of $600,000.
Assuming management intend to continue using the asset, what is the tax base of the asset on 31 December 20X5 after the
revaluation adjustment?
A. $125,000
B. $145,000
C. $500,000
D. $520,000
A is correct based on the following calculations:
Tax base (TB) of assets = Carrying amount + Future deductions – Future taxable amounts
Carrying amount = $600,000
The asset had a fair value of $600,000 and this becomes the carrying amount as it is accounted for using the revaluation model.
Future taxable amount = $600,000 as it will equal the carrying amount because all the expected future economic benefits that will
be generated from the carrying amount will be taxable.
Future deductions = tax cost – accumulated tax depreciation
Future deductions = Original tax cost of $500,000 – $375,000 in depreciation = $125,000
So substituting into the first formula:
TB of assets = Carrying amount + Future deductions – Future taxable amounts
$125,000 = $600,000 (CA) + $125,000 (Future deductible amounts) - $600,000 (Future taxable amounts)
If you are unsure about these steps review the Module 4 Part C webinar recording and flowcharts that guide you through these
steps.
Reference:
Module 4
> Part C
> Recovery of revalued assets through use or through sale
> Page 192-194
Question 90 marks
The tax rate is 30% and capital gains tax is applicable. In 20X5, there was an increase in the demand for widgets and a shortage of
supply of both widgets and the asset that produces it. Accordingly, on 31 December 20X5, the asset had a fair value of $600,000.
Ignoring tax effects, which of the following represents the correct journal to record the revaluation adjustment?
A. DR Asset $300,000 | CR Gain on revaluation (P&L) $300,000

B. DR Asset $350,000 | CR Revaluation surplus (OCI) $350,000
C. DR Asset $350,000 | CR Gain (P&L) $250,000 | CR Revaluation surplus (OCI) $100,000
D. DR Accumulated depreciation $200,000 | DR Asset $600,000 | CR Revaluation reserve (OCI) $800,000
B is correct because the revaluation of the asset is $350,000 and this revaluation will be taken to OCI.
Assets carrying amount prior to revaluation:
less ($250,000) Accumulated Accounting Depreciation
Fair value (FV) is $600,000
Difference between FV and CA is the revaluation of $350,000 [$600,000 - $250,000]
The journal is DR Asset | CR Revaluation Surplus (OCI) as shown on page 193.
Reference:
Module 4
> Part C
> Page 193
Question 101 mark
years for accounting purposes and at a rate of 15% for tax purposes. Happy Ltd accounts for the asset using the revaluation model.
The CGT cost base is $520,000. The tax rate is 30% and capital gains tax is applicable. In 20X5, there was an increase in the
demand for widgets and a shortage of supply of both widgets and the asset that produces it. Accordingly, on 31 December 20X5,
the asset had a fair value of $600,000.
Considering the revaluation adjustment only, what would be the related tax effect journal if management intend to recover the asset
through sale?
A. DR OCI- revaluation surplus $99,000 | CR Deferred tax liability $99,000

B. DR Deferred tax asset $105,000 | CR Deferred tax income $105,000
C. DR OCI- revaluation surplus $136,500 | CR Deferred tax liability $136,500
D. DR Deferred tax asset $180,000 | CR Deferred tax income $180,000
A is correct because the revaluation for accounting purposes was $350,000 and for tax purposes it was $20,000 so the temporary
difference on the revaluation was $330,000. This difference x 30% gives a DTL of $99,000.
This is based on the calculations shown below:
Step 1: Carrying amount revaluation:
less ($250,000) Accumulated Accounting Depreciation
Fair value (FV) is $600,000
Difference between FV and CA is the revaluation of $350,000 [$600,000 - $250,000]
Step 2: Tax base before revaluation (use normal formula):
Future deductions = Original tax cost of $500,000 – $375,000 in depreciation = $125,000
TB of assets = Carrying amount + Future deductions – Future taxable amounts
$125,000 = $600,000 (CA) + $125,000 (Future deductible amounts) - $600,000 (Future taxable amounts)
Step 3: Tax base after the revaluation (use the adjusted formula):
The formula for the tax base when CGT is applicable and there is recovery through sale is:
Tax base = Carrying amount + Future tax deductions (CGT cost base - accumulated tax depreciation) - Future taxable amounts
(full revalued amount)
Carrying amount: The asset had a fair value of $600,000 and this becomes the carrying amount as it is accounted for using the
revaluation model.
Future tax deductions (CGT cost base - accumulated tax depreciation):
CGT Cost base is $520,000.
Annual tax depreciation is 15% x $500,000 original cost = $75,000
There have been 5 years of depreciation so 5 x $75,000 = $375,000 accumulated tax depreciation.
So, future tax deductions is $520,000 - $375,000 = $145,000.
Future taxable amount (full revalued amount): This is $600,000, as this is the fair value and we are using the revaluation model.
Apply the formula: CGT Tax base = $600,000 + $145,000 - $600,000 = $145,000.
Step 4: Work out the revaluation for tax purposes
The original tax base $125,000 and the CGT Tax base is $145,000 so the revaluation had to be $20,000.
Step 5: Work out the temporary difference and deferred tax
Revaluation for accounting purposes was $350,000 (see step 1) and for tax purposes it was $20,000 (see step 4).
Temporary difference on the revaluation was $330,000 ($350,000 - $20,000).
This difference x 30% gives a DTL of $99,000.
This is a DTL because it is a taxable temporary difference, and the carrying amount is greater than the tax base.
You will pay less tax now (because of higher tax depreciation which lowers taxable profit) but you will pay more tax later when it
reverses. So, you have a present obligation to pay more tax later.
This table summarises all the calculations:
CA TB TD DT
1 Jan 20X1 $500,000 $500,000 $0 $0
Dep for 5 years ($250,000) ($375,000)
Book value before reval $250,000 $125,000
Reval $350,000 $20,000 $330,000 $99,000 DTL
Revalued CA $600,000 $145,000
If you are unsure about these steps review the Module 4 Part C webinar recording and flowcharts that guide you through these
steps.
Reference:
Module 4
> Part C
> Recovery of revalued assets through use or through sale
> Page 192-194
Question 111 mark

