Practice Exam - 2

4/24/23, 1:57 AM KnowledgEquity - Apply knowledge. Improve performance.
FR Practice Exam 2
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Question 1 Marks: 1
Section A: Multiple Choice Questions – Single Option
This section has 42 questions worth 1 mark each (total of 42 marks)
BuildIt Ltd is a property developer who sold a parcel of land to a customer for $250,000. While the ownership transfers immediately
to the customer once the contract is signed, the $250,000 payment is only required at the end of three years. The effective interest
rate applicable to this contract is 8%.
In terms of IFRS 15, what is the standalone selling price of the land that would have been payable by the customer if it was paid on
the date the contract was signed?
Answer Options
You answered B. The correct answer is B
USER SELECTION CORRECT ANSWER
A $190,000
B $198,450
C $250,000
D $314,750
Answer Explanation
B is correct because the contract includes a significant financing component. We can calculate the standalone price by discounting
the $250,000 by 8% for a 3 year period. The discount rate is 1/(1.08)^3 = 0.7938. So, $250,000 x 0.7938 = $198,450. This indicates
that $51,550 represents the 'financing portion' of the contract.
A is incorrect because this adjusts the $250,000 by 8% each year for 3 years (8% x $250,000 x 3 years = $60,000 in interest). This
is not the correct calculation.
https://knowledgequity.com.au/course/financial-reporting/fr-practice-exam-2 1/37
C is incorrect as this has not separated out the financing component of the contract.
D is incorrect as this has treated $250,000 as the present value and increased it by 8% p.a. over 3 years (1.08^3 = 1.259). This
would only be valid if the $250,000 was the standalone selling price at the date the contract was signed, but the $250,000 is paid
in year 3.
Module: 3 > Part: A > 3.1 Recognition of revenue > Step 3: Determine the transaction price
of the contract > Page: 127
Question 2 Marks: 1
BuildIt Ltd is a property developer who sold a parcel of land to a customer for $250,000. While the ownership transfers immediately
to the customer once the contract is signed, the $250,000 payment is only required at the end of three years. The effective interest
rate applicable to this contract is 8%.
In terms of IFRS 15, what are the journal entries relating to the transaction at the end of three years?
Answer Options
You answered C. The correct answer is C
A DR Bank $250,000 | CR Sales $250,000
B DR Bank $250,000 | CR Sales $190,000 | CR Interest Receivable $60,000
C DR Bank $250,000 | CR Accounts Receivable $198,450 | CR Interest Income $51,550
D DR Bank $314,750 | CR Accounts Receivable $250,000 | CR Interest Income $64,750
Answer Explanation
C is correct because according to IFRS 15, when there is a significant financing component, this must be taken into account and
treated separately.
We can calculate the standalone price by discounting the $250,000 by 8% for a 3 year period. The discount rate is 1/(1.08)^3 =
0.7938. So, $250,000 x 0.7938 = $198,450. This is the amount that the same would be recorded as on the date that the contract is
signed and the ownership transfers to the customer.
So on this date, the journal would be:
DR Accounts Receivable $198,450 CR Sales $198,450
However, the question asked for the journals after three years. The interest component on this sale is $250,000 - $198,450 =
$51,550.
So after three years, the journals would be as follows:
DR Bank $250,000 (total amount to be received from the customer)
CR Accounts Receivable $198,450 (settlement of the amount owing by the customer)
CR Interest Income $51,550 (the residual amount).
Module: 3 > Part: A > 3.1 Recognition of revenue > Step 3: Determine the transaction price
of the contract > Page: 129
Question 3 Marks: 1
Which of the following is correct?
Answer Options
A Investor A has 25% ownership interest in Entity F.
B Investor A has a 72% ownership interest in Entity E.
C Investor A has an 40% ownership interest in Entity G.
D Investor A has a 63,75% ownership interest in Entity H.
Answer Explanation
B is correct because Investor A has control over Entity B. And Entity B has control over Entity E. So Investor A's interest in Entity E
will be Investor A's interest in Entity B x Entity B's interest in Entity E = 90% x 80% = 72%
Module: 5 > Part: A > 5.2 The acquisition method > Page: 226
Question 4 Marks: 1
General purpose financial reporting is most likely focused on meeting the needs of which of the following users?
Answer Options
You answered D. The correct answer is D
A Banks.
B Regulators.
C Government.
D Individual creditors.
Answer Explanation
D is correct because individual creditors are the least likely to have power to demand information from the entity that is tailored to
their needs.
The definition of GPFS in IAS para 7 states: 'Financial statements that are intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to their particular information needs.'
A, B and C are incorrect because these users are more likely to be in a position to require the entity to prepare special tailored
reports.
Module: 1 > 1.1 The role and importance of financial reporting > The importance of
financial reporting > Page: 3
Question 5 Marks: 1
Entity A Ltd controls Entity B Ltd. During the financial year ending 30 June 20X1, Entity A sold an item of inventory to Entity B. The
inventory cost the parent $60,000 and was sold to the subsidiary for $80,000. At 30 June 20X1, Entity B still had all of the inventory
on hand.
Assume a tax rate of 30%.
What is the appropriate consolidation adjusting entry for the year ended 30 June 20X1 (the year of the intra-group sale)?
Answer Options
DR Inventory $20,000 | DR Cost of sales $60,000 | CR Sales $80,000 || DR Income tax expense $6,000
A
| CR DTA $6,000
DR Sales $80,000 | CR Cost of sales $60,000 | CR Inventory $20,000 || DR DTA $6,000 | CR Income tax
B
expense $6,000
DR Retained earnings (o/b) $20,000 | CR Inventory $20,000 || DR Income tax expense $6,000 | CR
C
Retained earnings (o/b) $6,000
D
Answer Explanation
B is correct because total profit is $80,000 carrying value to Entity B less $60,000 carrying value to Entity A = $20,000 and the tax
effect on profit is $20,000 x 30% = $6,000. Profit or loss on sales within the group are only recognised by the group when the
underlying asset is sold externally to the group.
In this question, all of the inventory is still on hand at the end of the year – accordingly there is an ‘unrealised’ profit on the sale of
inventory that needs to be eliminated when preparing the consolidated financial statements.
Module: 5 > Part: B > 5.8 Preparation of consolidated financial statements > Transactions
within the group > Page: 258
Question 6 Marks: 1
On 1 July 20X4, Entity S Ltd purchased 25% of the shares in Entity T for $85,000. Entity S has determined that it has significant
influence over Entity T. Accordingly, Entity T is an associate of Entity S. The carrying amount of the investment at the time of
acquisition was $85,000.
The following information was available in relation to the year ended 30 June 20X5 in relation to Entity T:
– Profit after tax was $40,000
– Entity T paid a dividend of $20,000
What is the carrying amount of the investment in the associate at 30 June 20X5?
Answer Options
A $20,000
B $90,000
C $95,000
D $105,000
Answer Explanation
B is correct because $85,000 + 25% of ($40,000 [profit after tax] – $20,000 [dividend paid]) = $85,000 + $5,000 = $90,000.
A is incorrect because it does not take into account the original carrying amount of the investment and does not take into account
that the carrying amount of the investment is only increased by 25%.
C is incorrect because this does not take into account the payment of the dividend.
D is incorrect because this does not take into account that the carrying amount of the investment is only increased by 25%.
Module: 5 > Part: C > 5.13 Application of the equity method > Recognising the investor's
share of the associate post-acquisition other comprehensive income > Page: 291
Question 7 Marks: 1
Which of the following characteristics is specific to provisions?
Answer Options
A It is a possible obligation as a result of a past event.
B An element of uncertainty exists, whether this be due to timing or amount.
C The amount of the provision can be established reliably without the need to make estimates.
D It arises from an obligation to pay for goods or services that have been supplied but not yet paid.
Answer Explanation
B is correct because a key aspect of a provision is the requirement that uncertainty exists. Provisions are defined as liabilities of
uncertain timing or amount (IAS 37 para. 10).
A is incorrect because a provision requires an entity to have a present obligation (IAS 37 para. 14). A possible obligation may give
rise to a contingent liability.
C is incorrect because a reliable estimate can be made of the amount of the provision. A provision is considered to be capable of
being reliably measured even where a number of possible outcomes exist.
D is incorrect because this is a characteristic of an accrual.
Module: 3 > Part: B > 3.4 Recognition of provisions > Definition of provisions > Page: 144
Question 8 Marks: 1
Entity B purchases large pieces of vacant land. It sub-divides this land and then sells it off individually as inventory in the ordinary
course of business. Due to the nature of its business, the customers repay their accounts over 3 years. At the end of 20X6, the
outstanding customer balance account was $560,000.
Management made the following estimates in relation to these balances:
– 30% chance that credit loss for 12 months would be $10,000
– 40% chance that the lifetime expected credit loss would be $16,000
– 60% chance that the lifetime expected credit loss would be $17,000 The risk of default increased significantly since the initial
recognition of these customer balances but, at the end of 20X6, there was no indication of impairment.
Which of the following relating to the customer accounts of Entity B is correct?
Answer Options
You answered A. The correct answer is A
The customers are considered assets as Entity B has a contractual relationships with them and so the
A
balance should be classified as amortised cost.
The cash from the customers are economic benefits that can be reliably measured and so the amounts
B
owning should be classified as fair value through profit and loss.
The customer accounts are in effect a loan from Entity B and the inflow of economic benefits are
C
probable and so the amounts should be measured at their net realisable value.
The inflow of economic benefits satisfy the recognition criteria and should be measured initially at their
D
current cost with fair value changes through other comprehensive income.
Answer Explanation
A is correct because the customers are actually long term debtors. Debtors balances are a resource controlled by the entity as a
result of a past event through which economic benefits are expected to flow. These benefits are probable and can be reliably
measured. Hence the debtors balances are assets.
Per IFRS 9, debtors are considered financial assets. IFRS 9 classifies financial assets that are held for the sole purpose of receiving
interest and principal payments on specified dates as 'amortised cost'.
Module: 6 > Part: A > What are Financial Instruments? > Page: 307
Question 9 Marks: 0
The following information relating to Rex Ltd is available.
20X1: Taxable loss before utilisation of tax losses ($20,000)
20X2: Taxable profit before utilisation of tax losses $60,000
In 20X1, there were taxable temporary differences of $30,000. 20% of this is expected to reverse in two years, 30% is expected to
reverse in five years and the remainder is expected to reverse in seven years.
At the end of 20X1, management was unable to establish if the entity would make any taxable profits in the future beyond the
reversal of taxable temporary differences.
The tax rate is 30% and tax losses can be carried forward for 6 years. Carry back of tax losses is not permitted.
What is the deferred tax asset relating to the tax losses in 20X1?
Answer Options
You answered B. The correct answer is C
A $0
B $1,800
C $4,500
D $6,000
Answer Explanation
C is correct because the DTA is $15,000 x 30% = $4,500. DTA can be recognised to the extent of taxable temporary differences
since profit is unable to be established.
However, tax loss carry forward period is only 6 years so the DTA can only be recognised to the extent of those taxable temporary
differences that are expected to reverse within the tax loss carry forward period.
That is, to the extent of $15,000 (i.e. $30,000 x (20% + 30%)) DTA is $4,500 (i.e. $15,000 x 30%).
Module: 4 > Part: B > 4.6 Recovery of tax losses > Page: 188
Question 10 Marks: 1
Entity B purchases large pieces of vacant land. It sub-divides this land and then sells it off individually as inventory in the ordinary
course of business. Due to the nature of its business, the customers repay their accounts over 3 years.
At the end of 20X6, the outstanding customer balance account was $560,000. Management made the following estimates in
relation to these balances:
– 70% chance that credit loss for 12 months would be $12,000 – 40% chance that the lifetime expected credit loss would be
$16,000
– 60% chance that the lifetime expected credit loss would be $17,000
The risk of default increased significantly since the initial recognition of these customer balances but, at the end of 20X6, there was
no indication of impairment.
What is the net customer account balance at the end of 20X6?
Answer Options
A $543,400
B $548,000
C $548,600
D $560,000
Answer Explanation
A is correct because the customer accounts are long term debtors and are required to be measured at amortised cost in terms of
IFRS 9. When the carrying amount is greater than the recoverable amount, the asset is required to be impaired. Even though there is
no indication of impairment, IFRS 9 requires the expected credit loss to be recognised. To determine the amount of expected credit
loss to be recognised, the entity needs to determine the credit status of the financial instrument in terms of the 3 stage basis.
The information in the question indicates that the risk of default increased significantly since initial recognition and hence this is a
Stage 2. For stage 2, the lifetime expected credit loss must be recognised. Credit loss is the probability-weighted estimate of credit
losses. $6,400 (i.e. $16,000 x 40%) $10,200 (i.e. $17,000 x 60%) = $16,600 Customer account balance: $543,400 (i.e. $560,000 -
$16,600).
Module: 6 > Part: D > Measurement > Impairment of financial assets carried at amortised
cost > Page: 337
Which of the following relating to IAS 8 is correct?
Answer Options
A Voluntary changes to an accounting policy will require prospective adjustments.
B The discovery of material errors in prior financials will require prospective adjustments.
C New information relating to estimates made in prior financials will require retrospective adjustments.
Changes to accounting policies required by an IFRS without transitional provisions will require
D
retrospective adjustments.
Answer Explanation
D is correct because IAS 8, para 19(b) indicates that if the change is required by an IFRS that does not have transitional provisions,
then retrospective adjustment is required.
A is incorrect because IAS 8, para 19(b) requires retrospective adjustment where an entity makes a voluntary change in accounting
policies.
B is incorrect because IAS 8, para 42 requires retrospective adjustment for a material error.
C is incorrect because IAS 8, para 36 and 37 require adjustments to be made in the current and future periods where there is a
revision to an estimate.
Module: 2 > Part: A > 2.2 Accounting policies > Changes in accounting policies > Page: 71
Investa Ltd own a building which is held for rentals and capital appreciation. Investa uses the fair value model to measure its rental
buildings. During the current year, the fair value of the building was estimated at $10,000 higher than its current carrying amount.
Which of the following represents the correct accounting for this event?
Answer Options
A The full increase in fair value should be recorded in profit or loss.
B The rental building cannot be carried at an amount in excess of its carrying amount.
C The carrying amount can be adjusted by the increase in value up to the extent of the original cost.
The fair value increase up to original cost should be recorded in profit or loss and the remainder as a
D
revaluation surplus in OCI.
Answer Explanation
A is correct because building held for rentals and capital appreciation is scoped into IAS 40 – investment properties. In terms of IAS
40, fair value changes to land or building measured in terms of the fair value model must be recognised in profit or loss.
Be careful to not get confused with the treatment required for property plant and equipment in terms of IAS 16 for assets that are
measured in terms of the revaluation model.
Module: 1 > 1.6 Application of measurement principles in the International Financial