On 1 January, Parent Ltd bought 20% of the shares in Child Ltd for $11,000. On 30 June, Parent Ltd purchased an additional 60%
of the shares in Child Ltd for $100,000. This purchase gave Parent Ltd control over Child Ltd.
On 30 June, the fair value of Parent Ltd’s initial 20% shareholding was $15,000 and the fair value of the non-controlling interests
(NCI) was $23,000.
The fair value of the net identifiable assets was $90,000.
What would be the amount of NCI included in the goodwill calculation if the partial goodwill method is used?
A. $11,000
B. $15,000
C. $18,000
D. $23,000
You selected C - This is correct
C is correct because when calculating goodwill using the partial goodwill method, the NCI is calculated by multiplying the net
identifiable assets by the NCI percentage holding.
This is $90,000 x 20% = $18,000.
Partial goodwill method:
$100,000 FV of purchase price
+ $15,000 FV of previous held interests
+ $18,000 Non- controlling interests
= $133,000 Sub-total
- ($90,000) FV of net identifiable assets
= $43,000 Goodwill
For more guidance please watch the Module 5 Part A Webinar.
Reference:
Module 5
> Part A
> 5.2 The acquisition method
> (D) Recognising and measuring goodwill or a gain from a bargain purchase
> Page 229-231
Question 121 mark
On 1 January, Parent Ltd bought 20% of the shares in Child Ltd for $11,000. On 30 June, Parent Ltd purchased an additional 60%
of the shares in Child Ltd for $100,000. This purchase gave Parent Ltd control over Child Ltd.
On 30 June, the fair value of Parent Ltd’s initial 20% shareholding was $15,000 and the fair value of the non-controlling interests
(NCI) was $23,000. The fair value of the net identifiable assets was $90,000.
What is the total amount of Parent Ltd’s holding in Child Ltd that would be used in the calculation of goodwill?
A. $100,000
B. $111,000
C. $115,000
D. $123,000
C is correct based on the consideration of $100,000 + $15,000 of Previously held interest = $115,000.
These are two parts of the goodwill equation as outlined in IFRS 3, para. 32:
Goodwill is measured at acquisition date as the fair value of the consideration transferred plus the amount of any non-controlling
interest, plus the fair value of any previously held equity interest in the acquiree, less the fair value of the identifiable net assets
acquired (IFRS 3, para. 32).
Reference:
Module 5
> Part A
> Page 229-231
Question 130 marks
On 30 December 20X6, the following information was available for Entity A:
– Statement of Comprehensive Income: $170,000
– Statement of Profit or Loss: $158,000
The Statement of Financial Position included the following balances which were equal to the relevant tax bases:
– Machinery (carrying amount): $250,000
– Equipment (carrying amount): $130,000
On 31 December 20X6, the following information became available:
– The fair value of machinery and equipment was $260,000 and $135,000 respectively.
Entity A adopts the revaluation model for property, plant and equipment.
What is the total of Other Comprehensive Income for the year ended 31 December 20X6 assuming the applicable tax rate is 30%?
A. $12,000
B. $15,500
C. $22,500
D. $27,000
You selected D - This is incorrect. The correct answer is C
C is correct based on the following calculations:
Step 1: (pages 83 - 88 of Module 2) 30 December 20X6: Total comprehensive income (the combination of P&L and OCI) was
$170,000. We also know know that the P&L was $158,000 so OCI must be $170,000 - $158,000 = $12,000.
Step 2: (Pages 193 - 194 of Module 4)
Machinery increased by $10,000 (i.e. $260,000 - $250,000). This increase would go to revaluation surplus in OCI. The deferred
tax liability on this would be $3,000 (i.e. $10,000 x 30%).
Equipment increased by $5,000 (i.e. $135,000 - $130,000). This would go to revaluation surplus in OCI.
The deferred tax liability on this would be $1,500 (i.e. $5,000 x 30%).
Step 3:
The OCI balance would be calculated as follows: $12,000 balance on 30 December + $7,000 machinery revaluation (i.e. $10,000 -
$3,000) + $3,500 equipment revaluation (i.e. $5,000 - $1,500) = $22,500 Balance on 31 December
Also refer to Module 4 (pages 193 - 194)
Reference:
Module 2
> Part B
> 2.7 The concept of other comprehensive income and total comprehensive income
> Page 83-88
Question 140 marks
Parent Ltd sold a machine with a carrying amount of $30,000 to Subsidiary Ltd for $40,000 on 1 January 20X6. Parent Ltd
depreciates fixed assets at a rate of 20% and Subsidiary Ltd depreciates fixed assets at a rate of 10%.
What is the consolidation elimination journal entry amount for opening retained earnings on 1 January 20X8 assuming the
applicable tax rate is 30%?
A. $5,600
B. $6,300
C. $7,000
D. $10,000
You selected B - This is incorrect. The correct answer is A
A is correct, based on the following explanation.
The consolidation journals on 31 December 20X7 would be as follows:
- DR Profit on sale of machine: $10,000
- CR Machine: $10,000
- DR Accumulated depreciation: $1,000
- CR Depreciation: $1,000
- DR Deferred tax asset: $2,700
- CR Tax expense: $2,700
So, the net income statement effect is a reduction of $6,300 (i.e. $10,000 - $1,000 - $2,700).
But the question asks for the adjustment for opening retained earnings for 1 January 20X8. This means we need to further account
for the effects on profit during the 20X7 financial year.
During 20X7, all that we would need to do is realise the intra-group profit through depreciation of 1,000 (10,000 unrealised profit /
10 years).
The tax on this is 300 (1,000 x 30%)
So the combined adjustment to opening retained earnings in 20X8 is 5,600 (6,300 - 1,000 + 300)
If you are unsure about these calculations please review the webinar tasks and webinar solutions recording for Module 5 Part B
(intra-group transactions).
Reference:
Module 5
> Part B
> 5.8 Preparation of consolidated financial statements
> Transactions within the group
> Page 254-260
Question 151 mark
When classifying financial instruments which of the following are accurate?
I If a financial instrument fails the fixed-for-fixed test it will most likely be classified as a liability.
II When a financial instrument allows for the settlement of a fixed dollar amount with a fixed number of shares this
would most likely be classified as an equity instrument.
III When a financial instrument has to pay a variable amount of shares depending on the current share price to met a
fixed obligation this would fail the fixed-for-fixed test.
IV When the fixed-for-fixed test is met it is likely to be a compound financial instrument.
A. I and II only
B. I and III only
C. I, II and III only
D. I, II and IV only
C is correct because options I, II and III are all accurate statements, while option IV is not accurate.
Item IV is not accurate because when the fixed-for-fixed test is met it is likely to be classified as an equity instrument as this
exposes the instrument to variable returns (because a fixed number of shares may may vary in price over time). This exposes the
instrument to the residual interest in the net assets of the entity.
Reference:
Module 6
> Part A
> Part A: What are Financial Instruments?
> Page 305-306
Question 160 marks
Sun Ltd acquired 90% of the shares of Moon Ltd on 1 January 20X1. This gave Sun Ltd control over Moon Ltd. On 1 January
20X2, Moon Ltd sold a machine with a carrying amount of $30,000 to Sun Ltd for $50,000. Moon Ltd’s policy is to depreciate
fixed assets over a useful life of 8 years, while Sun Ltd depreciates its fixed assets over a useful life of 10 years.
Assume the applicable tax rate is 30%.
What is the consolidation elimination journal amount for opening retained earnings on 31 December 20X3?
A. $11,200
B. $12,600
C. $18,000
D. $20,000
You selected A - This is incorrect. The correct answer is B
B is correct because DR Retained earnings $12,600 is based on $20,000 - $2,000 - $5,400 as shown below:
Prior year (20X2):
Step 1:
Gain on Sale:
Proceeds $50,000
Less: Carrying amount ($30,000)
Gain on Sale $20,000
Journal entry is:
Dr Gain on sale $20,000
Step 2:
Depreciation adjustment:
Depreciation according to Sun Ltd $5,000 ($50,000 x 10%)
Depreciation according to the group $3,000 ($30,000 x 10%)
Over depreciation $2,000
Journal entry is:
Cr Asset: Machine $20,000
Dr Accum Dep $2,000
Cr Dep expense (P&L) $2,000
Step 3:
DTA calculation:
Carrying amount of asset decreased by $18,000 ($20,000 - $2,000)
Tax base has no movement = $0

Temporary difference = $18,000 ($18,000 CA – $0 TB)
DTA = $5,400 ($18,000 x 30%)
Journal entry is:
Dr DTA $5,400
Cr Tax expense $5,400
(20X3):
Dr Retained earning $12,600 (i.e. $20,000 - $2,000 - $5,400)
Reference:
Module 5
> Part B
> Page 254-260
Question 171 mark
In terms of IFRS 15, how would you treat a consideration payable to a customer as an incentive for the customer to make a
purchase with the entity?
A. No effect on the revenue to be recognised.

B. Account for it as a purchase from a supplier.
C. Reduce the transaction price by the consideration payable.
D. Treat it as a financing component and adjust for the time value of money.
C is correct because IFRS 15, para. 70 requires the transaction price to be reduced by consideration payable to the customer unless
the consideration payable to the customer is in exchange for a distinct good or service.
Reference:
Module 3
> Part A
> Page 130
Question 181 mark
Can contracts for non-financial items ever be classified as financial instruments?
A. Yes, if the contract is to be settled net in cash.

B. Yes, if it is used for the intended purpose of purchase.
C. No, because it is expressly excluded from the scope of IAS 32.
D. No, because it does not meet the definition of financial instruments.
A is correct because a contract with non-financial items which will be settled net in cash is a financial instrument.
B is incorrect because if it is used for the intended purpose, then it would specifically not be classified as a financial instrument in
terms of IAS 39, para. 5.
C is incorrect because IAS 32, para. 8 does include this.
D is incorrect because in some instances, contracts for non-financial items do satisfy the definition of financial instruments.
Reference:
Module 6
> Part A
> 6.3 Contracts to buy or sell non-financial items
> Page 307
Question 190 marks
Entity A is a mining company that is considering raising a liability or provision for the rehabilitation of the land at the completion
of a particular mining project. Environmentalists have reliably estimated the costs of rehabilitation but the timing and probability
of future outflows of economic benefits is uncertain.
Which of the following in relation to IAS 37 is correct?
A. A provision should be recognised since the timing is uncertain.

B. A liability should be recognised as the costs can be reliably measured.
C. A provision cannot be recognised as the probability criterion is not satisfied.
D. A liability cannot be recognised because environmental costs are scoped out of IAS 37.
You selected B - This is incorrect. The correct answer is C
C is correct because it does not meet the requirements if IAS 37, para. 14(b).
For a provision to be recognised: (a) an entity has a present obligation (legal or constructive) as a result of a past event; (b) it is
probable that an outflow of resources embodying economic benefits will be required to settle the obligation; and (c) a reliable
estimate can be made of the amount of the obligation (IAS 37, para. 14).
A provision is a liability with uncertain amount or timing (IAS 37, para. 10). So, it is possible that a liability / provision exists in
this situation.
However, the probability criterion is not satisfied, so neither a provision or liability can be recognised.
Reference:
Module 3
> Part B
> 3.4 Recognition of provisions
> Definition of provisions
> Page 143
Question 201 mark
Entity Z offers special insurance cover for famous actors who perform their own stunts during the filming of action movies. Their
latest client is Jack Cruise for the production of Mission Granted 3.
In the past, Jack made insurance claims during the production of the other Mission Granted movies.
The insurance policy covers Jack for the following:
– Leg injury $500,000
– Hand injury $1,000,000
– Face injury $3,000,000
Jack’s agent drew on past experience and indicated that there is a 55 per cent chance of a leg injury, 22 per cent chance of a hand
injury and only a 0.5% chance of a face injury.
Should Entity Z raise a provision for Jack Cruise’s policy?
A. No, because there is no present obligation to make any payment.

B. No, because the chances of a hand and face injury are less than 50 per cent.
C. Yes, because the chances of a claim is probable and can be reliably estimated.
D. Yes, because there is a greater than 50 per cent chance that there will be a leg injury.
C is correct because the provision needs to be satisfy the recognition criteria or probability and reliable measurement. Past claims
indicate probability and his agent's past experience provides grounds to for reliable measurement.
A is incorrect because the signing of the insurance contract between Jack and Entity Z gives rise to a legal obligation which is the
present obligation and past event.
B is incorrect because the chances of these specific injuries relate to the measurement of the provision and not to the probability.
The fact that Jack made insurance claims on all of the previous Mission Granted movies indicates that it is highly probably that he
will also make a claim for the production of Mission Granted 3.
D is incorrect because this does not include the probability criteria nor does it take into account the recognition of the other injuries
in the calculation of the provision.
Reference:
Module 3
> Part B
> 4.5 Recognition of deferred tax assets
> Recognition of Provisions
> Page 143-146
Also see: Module 1> Page 22-23
Question 211 mark
Entity A has a contract with a customer to sell 10,000 pairs of shoes over a 10-month period. The total contract price is $500,000.
The standalone selling price for each pair is $60.
At the end of 5 months, the customer requested that an additional 100 pairs be provided by Entity A during the original 10-month
period. As an act of goodwill, Entity A decided to provide the additional 100 pairs of shoes free of charge.
How should this modification to the contract with the customer be treated in terms of IFRS 15?
A. It should be treated as a separate contract with zero revenue.

B. It should replace the existing contract and future revenue adjusted prospectively.
C. It should become part of the existing contract and revenue should be adjusted retrospectively.
D. It should be ignored for the purposes of revenue recognition but disclosure is required in the notes.
B is correct because it should replace the existing contract and future revenue adjusted prospectively. This is because the shoes are
distinct goods and the modification is not to be treated as a separate contract. This is required in terms of IFRS 15, para. 21.
In order for the modification to be treated as a separate contract, it needs to be distinct goods and the contract price needs to
increase to reflect the stand alone selling prices after appropriate adjustments.
A is incorrect because the modification of 100 additional pairs of shoes are distinct since each pair can be used and benefited from
separately however, Entity A is providing this free of charge. Therefore, it fails the second requirement and cannot be treated as a
separate contract.
C is incorrect because the contract should not become part of the existing contract because this treatment applies to modifications
that are not treated as a separate contract, but for goods that are not distinct. The additional pairs of shoes are distinct.
D is incorrect because the contract should not be ignored because a transaction will take place (i.e. the provision of additional
shoes) and this must therefore be recorded in the accounting records.
Reference:
Module 3
> Part A
> Step 1: Identify the contract(s) with the customer
> Page 122-123
Question 221 mark
The following extract from Sunny Ltd’s financial statements are provided:
31 Dec 20X0 31 Dec 20X1

Trade receivable $200,000 $150,000
Allowance for doubtful debts ($10,000) ($13,000)
Sales revenue $650,000
Doubtful debts expense $22,000
What is the cash received from debtors during the 20X1 financial year?
A. $478,000
B. $600,000
C. $678,000
D. $681,000
You selected D - This is correct
D is correct as Cash Received from Customers is $681,000.
The formula for this is:
Opening balance of receivables + Sales revenue - Bad debts written off - Closing balance of trade receivables.
The formula for bad debts written off is:
$10,000 Opening balance of allowance for doubtful debts
+ $22,000 Doubtful debts expense
- ($13,000) Closing balance of allowance for doubtful debts
= $19,000 Bad debts written off.
So the calculation for cash received from customers is:
$200,000 Opening Trade debtors
+ $650,000 Sales revenue
- ($19,000) Bad debts written off
- ($150,000) Closing Trade debtors
= $681,000 Cash Received from Customers
Reference:
Module 2
> Part E
> 2.17 Common methods adopted on how to prepare a statement of cash flows
> Formula method
> Page 103
Question 231 mark
AB Ltd sells its debtors with a carrying amount of $80,000 to Zed Ltd for $70,000. AB Ltd agreed to reimburse Zed Ltd for
unrecoverable debts up to a maximum of $500.
What is the journal entry to record the above transaction in the records of AB Ltd?
A. DR Bank $70,000 | DR Loss on sale $10,000 | CR Debtors $80,000