Reporting Standards > Investment property > Page: 51
The following information relates to Entity A:
A cash flow hedge was entered into on 1 May 20X6 for the purchase of widgets to be shipped from South Africa on 30 July 20X6.
An amount of R200,000 is payable on 31 August 20X6. All the requirements for hedge effectiveness were satisfied.
Exchange rates: Spot rates Forward rate for delivery on 31 August 20X6
1 May R1 = $0.10 R1 = $0.11
31 May R1 = $0.12 R1 = $0.12
30 June R1 = $0.14 R1 = $0.13
31 July R1 = $0.09 R1 = $0.10
30 August R1 = $0.13 R1 = $0.13
In the previous financial year, Entity A recognised a loss on the fair value changes of property, plant and equipment to the value of
$30,000. In the current year, the assets required an upward revaluation adjustment of $40,000 to reflect its fair value as at 30 June
20X6.
Ignore tax effects.
Assuming there were no other adjustments, what would be the Other Comprehensive Income balance for the year ended 30 June
20X6?
Answer Options
You answered A. The correct answer is B
A $12,000
B $14,000
C $18,000
D $26,000
Answer Explanation
B is correct because the OCI balance would be $14,000 as the amounts that would be included in OCI include: - The movement in
the value of the FEC instrument prior to the recognition of the hedged item (i.e. the widgets) - The revaluation gains in the PPE after
deducting losses recognised in prior years in P&L.
Balance of OCI as at 30 June 20X6: Gain on FEC contract $4,000 Add Revaluation surplus $10,000 Balance $14,000
The FV changes in investment property are taken directly to P&L.
With regard to the movement in the FEC instrument, the following journals would be processed:
31 May
Dr FEC Asset $2,000 Cr Gain on FEC (OCI) $2,000 Note: ($0.12 - $0.11) x R200,000)
30 June Dr FEC Asset $2,000 Cr Gain on FEC (OCI) $2,000 Note: ($0.13 - $0.12) x R200,000)
With regard to the revaluation adjustment, the following journal would be processed: Dr PPE $40,000 Cr Gain on Reval (P&L)
$30,000 Cr Revaluation surplus (OCI) $10,000.
Module: 6 > Part: E > 6.19 Accounting for hedging relationships > Types of hedges > Page:
352
According to IAS 37, which of the following is not a disclosure requirement for provisions?
Answer Options
A The carrying amount at the end of the period.
B The amount of provisions used during the period.
C A detailed description of the nature of the obligation.
D An indication of the uncertainty about the timing of the outflows.
Answer Explanation
C is correct because it is not required as a disclosure. An entity shall disclose the following for each class of provision: a brief
description of the nature of the obligation and the expected timing of any resulting outflows of economic benefits. A detailed
description is not required.
A is incorrect because for each class of provision, an entity shall disclose the carrying amount at the beginning and end of the
period.
B is incorrect because for each class of provision, an entity shall disclose amounts used (i.e., incurred and charged against the
provision) during the period.
D is incorrect because an entity shall disclose the following for each class of provision: an indication of the uncertainties about the
amount or timing of those outflows.
Module: 3 > Part: B > 3.6 IAS 37 Provisions, Contingent Liabilities and Contingent Assets:
Disclosure > Provisions > IAS 37 - disclosure > Page: 148
Which of the following would fall within the scope of IAS 37?
Answer Options
You answered D. The correct answer is B
A Lease contracts.
B Onerous contracts.
C Executory contracts.
D Construction contracts.
Answer Explanation
B is correct because IAS 37, para. 66 explicitly requires an onerous contract to be recognised as a provision.
A is incorrect because IAS 37, para. 1 scopes out provisions that are covered by other standards. Leases are covered in IAS 17.
C is incorrect because IAS 37, para. 1 scopes out provisions that result from executory contracts.
D is incorrect because IAS 37, para. 1 scopes out provisions that are covered by other standards. Construction contracts are
covered in IAS 11.
Module: 3 > Part: B > Scope of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets > Scope of IAS 37 > Page: 143
Entity A enters into a contract with Wholesalers Ltd to supply 10,000 garments every month for 12 months. The contract price is
$4,800,000 which reflects the standalone selling price for each garment. Six months into the contract, Wholesalers Ltd requested a
modification to the original contract because it wanted Entity A to supply 1,000 handbags each month for six months at a total price
of $120,000. The standalone selling price for each handbag is normally $22.
How should this contract modification be treated in terms of IFRS 15?
Answer Options
A The modification will be treated as a separate contract.
B The modification will be treated as part of the existing contract.
C The modification will be treated as a replacement of the existing contract.
D The modification will replace certain parts and become part of the existing contract.
Answer Explanation
A is correct because the request for handbags is distinct and the contract price has increase.
Modifications to contracts are required to be treated as separate contracts if the following two requirements are met:
1. The new promised goods and services are distinct from other goods and services.
2. The price of the contract increases by an amount that reflects the standalone selling prices after taking into account adjustments
like discounts.
The request for handbags is distinct from garments that are provided per the existing contract. That is, the handbags are separately
identifiable and Wholesalers Ltd can benefit by selling these on its own. The price of the contract increases by $120,000 which
indicates that each handbag is sold for $20 under the contract (i.e. $120,000 / (1,000 x 6)). The standalone handbag selling price is
$22, so the contract price increased by an amount with reflects the standalone selling price, net of discounts.
Hence, the requirements are satisfied and the modification needs to be treated as a separate contract in terms of IFRS 15, para. 20.
Module: 3 > Part: A > 3.1 Recognition of revenue > Step 1: Identify the contract(s) with the
customer > Page: 122
On 30 June 20X6, Entity V tendered for and won a contract to repair roads for the Government. The contract is for 3 years with the
option to renew for 1 year. At the inception of the contract, Entity V anticipated that it would exercise its option to renew the
contract.
However, at the end of the third year, Entity V decided that it would not renew the contract.
Entity V incurred the following costs to obtain the contract:
– Annual retainer fee to an external agent to assist with the completion of contracts: $50,000
– Success bonus to a manager who worked on the tender and who will be involved with the contract work: $30,000
– Sales commission to employees for successfully obtaining the contract: $80,000
– Legal fees for lodging the contract: $20,000
What is the amortisation expense relating to the capitalised costs that would be recognised in the statement of profit or loss for the
year ended 30 June 20X9?
Answer Options
You answered D. The correct answer is C
A $27,500
B $40,000
C $55,000
D $80,000
Answer Explanation
C is correct based on the following calculations: The incremental costs related to the contract are $110,000 ($80,000 + $30,000).
The contract is more than 12 months and these amounts are recovered during the contract.
Hence, the incremental cost of $110,000 would be capitalised as an asset and amortised over the life of the contract. This was
initially expected to be 4 years. Hence, the annual amortisation for year 1 (20X7) and year 2 (20X8) would be $27,500 (i.e. $110,000
/ 4). This means that the balance of the incremental cost asset on 30 June 20X9 is $55,000.
However, the entity indicated that it will not renew the contract and so the contract life changed from 4 years to 3 years. Hence, the
entire remaining balance of $55,000 would be amortised in year 3 (20X9).
Module: 3 > Part: A > 3.2 Contract costs > Incremental costs of obtaining a contract >
Page: 138
Which of the following is not separately recognised, as part of the identifiable assets and liabilities of the acquiree, in a business
combination?
Answer Options
A Property, plant and equipment recognised at cost by the acquiree.
B A contingent asset with a probable flow of economic benefits.
C A trademark registered by an acquiree immediately prior to the business combination.
A contingent liability that is a present obligation that arises from past events and its fair value can be
D
measured reliably.
Answer Explanation
B is not separately recognised from goodwill in a business combination, so this is correct.
A, C and D would be separately recognised because: A - Property, plant and equipment is recognised at fair value as part of the
business combination. C - a trademark would likely be recognised as an intangible asset in accordance with IAS 38. D - Contingent
liabilities are separately recognised in accordance with the requirements of IFRS 3.
Module: 5 > Part: A > 5.2 The acquisition method > (C) Recognising and measuring the
identifiable assets acquired, the liabilities assumed and any non-controlling interest in the
acquiree > Page: 229
Entity E Ltd controls Entity F Ltd. During the financial year ending 30 June 20X1, Entity E sold an item of inventory to Entity F. The
inventory cost the parent $60,000 and was sold to the subsidiary for $80,000. At 30 June 20X1, Entity F had sold all of the
inventory to external parties (i.e. none of the inventory was still on hand).
Answer Options