B. DR Bank $80,000 | CR Gain on sale $10,000 | CR Debtors $70,000
C. DR Bank $70,000 | DR Loss on sale $10,500 | CR Debtors $80,000 | CR Guarantee liability $500
D. DR Bank $60,500 | DR Loss on sale $500 | DR Bargain purchase $19,000 | CR Debtors $80,000
C is correct based on the following components:
DR Bank $70,000 occurs because we receive cash of $70,000.
CR Debtors $80,000 occurs because AB Ltd sells the debtors to Zed Ltd and does not have any managerial involvement and is not
responsible for the risks and rewards relating to the debtors that are sold. Hence, the debtors qualify for de-recognition.
CR Guarantee liability $500 occurs because AB Ltd has a present obligation to reimburse bad debts up to $500 and so this needs to
be recognised as a liability.
DR Loss on sale $10,500 occurs as this residual is a loss on sale of debtors.
Reference:
Module 6
> Part B
> Part B: Recognition and Derecognition of Financial Assets and Financial Liabilities
> Transfers of financial assets
> Page 316-317
Question 241 mark
20X1 20X2 20X3

indefinitely.
However, carry-back of tax losses is not permitted. On 1 January 20X1, Sunshine purchased an asset for $10,000. Management
estimated that the asset has a useful life of 5 years. The asset is depreciated at 25% for tax purposes.
Which of the following correctly represents the journal for the recovery (recoupment) of unrecognised tax losses in 20X3?
A. DR Deferred tax expense $250 | CR Deferred tax asset $250

B. DR Deferred tax expense $375 | CR Current tax income $375
C. DR Deferred tax expense $1,500 | CR Current tax income $1,500
D. DR Deferred tax expense $2,500 | CR Deferred tax asset $2,500
B is correct based on the following calculations:
Step 1: Calculate total DTA (be careful of the 25% tax rate)
The total DTA available for the tax loss is $1,375 (which is the tax loss x 25% tax rate).
Step 2: Recognise only the portion permitted (see Figure 4.8)
In 20X1 we were able to recognise $125 of this DTA because of the $500 additional tax depreciation.
$500 taxable temporary difference x 25% = $125 DTL.
Hence the DTA that is recognised is limited to the amount of $125.
In 20X2 we did the same and again recognised $125 DTA.
So, the total DTA we have recognised is $250 based on the $1,000 temporary difference ($500 x 2 years).
Then in 20X2 there is a $3,000 taxable profit, so we can recover or recoup $3,000 x 25% = $750 of DTA linked to losses.
Step 3: Work out the unrecognised portion.
This means that from the original DTA of $1,375 we have recognised (125 + 125 + 750) = $1,000.
This means that there is ($1,375 - $1,000) = $375 unrecognised.
This is also shown on the follow table:
Details Amount DTA
Tax loss 5,500 1,375 DTA available
DTA 20X1 500 TD (125)
DTA 20X2 500 TD (125)
Recouped in 20X2 3,000 (750)
Sub-total 4,000 (1,000)
Unrecognised portion 1,500 375
So the journal for the recoupment amount is for 375.
Reference:
Module 4
> Part B
> 4.6 Recovery of tax losses
> Table 4.9
> Page 179-182,186-187
Question 251 mark
Which of the following is a financial asset?
A. Oil
B. Wheat
C. Debtors
D. Gold bullion
C is correct because debtors or accounts receivable satisfy the definition of financial assets per IAS 32, para. 11. Debtors are
classified as primary financial instruments.
A, B and D are assets but do not meet the definition of financial assets.
Reference:
Module 6
> Part A
> Part A: What are Financial Instruments?
> Page 304-305
Question 260 marks
Which of the following is not a disclosure required to be made in the statement of changes in equity?
A. Retrospective adjustments required by IAS 8.

B. Deferred tax arising from transactions with equity participants.
C. A reconciliation between opening and closing balances of each component of equity.
D. An allocation of comprehensive income between non-controlling interests and owners of the parent.
You selected A - This is incorrect. The correct answer is B
B is the correct answer because it is not required.
All other options are listed in terms of IAS 1, para. 106.
Reference:
Module 2
> Part C
> Part C: Statement of Changes in Equity
> Page 91-92
Question 271 mark
The annual tuition fees for Academy A is $6,000. Sandra is currently experiencing financial difficulties and so entered into an
agreement with Academy A to give the academy a gold trophy which she inherited from her great grandfather.
Academy A intend to use this as their new floating trophy for Dux students and, in exchange, Sandra would not have to pay the
annual tuition fee. Because of its history, the fair value of the gold trophy is $5,800, while the selling price for similar trophies is
$5,500. Academy A estimates that the value of the trophy would increase to $6,500 when it is ingrained with its world-renowned
logo.
In terms of IFRS 15, what amount should Academy A recognise as revenue in relation to its contract with Sandra?
A. $5,500
B. $5,800
C. $6,000
D. $6,500
B is correct because IFRS 15, para. 67 requires that non-cash consideration should be measured at the fair value of the goods or
services received.
Reference:
Module 3
> Part A
> Page 130
Question 281 mark
Which of the following relating to goodwill is correct?
A. Generally, the values used in the calculation of goodwill will be the acquisition date fair values.
B. When calculating goodwill, non-controlling interests can be calculated using the fair value or cost model.
C. Goodwill is the total assets of the acquirer less assumed liabilities of the acquiree less non-controlling interests.
D. Goodwill is the sum of individually identifiable and separately recognisable assets that would give rise to future economic
benefits.
A is correct because IFRS 3, para. 10 requires goodwill to be calculated using the at acquisition date fair values of the identifiable
assets, assumed liabilities and non-controlling interest.
Goodwill is measured at acquisition date as the fair value of the consideration transferred plus the amount of any non-controlling
interest, plus the fair value of any previously held equity interest in the acquiree, less the fair value of the identifiable net assets
acquired (IFRS 3, para. 32).
B is incorrect because the choice permitted for the calculation of non-controlling interests include the fair value or the non-
controlling interest's proportionate share of the acquiree's identifiable net assets. (IFRS 3, para. 19)
C is incorrect because the calculation of goodwill is based on the identifiable assets of the acquiree and not of the acquirer.
D is incorrect because goodwill does not include individually identified and separately recognised assets. This is covered in the
definition of goodwill as stated in IFRS 3, Appendix A.
Reference:
Module 5
> Part A
> Page 227-231
Question 291 mark
Australia Bank Ltd provided a loan of $5,000,000 to Entity A. The loan contract states that interest would be charged at a fixed rate
of 9% annually.
Which of the following would result in this loan being classified as fair value through profit or loss?
A. The loan contract requires payment of 5% of profits that exceed $5,000,000.

B. The loan contract is valid for 30 years provided that Entity A's assets exceed its liabilities.
C. The loan contract includes a penalty of 10% of the principal amount for early settlement of the loan.
D. The loan contract does not contain any provisions that are contingent on future uncertain events.
A is correct because financial assets are classified as FV through profit and loss if they are not classified as amortised cost.
This is the only option that includes amounts (i.e. 5% of profits that exceed $5,000,000) which are not interest or principal
payments. Hence, this would result in the instrument been classified as FV through profit and loss.
In order for it to be classified as amortised cost, the bank needs to hold that financial asset for collecting contractual cash flows that
are solely from interest and principal re-payments.
B, C and D satisfy the criteria to be considered 'solely payments of interest and principal' in terms of IFRS 9, para. B4.1.10.
Reference:
Module 6
> Part C
> Part C: Classification of Financial Assets and Financial Liabilities
> Contractual cash flows that are solely payments of principal and interest on the principal amount outstanding
> Page 325-327,338
Question 301 mark
On 1 April 20X5, Entity A entered into an agreement with Entity B to sell a financial asset with a carrying amount of $50,000. The
sale price of the financial asset on 1 April was $65,000.
The agreement requires Entity A to buy back the financial asset from Entity B on 30 June 20X5 for $70,000.
In terms of IFRS 9, what would be the journal entry to record the transaction on 30 June 20X5 in the records of Entity A.
A. DR Financial asset $70,000 | CR Bank $70,000

B. DR Bank $70,000 | CR Asset $50,000 | Cr Gain on transfer of asset $20,000
C. DR Loan payable $65,000 | DR Interest $5,000 | CR Bank $70,000
D. DR Loan payable $50,000 | DR Financial asset $20,000 | CR Bank $70,000
C is correct because the agreement required Entity A to buy back the financial asset and hence Entity A did not relinquish control
of the asset.
That is, Entity A was still responsible for the risks and rewards relating to that financial asset.
Hence the financial asset does not qualify for de-recognition and the transaction needs to be recorded as a loan with the difference
treated as interest.
Reference:
Module 6
> Part B
> Page 314-315,532
Question 310 marks
Due to cash flow issues, Entity A decided to sell a financial asset at its carrying amount of $100,000 to Entity B. The sale
agreement includes a market interest rate of 6% and stipulates that Entity A will purchase the financial asset back from Entity B
after 2 years at a price of $200,000.
Which of the following journals correctly accounts for the sale on the date that the initial transaction occurred?
A. DR Bank $100,000 | CR Loan $100,000

B. DR Bank $100,000 | CR Financial asset $100,000
C. DR Bank $100,000 | CR Loan $178,000 | DR Loss on contract $78,000
D. DR Bank $366,680 | CR Financial asset $100,000 | CR Loan $200,000 | CR Gain on contract $66,680
You selected A - This is incorrect. The correct answer is C
C is correct because the risks relating to the financial asset have not passed to Entity B because Entity A is required to buy it back.
Hence, this financial asset does not qualify for de-recognition.
The substance of this transaction is that of a loan agreement. However, because it is payable in 2 years' time, the amount must be
present valued.
The market interest rate is 6% and the PV factor for a single cash flow over a 2 year period is (1 / (1.06)^2) = 0.8900.
This means that the present value of the loan is $178,000 (i.e. $200,000 x 0.8900).
- The bank would be debited with the cash inflow of $100,000.
- The loan would need to be raised at the present value of $178,000.
- The difference is a loss on this contract of $78,000.
A is incorrect because it does not recognise the loan at the present value.
B and D are incorrect because the financial asset does not qualify for derecognition.
Reference:
Module 6
> Part B
> Page 313-319
Question 320 marks
On the 30 June 20X8 one of the machines in the fixed asset register of ABC Ltd had the following details:
– Cost: $500,000
– Carrying amount $350,000
– Fair value $352,000
– Value in use $348,000
– Costs of disposal $2,500
– Remaining useful life 7 years ABC Ltd measures assets using the cost model in terms of IAS 16.
What would be the closing balance of the machine on 30 June 20X8?
A. $348,000
B. $349,500
C. $350,000
D. $352,000
B is correct because assets needs to be carried at the lower of carrying amount and recoverable amount.
Recoverable amount is higher of (FV – Costs to sell) and value in use
FV less costs to sell = $349,500 [$352,000 - $2,500)]
Value in use = $348,000
Therefore Recoverable amount is $349,500 as this is the higher of the two amounts, so this is the closing balance.
Reference:
Module 7
> Part B
> Part B: Impairment of Individual Assets
> Figure 7.2
> Page 378
Question 330 marks
Which of the following is not considered ‘offsetting’?
A. Presenting only the net gain or loss on foreign currency transactions.

B. Presenting only the net gain or loss arising from financial instruments held for trading.
C. Presenting only the final balance of inventory after deducting obsolescence allowances.
D. Presenting the expenditure for a provision net of related reimbursements with a third party.
You selected D - This is incorrect. The correct answer is C
C is correct because it is not considered to offsetting as it refers to 'measuring assets net of valuation allowances' IAS 1, para. 33.
In terms of this paragraph, this is not considered offsetting and is permitted.
All other options relate to offsetting practices. Refer to IAS 1, para. 34 and 35.
Reference:
Module 2
> Part A
> 2.1 Complete set of financial statements
> Other general features
> Page 66
Question 341 mark
Which of the following relating to the treatment of a contingent liability that is a present obligation that can be measured reliably
even if it is not probable during a business combination is correct?
A. Contingent liabilities would not have an impact on the calculation of goodwill.

B. Contingent liabilities would fail the recognition criteria and so would be disclosed only in the consolidated entity.
C. Contingent liabilities would be recognised in a business combination and would cause the goodwill to be larger.
D. Contingent liabilities would be recognised in a business combination and would make the net identifiable assets larger.
C is correct because during a business combination, the exception to the requirements of IAS 37 apply to contingent liabilities.
That is, during a business combination, contingent liabilities must be recognised and taken into account in the calculation of
goodwill.
Remember, goodwill = purchase consideration - net identifiable assets.
Thus, the inclusion of contingent liabilities would cause the net identifiable assets to be lower and so, the amount attributable to
goodwill would be larger.
A and B are incorrect because contingent assets are recognised during a business combination.
D is incorrect because recognising contingently liabilities would cause the net identifiable assets to decrease not get larger.
Reference:
Module 5
> Part A
> (C) Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree
> Table 5.3
> Page 228-229
Question 351 mark
Pepper Ltd acquired 80% of the shares in Salt Ltd on 1 January 20X1. This gave Pepper Ltd control over Salt Ltd. In November
20X1, Salt Ltd sold inventory with a cost of $10,000 to Pepper Ltd for $15,000. On 31 December 20X1, Pepper Ltd still had 45%
of this inventory on hand.
What is the consolidation elimination journal amount for Cost of Sales on 31 December 20X1?
A. $5,500
B. $8,250
C. $10,000
D. $12,750
You selected D - This is correct
D is correct because the total journal adjustment to cost of sales is $12,750 ($10,000 + $2,750).
Step 1:
Dr Sales $15,000 (for the sale to the parent)
Cr COGS $10,000 (for the cost to the subsidiary)
This gives us an unrealised profit of $5,000.
Step 2:
45% was still on hand at the period end, so 55% was sold to parties external to the group. Thus, we can realise 55% of the
unrealised profit: $5,000 x 55% = $2,750.
Cr COGS $2,750 (for the realisation of the profit)
So, the total journal adjustment to cost of sales is $12,750 (i.e. $10,000 + $2,750).
Reference:
Module 5
> Part B
> Page 254-260
Question 361 mark
Conglomerate Ltd purchased Small Ltd 3 years ago. The business combination resulted in goodwill of $100,000. Management
believe that the goodwill should be amortised over a useful of 10 years.
Over the past 3 years, goodwill was impaired by a total of $5,000. In the fourth year since acquisition, goodwill will be impaired
by $1,000.
What is the correct carrying amount of goodwill at the end of the fourth year?
A. $54,000
B. $60,000
C. $94,000
D. $100,000
C is correct because the carrying amount is $94,000 (initial amount) - $6,000 (accumulated impairment).
Paragraph B63(a) of IFRS 3 requires goodwill to be measured after initial recognition ‘at the amount recognised at acquisition date
less any accumulated impairment losses’. (see page 233)
IFRS 3 does not allow for goodwill to be amortised. Even though management believe it should be amortised, this is not allowed in
terms of IFRS 3.
Reference:
Module 7
> Part A
> 7.2 Identifying assets that may be impaired
> Specific requirements for certain intangible assets and goodwill
> Page 374,273
Question 370 marks
YogiYippi is a well established and internationally recognised milkshake brand owned by Entity X. During the year, a competitor
acquired Entity X and as part of the business combination, it acquired the YogiYippi brand for $3 million. The competitor expects
the brand to generate revenues in excess of $20 million.
Assuming the competitor was the acquirer in the business combination, how should the competitor treat the YogiYippi brand?
A. The amount of $3 million should be immediately expensed.