DR Inventory $20,000 | DR Cost of sales $60,000 | CR Sales $80,000 || DR Income tax expense $6,000
A
| CR DTA $6,000
DR Retained earnings (o/b) $20,000 | CR Cost of sales $20,000 || DR Income tax expense $6,000 | CR
B
C DR Sales $80,000 | CR Cost of sales $80,000
D
Answer Explanation
C is correct because there is no ‘unrealised’ profit on the sale of inventory that needs to be eliminated when preparing the
consolidated financial statements because all of the inventory was sold at the end of the year.
Profit or loss on sales within the group are recognised by the group when the underlying asset is sold externally to the group.
Accordingly, only the intragroup sale transaction needs to be eliminated.
within the group > Page: 254-261
On 31 December 20X6, Entity W had a taxable profit of $220,000. The following information was extracted from the statement of
financial position:
20X5 20X6
Deferred tax asset $28,000 $34,000
Deferred tax liability $63,000 $54,000
Current tax payable $108,000 $220,000
What is the amount of tax expense for the year ended 31 December 20X6 if the applicable tax rate is 30%?
Answer Options
You answered C. The correct answer is B
A $46,000
B $51,000
C $66,000
D $69,000
Answer Explanation
B is correct because Tax expense = current tax + deferred tax expense - deferred tax income. Here this is $66,000 + ($9,000) -
$6,000 = $51,000. This is calculated as follows:
Current tax = taxable profit x 30% = $220,000 x 30% = $66,000
DTL decreased by $9,000 ($54,000 closing balance - $63,000 opening balance) So deferred tax expense is a negative amount.
(9,000)
DTA increased by $6,000 ($34,000 closing balance - $28,000 opening balance) So deferred tax income is a positive amount.
$6,000
Substitute into the formula for tax expense: = $66,000 + ($9,000) - $6,000 = $57,000 - $6,000 =51,000
Module: 4 > Part: A > 4.1 Tax expense > Tax expense > Page: 162
Extracts from ABC Ltd’s statement of financial position indicated an amount of $30,000 relating to income received in advance for
royalties and an amount of $40,000 for trade receivables. The accountant included $10,000 of income from royalties in the current
year’s tax assessment calculation, while sales are taxed on the cash basis.
The tax rate is 30%.
What is the combined deferred tax asset or liability balance in relation to these two items?
Answer Options
You answered B. The correct answer is A
A $9,000 - DTL
B $12,000 - DTL
C $15,000 - DTL
D $21,000 - DTL
Answer Explanation
A is correct because the combined amount is $12,000 DTL - $3,000 DTA = $9,000 DTL.
This is calculated as follows:
Income received from royalties in the balance sheet is a liability (income received in advance).
TB for income received in advance is calculated as:
CA - amounts that will not be taxed in the future = $30,000 - $10,000 (since this is taxed in the current year) = $20,000
Deferred tax on income received from royalty = CA - TB x 30% = $30,000 - $20,000 = $10,000 x 30% = $3,000
DTA Deferred tax on trade receivable = CA - TB x 30% = $40,000 - $0 x 30% = $12,000 DTL
Combined amount $9,000 DTL (i.e. $12,000 DTL - $3,000 DTA)
Module: 4 > Part: A > 4.3 Deferred tax > Page: 165
Anon Ltd purchased inventory at a cost of $50,000 during the year. At the end of the financial year, the net realisable value of the
inventory was $49,000. The fair value is estimated at $53,000 and the costs to effect the sale is estimated at $2,000.
If management decide to use the inventory, its value in use would be $20,000.
At what value should the inventory be included in the financial statements?
Answer Options
A $20,000
B $49,000
C $50,000
D $51,000
Answer Explanation
B is correct because inventory must be recorded at the lower of cost or net realisable value in terms of IAS 2. You should not try
and impair inventory in terms of IAS 36.
Module: 1 > 1.5 Measurement of elements of financial statements > Cost-based and value-
based measures used in the International Financial Reporting Standards > Page: 28
Which of the following is not a situation that would justify a change in accounting policy?
Answer Options
A Changes are required by the introduction of a new or existing IFRS.
B Changes will require the provision of more relevant and reliable information.
C Changes will result in a more faithful representation of the financial statements.
D Changes are proposed and approved by a special resolution by the board of directors.
Answer Explanation
D is correct because it is not a situation that, in itself, would justify a change in accounting policy.
A, B and C cover the requirements of IAS 8, para 14, which indicates that changes to accounting policies should only occur when it
is required by an IFRS or when it will result in the provision of more relevant and reliable information about the financial statements.
Module: 2 > Part: A > 2.2 Accounting policies > Changes in accounting policies > Page: 71
An entity has issued a redeemable preference share that will mature in 10 years, at which time the holder has the option to redeem
the instruments for face value plus accrued interest or a fixed number of the issuers shares.
However, during the first five years, the issuer of the redeemable preference shares has the option to redeem the shares for their
face value plus accrued interest or for an equivalent amount in shares of the issuer. This conversion option expires after the first
five years.
What type of instrument has the entity issued?
Answer Options
A The entity has issued a financial liability with an embedded derivative.
The entity has issued an equity instrument because the holder of the instrument has an option to
B
redeem it for a fixed number of shares on maturity.
The entity has issued an equity instrument because the holder of the instrument has an option to
C
redeem it for a variable number of shares on maturity.
The entity has issued a compound financial instrument because it has an obligation to exchange cash
D
and the holder can convert into a fixed number of shares.
Answer Explanation
D is correct because IAS 32, para 29 requires an entity to separately account for an instrument that has components of both a
financial liability and of equity (compound financial instrument). Such an instrument exists where it meets the definition of a
financial liability in IAS 32, para 11, and also provides the holder of the instrument with the right to convert the instrument into
equity instruments of the entity.
In this example the entity has a financial liability because it is required to pay the face value of the instruments plus accrued interest
on maturity, or, at the holder's discretion, a fixed number of shares in the entity.
Module: 6 > Part: D > 6.17 Compound financial instruments > Page: 344
Bax Ltd own a shipping crane with a carrying amount of $500,000. The crane is used to load and off-load containers from ships.
The accountant has been tasked with the calculation of the value in use of the crane but is not sure which amounts are to be
included and excluded from the calculation.
Which of the following cash flows should be included in the calculation?
Answer Options
You answered C. The correct answer is B
A Costs relating to the provision to decommission the crane.
B Enhanced cash inflows resulting from recent restructuring of the crane.
C Cash inflows from trucks that transport the containers to and from the crane.
Income tax receipt for the deductions claimed in relation to the recently completed restructuring of the
D
crane.
Answer Explanation
B is correct because the enhancements were already incurred. Hence, as at the date the value in use calculation is being
performed, the cash inflows from such enhancements need to be included in the calculation of the value in use and the organisation
needs to assess the asset in its current condition (which includes the enhancements already incurred).
Costs relating to enhancements that have not yet occurred as well as the related cash inflows from such future enhancements
should not be included as per para. 44 of IAS 36, but this has not occurred here.
A is incorrect because IAS 36, para. 43 requires that cash outflows relating to obligations that have already been recognised as a
provision to be excluded from the calculation of value in use.
C is incorrect because IAS 36, para. 43 excludes cash flows from assets that are largely independent of the cash flows from the
asset under review.
D is incorrect because IAS 36, para. 50 requires income tax receipts and payments to be excluded from the value in use calculation.
Module: 7 > Part: B > 7.5 Value in use > Step 1: Estimating expected future cash flows >
Page: 387
Cili Ltd owns a truck that was originally purchased at a cost of $200,000 on 1 January 20X2 and estimated to have a useful life of 10
years.
On 31 December 20X4, the truck impaired by $35,000.
On 31 December 20X6, the truck had a recoverable amount of $105,000.
What is the amount for the reversal of impairment?
Answer Options
A $5,000
B $15,000
C $25,000
D $30,000
Answer Explanation
C is correct because the reversal is $100,000 - $75,000 = $25,000 based on the following calculations:
Original without impairment adjustment:
Original cost = $200,000 less Acc Dep for 3 years = ($60,000) = Carrying amount $140,000 less Depreciation for 2 more years =
($40,000) = Carrying amount $100,000
Balance with impairment adjustment:
Original cost = $200,000 less Acc Dep for 3 years = ($60,000) = Carrying amount $140.000 less Impairment ($35,000) = Post
impairment carrying amount $105,000 less Depreciation for 2 more years = ($30,000) = Carrying amount $75,000
The $25,000 is the difference between the impaired carrying amount $75,000 and the old carrying amount had there never been