B. The amount of $3 million should be recognised as an intangible asset.
C. An asset of $20 million and an expense of $3 million should be recognised.
D. The YogiYippi brand should not be recognised as it lacks physical substance and cannot be separately identified.
You selected D - This is incorrect. The correct answer is B
B is correct because the brand can be rented, sold transferred licensed or exchanged as proved by the sale to the competitor. Thus it
can be separately identifiable and according to IAS 38, it should be recognised as an intangible asset at cost.
The acquiree may have intangible assets that were generated internally — according to IAS 38...they should be recognised by the
acquirer as part of the identifiable assets acquired as long as they satisfy either a:
• separability criterion, or
• contractual–legal criterion.
The separability criterion is fulfilled if the intangible asset can be separated from the entity and sold, rented, transferred, licensed or
exchanged. The contractual–legal criterion relates to control over the asset via contractual or legal rights, regardless of whether or
not the rights are transferable or separable from the entity or other rights (IAS 38, para. 12; IFRS 3, para. B32).
Reference:
Module 5
> Part A
> (C) Recognising and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest
in the acquiree
> Page 227
Question 381 mark
Which of the following would not be a requirement for a constructive obligation?
A. A published policy
B. A binding contract
C. A valid expectation
D. A pattern of past practices
B is correct because a binding contract will give rise to a legal obligation.
All other options form part of the definition of constructive obligation as stated in IAS 37, para. 10.
Reference:
Module 3
> Part B
> 3.4 Recognition of provisions
> Definition of provisions
> Page 143
Question 391 mark
XYZ Ltd (XYZ) is reorganising its factory to implement process efficiencies.
An asset has the following details:
– Purchase price $250,000
– Carrying amount $220,000
– Fair value $210,000
Estimated present value costs to dispose of the asset include:
– $2,500 contract costs
– $4,000 legal transfer costs
– $5,000 redundancy payment to one employee who is no longer needed as a result of the reorganisation.
The value in use is unknown. What is the value of impairment recognised by XYZ?
A. $10,000
B. $16,500
C. $17,500
D. $21,500
B is correct based on the following:
Impairment is required if recoverable amount is lower than the carrying amount. (Figure 7.2)
The carrying amount is $220,000.
The recoverable amount is the higher Fair value less costs of disposal and value in use. We are not given the value in use, so we
need to calculate the FV less costs of disposal.
FV = $210,000
The employee redundancy cost is not directly related to the sale of the asset and so is excluded from the calculation of FV less
costs to sell. (Table 7.6)
Costs to sell = $6,500 ($2,500 + $4,000)
So $210,000 - $6,500 = $203,500.
Impairment is required because this is lower than the carrying amount.
The impairment = $220,000 (Carrying Amount) - $203,500 (Fair Value less costs to sell) = $16,500.
Reference:
Module 7
> Part B
> 7.4 Fair value less costs of disposal
> Page 378-381
Question 401 mark
ABC Ltd has its financial year end on 31 December. The full-year financials were prepared on 20 January and submitted to the
board of directors on 5 February. The board met and approved the financials on 16 February.
The financials were made available to shareholders on 3 March and approved by the shareholders on 20 March. On 30 March, the
financials were filed with the regulatory board.
On which date are the financial statements of ABC Ltd authorised for issue?
A. 5 February
B. 16 February
C. 3 March
D. 20 March
B is correct because in terms of IAS 10, para 5, the financial statements are considered to be authorised for issue on the date that
the directors approve the financials.
Reference:
Module 2
> Part A
> 2.4 Events after the reporting period
> Types of events after the reporting period
> Page 75
Question 411 mark
Two months before the financial year end, Entity A received a legal notice relating to a law suit from a customer for $100,000. The
customer claimed that Entity A supplied inferior goods. The customer believes that he is entitled to compensation even though the
goods were sold with an exclusion clause that waives customers’ rights to return damaged and inferior goods.
The customer signed this exclusion clause when the goods were purchased. Entity A’s lawyers believe that there is a 99% chance
that the case will not be successful due to the contracts that the customer signed as well as the standard practice for the sale of
similar goods in the industry.
Referring to the Conceptual framework and IAS 37, which of the following is most correct?
A. The lawsuit should be recognised as a provision because it can be reliably measured.

B. The lawsuit should be disclosed as a contingent liability because it fails the probability criterion.
C. The lawsuit should not be disclosed as a contingent liability because the outflows of economic benefits are remote.
D. The lawsuit should not be recognised as a provision because a provision relates to uncertainty and the amount of $100,000 is
determinable.
C is correct as the lawsuit fails the definition of liability because there is no present obligation. Accordingly, the lawsuit would be
considered a contingent liability. It also fails the recognition criteria because the outflow of benefits is not probable. That is, there is
only a one per cent chance that the lawsuit would be successful.
IAS 37 states in para. 28 'A contingent liability is disclosed, as required by paragraph 86, unless the possibility of an outflow of
resources embodying economic benefits is remote.'
A is incorrect, because it is not a liability, hence, it is not a provision. Reliable measurement is not relevant here, as this refers to
recognition criteria after the definition of the liability is established.
B is incorrect, because although the lawsuit is a contingent liability it should not be disclosed as it fails the probability criterion.
D is incorrect, because although the lawsuit should not be recognised, the reason provided is not accurate.
Reference:
Module 1
> 1.4 The elements of financial statements

> Defining the elements of financial statements
> Page 22
Also see: Module 3> Page 152
Question 420 marks
Section B: Multiple Choice Question – Multiple Options
This section has 1 question worth 1 mark (total of 1 mark)
Select all that apply
Arden Enterprises Ltd (Arden) recognised the following temporary differences in its financial statements for the period ended 31
December 20X3:
– Provision for warranty: $40,000 deductible temporary difference
– Receivables: $30,000 taxable temporary difference
Both temporary differences are expected to reverse in the following financial year.
Taxable profit for the year ended 31 December 20X3 was zero. Forecast profit for the following year, before recognition of reversal
of temporary differences, is also expected to be zero.
Additional information:
– Tax losses can only be carried forward for one year
– The carry back of losses is not permitted
– The tax rate is 30 per cent.
What amount should Arden recognise as a deferred tax asset and a deferred tax liability for the year ended 31 December 20X3?
(Select all that apply)
A. $3,000 DTA
B. $9,000 DTA
C. $12,000 DTA
D. $9,000 DTL
E. $12,000 DTL
F. $30,000 DTL
You selected A - This is incorrect

The correct answers are: B and D

B and D are correct based on the following:
The total of the deductible temporary difference ($40,000) gives rise to a DTA of $12,000 but only $9,000 of this can be
recognised, as this is the value of the DTL.
Step 1: Work out the value of the DTA:
$40,000 deductible temporary difference of $40,000 x 30% = $12,000.
Step 2: Refer to Figure 4.8.
The DTA can only be recognised to the extent that it would be probable that there would be future taxable profits against which the
DTA can be used.
At the end of 20X3 taxable profits were zero. The forecast for the following year is expected to result in zero profits.
However, the taxable temporary difference is expected to reverse in the following year....the same year that the deductible
temporary difference would reverse.
Step 3: Work out the value of the DTL
$30,000 taxable temporary difference for receivables x 30% = $9,000.
Step 4: The DTA can be recognised to the extent of the DTL
Therefore, DTA that can be recognised is only $9,000.
Reference:
Module 4
> Part B
> 4.5 Recognition of deferred tax assets
> Initial recognition of other assets or liabilities not in a business combination transaction (IAS 12, para. 15(b))
> Figure 4.8
> Page 179-189
Question 43- awaiting marks
Section C: Extended Response Questions
This section has extended response questions worth a total of 18 marks
Case Scenario 1
The following information relating to Pretty Ltd for the year ended 30 June 20X8 is available:
Extract from Statement of profit or loss and other

comprehensive income
20X8
Sales Revenue $275,000
Income tax expense $70,000
Extract from Statement of financial position