any impairment recorded ($100,000).
IAS 36 requires the reversal of impairment to be limited to the lower of the recoverable amount ($105,000) or the CA had there
never been any impairment ($100,000).
Hence, the reversal is $25,000 ($100,000 – $75,000).
Module: 7 > Part: B > 7.5 Value in use > Step 1: Estimating expected future cash flows >
Page: 387
The following are features of forward and futures contracts:
I: the underlying item is not normally delivered;
II: traded as an “over the counter” (OTC) contract;
III: the fair value can be determined with reference to market values;
IV: requires payment of a margin deposit.
Which of the following indicates features that are specific only to a futures contract?
Answer Options
A II only
B II and IV only
C I, II and III only
D I, III and IV only
Answer Explanation
D is correct because option II is not included, as it is only applicable to forward contracts, which are not traded on an exchange.
Futures themselves are exchange traded, resulting in a deposit being required by the exchange and the availability of market prices
to determine the fair value of the contract.
Furthermore, futures contracts are usually "closed out" with an opposite contract so that the underlying item is not physically
delivered.
Module: 6 > Part: A > 6.4 Derivative financial instruments > Option contract > Page: 314
On 1 July 20X2, Entity L Ltd purchased 25% of the shares in Entity M Ltd. Entity L has determined that it has significant influence
over Entity M. Accordingly, Entity M is an associate of Entity L. The carrying amount of the investment at the time of acquisition was
$100,000.
For the year ended 30 June 20X3, Entity M made a loss after tax of $600,000.
For the year ended 30 June 20X4, Entity M made a profit after tax of $900,000.
What is the carrying amount of the investment for the years ended 30 June 20X3 and 30 June 20X4 respectively?
Answer Options
A $100,000 and $175,000
B Nil and $325,000
C $100,000 and $325,000
D Nil and $175,000
Answer Explanation
D is correct based on the following calculations: IAS 28 requires the investor’s share of any investee’s post-acquisition losses to be
brought to account until the carrying amount of the investment is zero. Investment as at 1 July 20X2 $100,000 Share of losses 20X3
(25% of $600,000 = $150,000) = Net ($50,000) Share of profits 20X4 (25% of $900,000 = $225,000) Investment as at 30 June
20X4 $175,000.
A is incorrect because it does not take into account the loss incurred in the year ended 30 June 20X4.
B is incorrect because it does not reverse the unrecognised loss on 30 June 20X4, prior to recognising the profit on 30 June 20X5.
C is incorrect because it repeats both errors from A and B.
Module: 5 > Part: C > Investments in Associates > 5.13 Application of the equity method >
Page: 286
Widgets ‘R Us is facing significant cash flow problems but has a large receivables balance, and so those cash flow problems are
only temporary in nature. In order to relieve some of the cash flow issues, the company approaches Factoring Bank, who agrees to
purchase the receivables from Widgets ‘R Us.
The terms of the arrangement are as follows:
1. Factoring Bank will purchase $500,000 worth of receivables from Widgets ‘R Us.
2. Widgets ‘R Us writes a put option for Factoring Bank with an exercise price of $400,000.
3. Widgets ‘R Us guarantees the first 5% of losses on the receivables.
Given the contractual terms of the transfer, what is the appropriate journal entry?
Answer Options
A DR Cash $500,000 | CR Income $500,000
B DR Cash $500,000 | CR Receivable $500,000
C DR Cash $500,000 | CR Loan payable $25,000 | CR Option liability $400,000 | CR Receivable $75,000
No journal entry is required because Widgets 'R Us has not met the derecognition requirements of IFRS
D
9.
Answer Explanation
C is correct because IFRS 9, para. 3.2.16 requires an entity to continue to measure the financial asset to the extent of the entity's
continuing involvement in that asset, which is $400,000 + ($500,000 x 5%) = $425,000. Therefore, 75,000 of the asset is
derecognised and the remainder is recognised as associated liabilities.
A is incorrect because the entity has provided the bank with a put option to sell those receivables back to the entity for $400,000,
which represents a liability, as well as guaranteeing losses on the sold receivables, which is also another liability that must be
recognised. Therefore, the recognition of revenue is not appropriate. Please see IFRS 9, para. 3.2.16 for the appropriate treatment.
B is incorrect because the entity has not satisfied the derecognition criteria for the financial asset. The entity is required to measure
the sold asset to the extent of its continuing involvement in that asset (see IFRS 9, para. 3.2.16) and recognise an associated
liability.
D is incorrect because IFRS 9, para. 3.2.16 requires an entity to recognise liabilities associated with the continued involvement in the
financial asset even when an entity might not meet the criteria for derecognition of the associated financial asset.
Module: 6 > Part: B > Recognition and Derecognition of Financial Assets and Financial
Liabilities > Transfers of financial assets > Page: 318
On 1 July 20X0, a subsidiary sold an item of plant to its parent for $100,000. The plant cost the subsidiary $200,000 and had a
carrying value of $80,000. The subsidiary had depreciated the plant using a straight-line basis over five years with a zero scrap
value at the end of its useful life. The parent depreciates the plant over four years.
Ignore tax effects.
What is the net effect on profits after the eliminations journal entries on 30 June 20X1?
Answer Options
You answered C. The correct answer is A
A Debit of $15,000
B Debit of $20,000
C Credit of $80,000
D Credit of $100,000
Answer Explanation
A is correct based on the following calculations:
Elimination of intra-group profit of $20,000 ($100,000 – $80,000) Depreciation for the group $20,000 ($80,000 x 25%)
Depreciation for Parent $25,000 ($100,000 x 25%) Over-depreciation $5,000 This would be a credit to profits (i.e. reversal results in
profits increasing)
The net effect is $15,000 ($20,000 – $5,000)
Widgets ‘R Us has renegotiated a receivables sales arrangement with Factoring Bank.
As a result of the renegotiation, the terms of the contract are as follows:
1. Factoring bank will pay $450,000 for $500,000 worth of receivables.
2. Widgets ‘R Us guarantees the first 5% of losses on the receivables.
What is the appropriate journal entry to account for this transfer?
Answer Options
A DR Cash $450,000 | CR Income $450,000
B DR Cash $450,000 | CR Receivable $450,000
C DR Cash $450,000 | DR Loss on Sale $50,000 | CR Receivable $500,000
D DR Cash $450,000 | DR Loss on Sale $75,000 | CR Receivable $500,000 | CR Loan Payable $25,000
Answer Explanation
D is correct because the entity has sold its receivables at a loss and also guaranteed losses on the receivables. Applying IFRS 9,
para. 3.2.11 and 3.2.12 results in the recognition of a $75,000 loss, a $25,000 liability and the full derecognition of the financial
asset.
A is incorrect because a sale of a financial asset has occurred that meets the derecognition criteria of IFRS 9. Accordingly, the
receivables must be derecognised and the requirements of IFRS 9, para. 3.2.12 followed for determining the amount to be
recognised in profit or loss.
B is incorrect because the entity sold $500,000 worth of receivables, meaning a loss of $50,000 was made on those receivables.
Also, the entity assumed a guaranteed liability and following IFRS 9, para. 3.2.12 requires a loss of $75,000 to be recorded in the
profit or loss. The full $500,000 of financial assets must be derecognised.
C is incorrect because this entry ignores the fact that the entity has assumed a $25,000 liability to guarantee losses associated
with the receivables. That liability must be recognised and accounting for in profit or loss per IFRS 9, paras. 3.2.11 and 3.2.12.
Which of the following would not be considered as an indicator of impairment in terms of IAS 36?
Answer Options
A New carbon emissions legislation has been passed.
B Variable interest rates have increased over the past year.
C Significant decline in the market value of shares held in XYZ Ltd.
D The number of faulty items reported for manufacturing Line A has increased by 45%.
Answer Explanation
C is correct because IAS 36 does not apply to financial assets as they fall within the scope of IFRS 9. This item would be considered
an impairment but only in terms of IFRS 9 not IAS 36, as shares are financial instruments. IAS 36 is more related to property, plant
and equipment.
A is incorrect because of significant adverse changes in the environment/market.
B is incorrect because of increases in market rates.
D is incorrect because the economic performance of the asset is worse than expected.
Module: 7 > Part: A > 7.2 Identifying assets that may be impaired > Impairment indicators
> Page: 381
Widgets ‘R Us signs an agreement to sell $500,000 worth of receivables for $450,000 and provides a guarantee for losses up to
$5,000.
However, it is too cumbersome to legally transfer title of the receivables to Factoring Bank. Instead, Widgets ‘R Us and Factoring
Bank agree to an arrangement whereby Widgets ‘R Us will transfer to Factoring Bank amounts collected from the debtors on their
respective due dates and Widgets ‘R Us agrees to not factor those debtors to anyone else.
Which of the following statements is correct in relation to accounting for the sale of the receivables?
Answer Options
Pass-through arrangement. Journal entries: DR Bank $450,000 | CR Debtors $500,000 | DR Loss on