20X7 20X8
Deferred tax asset $2,100 $1,800
Trade receivables (gross) $61,000 $44,500
Current tax payable $50,000 $35,000
Deferred tax liability $3,400 $5,500
Question 1: (4 marks) Calculate the following (show your workings): i) Bad debts written off ii) Cash received from customers
Note 1: Enter your written responses in the text box below. Expand the text box by dragging the bottom right corner out.
Note 2: Copy/paste your response to a Word document as a back-up. You will not need to upload or email this document (unless
we contact you).
Marked Answer :
Bad debts written off = opening balance of allowance for bad debt + doubtful debt expense – closing balance of allowance for
doubtful debts

off = $6,000 + 8,000 – 4,500 = $9,500
Bad debts written
Cash received from customers = opening balance of trade receivables + sales revenue – bad debts written off – closing balance of
trade receivables

customer = 61,000 + 275,000 – 9,500 (per above) – 44,500 = $282,000
cash received from
Total Marks : 4
Bad Debts Written off
Opening balance of allowance for doubtful
$6,000
debts:
+ Doubtful Debts Expense $8,000
- Closing balance of allowance for doubtful ($4,500)
debts
= Bad Debts Written off $9,500

Cash Received from customers
Opening balance of trade receivables $61,000
+ Sales revenue $275,000
- Bad Debts Written Off ($9,500)
- Closing balance of receivables ($44,500)
= Cash Received from Customers $282,000

Note: The balance for doubtful debts shown in the balance sheet is shown as a 'negative' amount because it is a contra-asset that
reduces the value of the gross receivables. This is similar to accumulated depreciation which reduces the historical cost of an asset
down to its 'written-down-value'.
When entering this amount into the formula you do not put in a negative number. You just put the balance (i.e. $6,000 for opening
balance).
Marks:
Up to 2 marks for bad debts written off
Up to 2 marks for cash received from customers
Reference:
Module 2
> Part E
> 2.18 Tips on how to analyse the statement of cash flows
> Consolidated financial statements
> Page 105
Case Scenario 1
The following information relating to Pretty Ltd for the year ended 30 June 20X8 is available:
Extract from Statement of profit or loss and other

comprehensive income
20X8
Sales Revenue $275,000
Income tax expense $70,000
Extract from Statement of financial position

20X7 20X8
Deferred tax asset $2,100 $1,800
Trade receivables (gross) $61,000 $44,500
Current tax payable $50,000 $35,000
Deferred tax liability $3,400 $5,500
Question 2: (3 marks) Calculate the following (show your workings): i) The deferred tax movement ii) Current tax expense iii)
Tax paid
we contact you).
Marked Answer :
Deferred tax movement = beginning balance of DTA 2,100 less end balance $1,800 = DTA movement of $300. Plus DTL
movement $3,400 – $5,500 = $2,100. So DTE = $1,800
Tax expense = current tax plus deferred tax, so current tax = tax expense less deferred tax
Current tax expense = $70,000 (income tax expense) less deferred tax $1,800
Currentt tax expense = $71,800
Income tax paid = opening balance of income tax payable + income tax expense – closing balance of income tax payable
Income tax paid = $50,000 + 70,000 – 35,000 = $85,000
Total Marks : 3
i) Deferred tax movement: $2,400
Deferred tax expense = $2,100 ($5,500 – $3,400)
Deferred tax income = ($300) [$1,800 – $2,100]
Total movement: $2,100 – ($300) = $2,400.
Be careful here. An increase in DTA increases deferred tax income but a decline in DTA will increase deferred tax expense.
The shift in the DTA is a decrease of $300, so this is a negative amount and will increase deferred tax expense.
This will increase the deferred tax movement from $2,100 to $2,400. (not down from $2,100 to $1800).
ii) Current tax expense: $67,600
The formula is in Figure 4.1 on page 265. Tax expense = current tax expense + deferred tax expense - deferred tax income
Refer to Knowledge Check 4.6 for a similar type of situation.
Income tax expense = $70,000 (given)
Income tax expense = current tax expense (CTE) + deferred tax expense – deferred tax income
$70,000 = CTE + $2,100 – ($300) (These two numbers were calculated in answer (i)
$70,000 = CTE + $2,400
So, CTE must be $67,600.
Current tax expense: $67,600
Note: You cannot just multiply the revenue figure by 30%. This is not correct for two reasons.
Firstly - because we multiply the taxable income by 30% to get the Income Tax Expense.
Secondly, because, Income Tax Expense is the total amount of the Tax Expense, and here we are asking for current tax expense.
iii) Tax paid: $82,600
Tax expense is not the same as tax paid. You need to look at the change in the current tax payable liability account.
There is a focus on cash flows here, so you need to do a similar approach to your previous answer on cash received from
customers. We look at the balance sheet items (opening and closing balance of tax payable, and adjust this for current tax expense).
Our opening balance is what is expected to be paid in the current period because it is a current liability.
We add the current tax expense which is supposed to be paid.
We then subtract the closing balance of current tax payable, because this indicates the total amount as yet unpaid.
$50,000 Opening balance of current tax payable
Add $67,600 Current tax expense
Less $35,000 Closing balance
= $82,600 Tax paid
An alternative correct answer is based on the formulas in module 2:
$50,000 Opening balance of current tax payable
Add $70,000 Income tax expense
Less $35,000 Closing balance
= $85,000 Tax paid
Marks
1 mark for each correct answer (total 3)
Reference:
Module 4
> Part A
> 4.1 Tax expense
> Figure 4.1
> Page 160
Case Scenario 2
On 31 July 20X8, Parent Ltd acquired 70 per cent of the shares of Son Ltd for $160,000.
On this date the following information was available for Son Ltd:
Son Ltd Fair value Tax base

Issued share capital $80,000
Retained earnings $90,000
Liabilities $25,000 $25,000 $25,000
$195,000

Current assets $40,000 $55,000 $40,000
Non-current assets $155,000 $180,000 $155,000
$195,000
Son agreed to adjust the fair value of its current assets in its accounting records prior to acquisition. The non-current assets will be
adjusted in the consolidated worksheet. The applicable tax rate is 30% and the group applies the partial goodwill method. The
incomplete consolidation worksheet for the Parent Group is provided below.
Adjustments Non- Parent

Account Parent Son controlling equity
Dr Cr interest interest
Issued share capital $150,000 $80,000 #1
Retained earnings $120,000 $90,000 #2
Business combination
#3
reserve
Revaluation surplus #4
Liabilities $25,000
Deferred tax liability #5 #6

Current assets #7
Non-current assets #8
Other net assets $110,000
Deferred tax asset
Investment in subsidiary $160,000
Goodwill #9

Question 3: (2 + 6 + 3 marks) There are 9 items that are not complete. i) What are the amounts for #1 & #2? (2 marks) ii) What
are the amounts for #3 to #8? (6 marks) iii) What is the goodwill adjustment (#9)? (3 marks) (Show your workings)
we contact you).
Marked Answer :
#1. Issued share capital (reverse sub): $80,000

Book value of identifiable net assets of sub: $170k ($80 + $90)
add: increase in current assets of $15,000 = $15,000
Less: DTL on rev of current assets.= $4,500
add: increase in noncurrent assets of $25,000
less; DTL on reval of non current asset = $7,500
FV of assets = $198,000
Dr Non current assets = $25k