A
sale $50,000
Not a pass-through arrangement. Journal entries: DR Bank $450,000 | CR loan $500,000 | DR Interest
B
expense $50,000
Pass-through arrangement. Journal entries: DR Bank $450,000 | CR Debtors $500,000 | CR Guarantee

C
liability $5,000 | DR Loss on sale $55,000
Not a pass-through arrangement. Journal entries: DR Bank $450,000 | CR loan $500,000 | CR

D
Guarantee liability $5,000 | DR Interest expense $55,000
Answer Explanation
C is correct because it is a pass-through arrangement and you need to derecognise the financial asset and record the relevant
liability and loss on sale. IFRS 9, para. 3.2.4(b) and 3.2.5 contain the requirements that must be satisfied for a financial asset to be
derecognised. These paragraphs contain the requirements for a pass-through arrangement which require the transferor to
immediately transfer amounts collected from the debtor to the transferee without delay, and the transferor is prohibited from
pledging the asset.
These have been satisfied and so the amounts would qualify for derecognition as a pass-through arrangement. Thus, options that
state it is not a pass-through arrangement are incorrect.
A is incorrect as it does not take into account the guarantee liability of $5,000 which would be payable to the transferee if the
debtors default to that extent.
B and D are incorrect because they state that it is not a pass-through arrangement.
Entity G issued 200 convertible notes on 1 January 20X6 for $500,000. The notes have a par value of $2,500 each. Interest of 6% is
payable annually in arrears over the 5-year term. The notes are convertible to 20 ordinary shares anytime up to the date of maturity.
The market interest rate for debt with similar risk is 9%.
What is the amount for finance costs that will be presented on the face of the statement of profit or loss for the year ended 31
December 20X7?
Answer Options
A $26,905
B $30,000
C $40,625
D $41,575
Answer Explanation
C is correct because the finance cost in 20X7 is $451,389 x 9% = $40,625. This is calculated as follows:
The liability portion of the convertible notes will be the present value of the notes and the present value of the interest.
PV of Notes ($500,000 x 0.6499): $324,950 Add PV of interest ($500,000 x 6%) x 3.8897: $116,691 Liability portion: $441,641
1 January 20X6: $441,641 Add Finance cost (20X6) ($441,641 x 9%): $39,748 Less: Coupon paid: The coupon paid is the $500,000
convertible notes x 6% per annum = $30,000.
31 December 20X6: $451,389 Finance Cost (20X7) ($451,389 x 9%): $40,625
An entity has issued 5,000 three-year convertible notes with face values of $1,000 each. The convertible notes pay an annual
coupon of 4% in arrears and are convertible at any time up to maturity for 100 shares in the issuer. At the time of issuance, the
prevailing market rate of interest for similar instruments without the conversion feature is 7%.
What is the journal entry at the end of the first year to record the accretion of interest?
Answer Options
A DR Note Payable $200,000 | CR Cash $200,000
B DR Interest Expense $200,000 | CR Note Payable $200,000
C DR Interest Expense $322,445 | CR Cash $200,000 | CR Note Payable $122,445
D DR Interest Expense $122,445 | DR Note Payable $77,555 | CR Cash $200,000
Answer Explanation
C is correct based on the following calculations: The entity issued 5,000 notes at a face value of 1,000 each, yielding proceeds of
$5,000,000. The entity also pays $200,000 interest (at 4% in arrears every year). Discounting the principal outstanding for three
years using the market interest rate of 7% gives a present value of $4,081,489 calculated as follows:
Present value of a single cashflow is calculated as PV = 1/(1 + k)^n) where k is the discount rate and n is the number of periods.
=1/(1+0.07)^3 = 0.816298
$5,000,000 X 0.816298 = $4,081,489
Discounting three interest payment cash flows at the same market rate gives a present value of $524,863 calculated as follows:
The Present value formula of an annuity is PV = [1 - 1/(1 + k)^n] / k
$200,000 X (1-1/(1+0.07)^3)/0.07 = $524,863
$200,000 X 2.624316 = $524,863
This gives the instrument a present value of $4,606,352 ($4,081,489 + $524,863).
In year 1, the interest accretion would be $4,606,352 x 7% = $322,445.
The amount the note payable would increase by is $322,445 (interest) minus the coupon interest payment of $200,000 = $122,445.
On 1 July 20X4, Entity Z Ltd purchased 100% of the shares in Entity Y Ltd for $300,000. The assets and liabilities of Entity Y are
recorded at fair value (and their tax base is equal to their fair value) with the exception of plant and equipment that is recognised at
cost. The carrying value of the plant at the time of acquisition is $105,000 (cost $175,000 less accumulated depreciation $70,000)
and the fair value is $140,000. On the date of acquisition, the plant is estimated to have a remaining useful life of five years with no
residual value.
Tax is 30%.
What is the post-tax adjustment to opening retained earnings in relation to the plant on 1 July 20X5 (the first year after acquisition)?
Answer Options
A Debit of $4,900
B Credit of $7,000
C Debit of $14,700
D Credit of $19,600
Answer Explanation
A is correct based on the following calculations:
Depreciation for group ($140,000 / 5) = $28,000
Depreciation for Sub ($105,000 / 5) = $21,000
Under-depreciation for group $7,000 ($28,000 – $21,000)
Therefore, this would result in a debit to profit of $7,000 to increase depreciation expense. The tax effect would be a credit of
$2,100 (30% x $7,000).
So the net effect would be $4,900 ($7,000 – $2,100)
Module: 4 > Part: C > Special Considerations for Assets Measured at Revalued Amounts >
Page: 194
Which of the following will most likely not require disclosure in the financial statements?
Answer Options
A A contingent liability that fails the probability criteria.
B A present obligation that cannot be reliably measured.
C A possible obligation with a flow of economic benefits that is remote.
D A possible asset with a flow of economic benefits that is virtually certain.
Answer Explanation
C is correct because IAS 37, para. 28 states that disclosure is not required if the possibility of an outflow of resources is remote.
A, B and D are incorrect because disclosure is likely to be required.
Module: 3 > Part: C > 3.9 Contingent liabilities > Page: 153
A bank holds note with three years remaining until maturity, which is recorded as a note receivable and has a present value of
$267,500. The note has an effective interest rate of 7%. The bank was notified that the borrower would only be able to repay
$300,000 on maturity.
What journal entry should the bank record for the financial asset impairment?
Answer Options
You answered D. The correct answer is A
A DR Impairment Loss $22,611 | CR Note Receivable $22,611
B DR Impairment Loss $5,111 | CR Note Receivable $5,111
C DR Note Receivable $17,500 | CR Impairment Loss $17,500
D DR Impairment Loss $27,699 | CR Note Receivable $27,699
Answer Explanation
A is correct because the impairment loss is $267,500 - $244,889 = $22,611. This is explained as follows:
The present value of receiving the face value of the note in 3 years' time is $267,500.
The borrower is only able to repay $300,000 at maturity, which if discounted for 3 years at the original effective interest rate is
$300,000 x 1/(1 + 0.07)^3 = $244,889.
The difference between the two present values ($267,500 - $244,889) = $22,611 is the impairment amount to recognise.
Module: 6 > Part: D > Measurement > Impairment of financial assets carried at amortised
cost > Page: 337
Entity A issues 1,000 convertible instruments at a face value of $300 per instrument. The instruments can be converted into a
variable number of ordinary shares being determined by reference to the market value of Entity A’s share price upon conversion.
Which of the following is the correct classification of the convertible instruments?
Answer Options
You answered D. The correct answer is B
A Equity instrument
B Financial liability
C Financial liability with an equity component
D Equity instrument with a liability component
Answer Explanation
B is correct because the instruments fail the fixed-for-fixed test i.e. variable number of shares are offered to the holder.
Consequently the instrument is classified as a financial liability.
Note that if the features of the instrument allowed settlement with a fixed number of the entity’s own equity instruments, the
financial instrument will have passed the fixed-for-fixed test. This would have resulted in both an equity and liability component
being recognised.
Module: 6 > Part: A > 6.2 Liability or equity? > Financial liabilities > Page: 309
Entity C Ltd controls Entity D Ltd. During the financial year ending 30 June 20X1, Entity C sold an item of inventory to Entity D. The
inventory cost the parent $60,000 and was sold to the subsidiary for $80,000. At 30 June 20X1, Entity D had sold 60% of the
inventory to external parties with 40% of the inventory still being on hand.
Answer Options
A
expense $2,400
B
expense $6,000
C
D
Answer Explanation
A is correct because total profit is $20,000 ($80,000 carrying value to Entity D less $60,000 carrying value to Entity C) and
unrealised profit is 40% x $20,000 = $8,000, with the tax effect of this being $8,000 x 30% = $2,400. Profit or loss on sales within
the group are only recognised by the group when the underlying asset is sold externally to the group.
In this question, 40% of the inventory is still on hand at the end of the year – accordingly there is an ‘unrealised’ profit on the sale of
inventory that needs to be eliminated when preparing the consolidated financial statements.
Total profit = $20,000 [$80,000 carrying value to Entity D less $60,000 carrying value to Entity C] Unrealised profit = 40% *
$20,000 = $8,000. Tax effect = $8,000 * 30% = $2,400
within the group > Page: 254-261
The management of Entity W are in the process of calculating the purchase consideration for a business combination. The
agreement was signed on 1 May 20X5. The terms of the business combination were finalised on 1 July 20X5 (the date shares were
transferred).
Management have identified the following costs in relation to the business combination:
– Cash $100,000
– Issuance of 100,000 Entity W shares.
The estimated fair value of the shares were as follows:
– 1 April 20X5 (last trading day for Entity W shares) $1.50
– 1 May 20X5 $1.80
– 1 July 20X5 $2.00
– Finder’s fee $15,000
– Valuation services $12,000
What is the total purchase consideration for the acquisition?
Answer Options
A $250,000
B $260,000
C $300,000
D $327,000
Answer Explanation
C is correct because Cash $100,000 + Shares $200,000 ($100,000 * 2.00) = $300,000.
A is incorrect because it values shares as at the last trading day.
B is incorrect as it values shares on the date the agreement was signed.
D is incorrect as it includes the acquisition costs (finder’s fee and valuation services).
Module: 5 > Part: A > 5.2 The acquisition method > (D) Recognising and measuring
goodwill or a gain from a bargain purchase > Page: 231
Section B: Multiple Choice Question – Multiple Options
This section has 1 question worth 1 mark (total of 1 mark)
Select all that apply
Which of the following meet the criteria of a contingent liability within the scope of IAS 37? (select all that apply)
Answer Options
You answered F. The correct answer is D,F
Major Ltd has full time, part time and casual staff and the company needs to accrue annual leave for
A
these employees.
Deeline Ltd is in the process of negotiating a long-term contract with a major customer. The CEO has
B
announced that each employee will receive a $100 bonus if the contracts are signed.
Raxspi Ltd manufactures kitchen appliances. It provides a one year warranty on all products sold.
C
Historical data has shown a warranty claim rate of five to seven per cent of appliances sold.
Texnet Ltd is being sued by Colbrash Ltd for failure to adhere to terms and conditions under a sales
D contract. Texnet's legal team is of the opinion that it is likely that a payment of damages will need to be
made.
Redroma Ltd has prepared a seven year profit forecast. The forecast shows that the entity will run at a
E loss until year four. Redroma Ltd wishes to disclose an amount for future operating losses in the notes
to the financial statements.
Rockstar Ltd has a contractor who was injured in the workplace and is likely to require significant
F medical treatment. As the extent of the injury is not known it has been extremely difficult to estimate
the expected cost of the treatment (which will be paid for by Rockstar Ltd).
Answer Explanation
D is correct because this is most likely to be recognised as a contingent liability. It is a possible obligation that arises from past
events (signing of the sales contract) and whose existence will be confirmed only by the occurrence or non-occurrence of one or
more uncertain future events not wholly within the control of the entity (judgement by the courts).
F is correct because this is a present obligation that arises from past events but is not recognised because the amount of the
obligation cannot be measured with sufficient reliability (IAS 37 para. 10 (b)(ii).
A is incorrect because annual leave is not within the scope of IAS 37, and even if it was, it would be a liability or provision.
B is incorrect because this is not a contingent liability. While it is a possible obligation, there is no past event as the event that will
trigger the bonuses (signing of the contracts) is not a past event; it is a future event.
C is incorrect because this is most likely to be recognised as a provision. It involves a present obligation as a result of a past
obligating event (the sale of the appliances). The actual amount payable is uncertain but an be estimated with a high degree of
confidence (5% to 7%).
E is incorrect because this is not a contingent liability. Forecast losses are not obligations of an entity. This does not meet the
definition in IAS 37 para. 10.
Module: 3 > Part: C > 3.9 Contingent liabilities > Page: 153
Question 43 Marks:
Section C Extended Response Questions
This section has extended response questions worth a total of 18 marks
Case Scenario: Lion Ltd

Lion Ltd has the following information relating to 20X7: (ignore tax)
Profit or loss $500,000

Exchange gain on translation of foreign operation $3,000
Exchange gain on foreign operation recognised in profit when the foreign operation was disposed $12,000
Asset revaluation of PPE $20,000
Share of total comprehensive income of associate $15,000
Share of profit of associate $12,000
Question 1: (4 marks)
Ignoring tax, what is the total of Other Comprehensive Income (OCI) for 20X7?In your answer identify each component that will be
included in OCI and show your workings.
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).
Your Answer
Asset revaluation of PPE = $20,000
Share of total comprehensive income of associate = $15,000
Total OCI for 20x7 = $35,000
Answer Explanation

OCI Calculation
Not included Profit or loss $500,000
$3,000 Exchange gain on translation of foreign operation $3,000
Exchange gain on foreign operation recognised in profit
Less ($12,000) $12,000
when the foreign operation was disposed
Add $20,000 Asset revaluation of PPE $20,000
Add difference between
$15,000 and $12,000 Share of total comprehensive income of associate $15,000
[$3,000]
Share of profit of associate $12,000
Total: $14,000
1 mark for correctly including each of the following: $3,000 - $12,000 + $20,000 +3,000 Note that the $12,000 is being transferred
out of OCI to P&L so it cannot be ignored, it must be deducted.
Module: 2 > Part: B > 2.7 The concept of other comprehensive income and total
comprehensive income > Page: 84
Question 44 Marks:
Case Scenario: Pepper Ltd
On 1 January 20X4, Pepper Ltd acquired 19,000 shares in Salt Ltd for $80,000. This gave Pepper Ltd significant influence over Salt
Ltd. At the date of acquisition, the equity section of Salt Ltd’s Statement of Financial position was as follows:
Issued share capital (50,000 shares) $100,000

Retained earnings $120,000
The following additional information relates to the 20X5 financial year:
The profit before tax for Salt Ltd is $80,000.

Salt Ltd sold inventory with a cost of $2,000 to Pepper Ltd for $6,000. At year end, Pepper Ltd only had 40% of the inventory
on hand.
Salt Ltd declared dividends of $10,000.
The tax rate applicable is 30%.
What is the share of associate’s profit that would be disclosed in the consolidated financial statements for the year ended 31
December 20X5? Identify each component of this calculation and show your workings.
Your Answer
Profit before tax = $80,000
Less: Tax = ($24,000)
Profit after tax = $56,000
Share of profit at 38% = $21,280

Less: Inventory sale = ($425.6)
Share of associate's profit in consolidated financial statements = $20,854.4
Answer Explanation
Calculate the share of associate's profit that would be disclosed in the consolidated financial statements.
The percentage that Pepper Ltd has of Salt Ltd is 38% (19,000 shares out of a total of 50,000).
The share of associate's profits is calculated as follows:
Profit of Associate ($80,000 x 70%) x 38% $21,280

Eliminate intra-group sale of inventory ($425.60)
[$6,000 (sales) - $2,000 (COGS) - $2,400 (realised profit - $4,000 x 60%) - $480 tax ($1,600 x 30%)] = $1,120
$1,120 x 38% shareholding
Share of associate's profit $20,854.40
Marks: 1 mark for correct profit of associate ($21,280). First we adjust the before tax profit for tax. We can do this as either:
$80,000 x 30% = $24,000 so $80,000 - $24,000 = $56,000. Or: $80,000 x (1 - tax rate) = $80,000 x 70% = $56,000. $56,000 x
38% = $21,280 4 marks for each component of the elimination of intra-group sale of inventory i) Determine unrealised profit. ii)
Adjust unrealised profit for 60% as this has been sold externally. iii) Adjust for tax. Iv) Adjust for 38% shareholding.
Module: 5 > Part: C > 5.13 Application of the equity method > Recognising the initial
investment at cost > Page: 288
Question 45 Marks:
Case Scenario: Pepper Ltd
On 1 January 20X4, Pepper Ltd acquired 19,000 shares in Salt Ltd for $80,000. This gave Pepper Ltd significant influence over Salt
Ltd. At the date of acquisition, the equity section of Salt Ltd’s Statement of Financial position was as follows:
Issued share capital (50,000 shares) $100,000

Retained earnings $120,000
The following additional information relates to the 20X5 financial year:
The profit before tax for Salt Ltd is $80,000.