Cr DTL $7,500
Cr Reval surplus $17,500
Dr Current assets $15,000
Cr DTL $4,500
Cr business reserves $10,500
#2 $90,000+120 = $210 less NCI amount of $63 = $147k
#3. Total business combination reserve $10,500
#4. Total Reval surplus $17,500
#5. DTL = current assets ($55,000) – less tax base of $40,000 = $15,000 temporary difference = DTL = $4,500
#6. DTL = $7,500 (non current assets)
#7. Current assets = revalued in its accounting book prior to reconciliation = $55,000
#8. noncurrent assets = not revalued = $155,000
NCI for partial good will method = NCI % (30%) of identifiable net assets. Net assets = $180,000 + $55,000 = $235,000 – $25,000
(liabilities).
NCI for partial good will = $210,000 x 30% = $63,000
Good will (#9) = $160,000 + $63,000 – $198,000 (Fair Value of Net assets)
Good will = $25,000
Total Marks : 11
Adjustments Non-
Parent equity
Account Parent Son controlling
Dr Cr interest
interest
Issued share capital $150,000 $80,000 $56,000 (1) $24,000 $150,000
Retained earnings $120,000 $90,000 $63,000 $27,000 $120,000 (1)
Business combination reserve $17,500 (1)
Revaluation surplus $10,500 (1)
Liabilities $25,000
Deferred tax liability $4,500 (1) $7,500 (1)

Current assets $55,000 (1)
Non-current assets $155,000 (1) $25,000
Other net assets $110,000
Deferred tax asset
Investment in subsidiary $160,000
Goodwill $21,400 (3)
#1: Parent acquired 70% of the shares in Son. Thus, 70% of the issued share capital at-acquisition is an inter-company balance and
must be eliminated. The adjustment is $56,000 ($80,000 X 70%).
#2: The consolidated retained earnings balance at-acquisition would be equal to the parent company's retained earnings balance
because 70% of the subsidiary's balance would be eliminated as an inter-company adjustment and the remaining 30% is
attributable to the non-controlling interest. Thus, the parent's equity interest of retained earnings remains the same at $120,000.
#3, #6 and #8:
The question indicated that non-current assets will be adjusted in the consolidated worksheet. Hence the amount that it is initially
included is at the carrying amount per the subsidiary's records.
So #8 is $155,000 (the carrying amount of the non-current assets per the subsidiary's records).
The adjustment required to this balance is a debit of $25,000 in order to get the carrying amount to reflect its fair value. Remember
that IFRS 3 requires the use of fair value for all amounts except for the good will calculation where the partial goodwill method is
used. The $25,000 debit adjustment was already included in the table.
The credit side of this adjustment would go to 'business combination reserve' and deferred tax liability. Business combination
reserve is used and not revaluation surplus because the adjustment did not take place in the subsidiary's records. Rather the
adjustment is only made in the consolidation worksheet as a result of the business combination and for the purposes of creating the
consolidated financial statements.
#3 is thus $17,500 ($25,000 x 70%) which is the after-tax adjustment relating to the $25,000.
#6 is the tax effect of the $25,000 fair value adjustment ($25,000 x 30%).
#4, #5 and #7:
These entries relate to the inclusion of current assets in the consolidation worksheet at its fair value. The reason this is included at
its fair value is because the subsidiary adjusted the value of the current assets in its own accounting records.
#7 is thus $55,000 which is the fair value of current assets. The actual adjustment would be $15,000 ($55,000 FV - $44,000 CA).
The entries that Son Ltd would have processed in its accounting records when this adjustment was made would have been as
follows:
Dr Current Assets $15,000
Cr Revaluation surplus (OCI) $10,500
Cr Deferred tax liability (B/s) $4,500
#4 is $10,500
#5 is $4,500
#9: Goodwill calculation - partial goodwill method

FV of net assets
Current assets at FV $55,000
Less DTL ($15,000 x 30%) ($4,500)
Non-current assets at FV $180,000
Less DTL ($25,000 x 30%) ($7,500)
Less: Liabilities ($25,000)
FV of net assets acquired $198,000

NCI portion of net assets = $59,400 ($198,000 x 30%)

Goodwill
Purchase consideration $160,000
ADD: NCI portion $59,400
$219,400
Less: FV of net assets ($198,000)
Goodwill $21,400
Marks:
1 mark for each correct amount for items #1 to #8.
Up to 3 marks for the Goodwill calculation (#9).
Reference:
Module 5
> Part B
> Non-controlling interest
> Page 268
Total Marks 28 / 42

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14/04/2022, 19:45 Course Outline – KnowledgEquity

FR Practice Exam 1Collapse All Answers

Section A: Multiple Choice Questions – Single Option

This section has 42 questions worth 1 mark each (total of 42 marks)

A. Revaluation gain of $1,000

B is correct because there is an impairment loss of $5,000, which is calculated as follows:

$120,000 / 10 years = $12,000 per year x 3 years = $36,000.

Step 2: Calculate Carrying Amount (CA) at 30 June 20X6:

- $36,000 accumulated depreciation

= $84,000 CA before impairment

= $70,000 CA after impairment

$70,000 CA / 7 years remaining = $10,000 per year x 2 years

Step 4: Calculate CA for 30 June 20X8 before revaluation

$70,000 from 30 June 20X6

- $20,000 accumulated depreciation

= $50,000 CA before revaluation.

Step 5: Compare Revaluation to Carrying Amount

Therefore the impairment is $50,000 - $45,000 = $5,000.

> 7.6 Recognising and measuring an impairment loss

What is the amount of the impairment reversal adjustment at 30 June 20Y0?

This is calculated as follows:

$120,000 / 10 years = $12,000 per year x 3 years = $36,000.

Step 2: Calculate Carrying Amount (CA) at 30 June 20X6:

- $36,000 accumulated depreciation

= $84,000 CA before impairment

= $70,000 CA after impairment

$70,000 CA / 7 years remaining = $10,000 per year x 2 years

Step 4: Calculate CA for 30 June 20X8 before revaluation

$70,000 from 30 June 20X6

- $20,000 accumulated depreciation

= $50,000 CA before revaluation.

Step 5: Compare Revaluation to Carrying Amount

Therefore the impairment is $50,000 - $45,000 = $5,000.

Step 6: Compare 20Y0 Carrying Amount to Revalued amount of $40,000

$45,000 Recoverable value 30 June 20X8

= $27,000 Carrying Amount

Step 7: Determine the reversal of impairment

> 7.7 Reversals of impairment losses

Past experience indicates the following:

– 30% chance that there will be no returns;

– 45% chance that there would be 50 returns;

– 15% chance that there would be 60 returns; and

– 10% chance that there would be 65 returns.

Based on the following calculations:

Revenue from no returns: ((200-0) x $500) x 30% = $30,000

Revenue from 50 returns: ((200-50) x $500) x 45% = $33,750

Revenue from 60 returns: ((200-60) x $500) x 15% = $10,500

Revenue from 65 returns: ((200-65) x $500) x 10% = $6,750

$30,000 + $33,750 + $10,500 = $6,750 = $81,000.

The total revenue is therefore $81,000.

> 3.1 Recognition of revenue

> Step 3: Determine the transaction price of the contract

Past experience indicates the following:

– 30% chance that there will be no returns;

– 45% chance that there would be 50 returns;

– 15% chance that there would be 60 returns; and

> 3.1 Recognition of revenue

> Step 3: Determine the transaction price of the contract

20X1 20X2 20X3

Which of the following tax-effect journals for 20X1 is correct?

A. DR Deferred tax asset $125 | CR Current tax income $125

BE CAREFUL HERE: The tax rate in this question is only 25%.