Salt Ltd sold inventory with a cost of $2,000 to Pepper Ltd for $6,000. At year end, Pepper Ltd only had 40% of the inventory
on hand.
Salt Ltd declared dividends of $10,000.
The tax rate applicable is 30%.
Assuming Pepper Ltd had control over Salt Ltd, what would be the Non-controlling interest portion of profits for the year ended
20X5? Show your workings.
Your Answer
Profit after tax = $56,000
NCI % of share = 62% of 56,000 = $34,720
Answer Explanation
Assuming Pepper Ltd had control over Salt Ltd, what would be the non-controlling interest portion of profits for the year ended
20X5?
Profit of Salt ($80,000 x 70%) $56,000
Eliminate intra-group sale of inventory ($1,120)
[$6,000 (sales) - $2,000 (COGS) - $2,400 (realised profit - $4,000 x 60%) - $480 tax ($1,600 x 30%)] shareholding
Total $54,880
x 62% (NCI percentage)
NCI share of profits $34,025.60
Marks: 1 mark for Profit of Salt: $56,000 (This is the before tax profit of $80,000 x (1 - tax rate) = $80,000 x 70% = $56,000. 2
marks for Elimination of intra-group sale of inventory adjusted for NCI percentage
Question 46 Marks:
Case Scenario: Transport Ltd

On 1 January 20X3, Transport Ltd purchased a new truck for $60,000. The estimated useful life at that date was 10 years and
management intend to recover the carrying amount of the truck through continued use. The truck is depreciated at a rate of 10% for
tax purposes.
Management of Transport Ltd do not believe that the cost model provides useful information to users of the financial statements
and so it adopts the alternative measurement model allowed. The applicable tax rate is 30%.
Where you are required to provide journal entries, please clearly indicate the allocation using the abbreviations:
(P&L) for profit or loss

(OCI) for other comprehensive income
(B/s) for balance sheet
N1 – On 2 January 20X4, management reassessed the TOTAL useful life of the truck to be only 9 years instead of 10 years.
N2 – On 31 December 20X4, an independent valuation expert assessed the fair value of the truck to be $49,700. The value in use
was estimated to be $49,000.
N3 – On 29 December 20X5, the truck was in a minor accident. The fair value, after deducting estimated selling costs was
estimated to be $30,000. Management believe that the economic benefits they would be able to derive from the continued use of
the truck would be $33,000.
N4 – On 31 December 20X6, the recoverable amount of the truck was $37,000.
The following information pertains to the truck balance PRIOR to the adjustments related to N4:
Carrying amount if no impairment was

Actual carrying amount
recognised
1 January 20X6 $33,000 $42,600
Depreciation – 20X6 ($5,500) ($7,100)
What is the amount of the reversal of impairment? Show your workings and relevant components of the calculation.
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).
Your Answer
Answer Explanation
The reversal of impairment is limited to the lower of the new recoverable amount ($37,000) and the notional carrying amount. That
is the carrying amount of the asset on that date assuming that the initial impairment loss was never recognised. Had the initial
impairment loss not been recognised, the asset would have had a carrying amount of $35,500 ($42,600 – $7,100). This amount is
lower than the new recoverable amount and so the reversal of impairment is limited to this amount. The current carrying amount is
$27,500 ($33,000 – $5,500) Reversal of impairment is $8,000 ($35,500 – $27,500) Marks: 1 mark: identifying reversal of impairment
is limited 1 mark: Determining carrying amount of $35,500 2 mark: Current carrying amount of $27,500 2 mark: Reversal of
impairment
Balance Adjustment of calculations Notional CA

with no
impairment
1 January 20X3 $60,000
Depreciation - 20X3 ($6,000) ($60,000/10 years)
31 December 20X3 $4,000

1 January 20X4 $54,000
Depreciation - 20X4 ($6,750) ($54,000/8 years) - total useful life changed to

be 9 years. One year was already depreciated in
20X3 so the remaining useful life is 8 years.
$47,250
Revaluation $2,450 ($49,700 FV - $47,250 CA)
31 December 20X4 $49,700 Fair value increased ad the revaluation model is
adopted. So the carrying amount would be
revalued up to fair value.

1 January 20X5 $49,700
Depreciation - 20X5 ($7,100) ($49,700/7 years)
$42,600
Impairment ($9,600) $42,600 - $33,000
Higher of the FV - costs to sell and the value in
31 December 20X5 $33,000 $42,600
use

1 January 20X6 $33,000 $42,600
Depreciation - 20X6 ($5,500) ($33,000/6 years) ($7,100)
$27,500 $35,500
Reversal of $8,000 Reversal of impairment is the LOWER of the new
Impairment recoverable amount and the amount the notional

carrying amount had the entity not put through
an impairment loss initially.
31 December 20X6 $35,500
Module: 7 > Part: B > 7.7 Reversals of impairment losses > Page: 395

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4/24/23, 1:57 AM KnowledgEquity - Apply knowledge. Improve performance.

YOU SCORED 27 OUT OF A POSSIBLE 42 [64%]

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

A DR Bank $250,000 | CR Sales $250,000

B DR Bank $250,000 | CR Sales $190,000 | CR Interest Receivable $60,000

C DR Bank $250,000 | CR Accounts Receivable $198,450 | CR Interest Income $51,550

D DR Bank $314,750 | CR Accounts Receivable $250,000 | CR Interest Income $64,750

So on this date, the journal would be:

DR Accounts Receivable $198,450 CR Sales $198,450

So after three years, the journals would be as follows:

DR Bank $250,000 (total amount to be received from the customer)

CR Accounts Receivable $198,450 (settlement of the amount owing by the customer)

CR Interest Income $51,550 (the residual amount).

Which of the following is correct?

USER SELECTION CORRECT ANSWER

A Investor A has 25% ownership interest in Entity F.

B Investor A has a 72% ownership interest in Entity E.

C Investor A has an 40% ownership interest in Entity G.

D Investor A has a 63,75% ownership interest in Entity H.

Assume a tax rate of 30%.

– Profit after tax was $40,000

– Entity T paid a dividend of $20,000

A It is a possible obligation as a result of a past event.

B An element of uncertainty exists, whether this be due to timing or amount.

D is incorrect because this is a characteristic of an accrual.

Management made the following estimates in relation to these balances:

– 30% chance that credit loss for 12 months would be $10,000

– 70% chance that credit loss for 12 months would be $12,000

Which of the following relating to the customer accounts of Entity B is correct?

20X1: Taxable loss before utilisation of tax losses ($20,000)

20X2: Taxable profit before utilisation of tax losses $60,000

– 30% chance that credit loss for 12 months would be $10,000

What is the net customer account balance at the end of 20X6?

A Voluntary changes to an accounting policy will require prospective adjustments.

USER SELECTION CORRECT ANSWER

A The full increase in fair value should be recorded in profit or loss.

Module: 1 > 1.6 Application of measurement principles in the International Financial

Ignore tax effects.

USER SELECTION CORRECT ANSWER

The FV changes in investment property are taken directly to P&L.

A The carrying amount at the end of the period.

B The amount of provisions used during the period.

C A detailed description of the nature of the obligation.

D An indication of the uncertainty about the timing of the outflows.

How should this contract modification be treated in terms of IFRS 15?

USER SELECTION CORRECT ANSWER

A The modification will be treated as a separate contract.

B The modification will be treated as part of the existing contract.

C The modification will be treated as a replacement of the existing contract.

Entity V incurred the following costs to obtain the contract:

– Sales commission to employees for successfully obtaining the contract: $80,000

– Legal fees for lodging the contract: $20,000

A Property, plant and equipment recognised at cost by the acquiree.

B A contingent asset with a probable flow of economic benefits.

C A trademark registered by an acquiree immediately prior to the business combination.

acquiree > Page: 229

Assume a tax rate of 30%.

USER SELECTION CORRECT ANSWER