ADVANCED FINANCIAL REPORTING

PRACTICE PAPER 1

INSTRUCTIONS TO CANDIDATES

1. This is a 90-minute, open-book assessment.

2. Answer ALL questions.

3. Candidates should deem each monetary amount shown with the €/£ symbol to be stated in their
relevant currency.

4. This assessment is autoscored. The following guidance applies to answer entries made in the
assessment:

• Alpha characters, currency symbols and commas to separate thousands are NOT
required, and should not be input into the answer boxes;

• Where necessary, answers should be rounded to the nearest whole number. For
example, if an answer is calculated as 81.7, candidates should input 82. Similarly, if an
answer is calculated as 124.3, candidates should input 124;

• A negative answer value may be required for the numeric questions as indicated. When
necessary, a negative value should be entered by inserting a minus sign before the
number;

• For journal entry questions, a net journal entry should be provided. Where both debit
and credit entries are required for one account, then only one entry should be made.
This entry should be the net amount of the individual entries. If a journal requires an
account to be debited by 100 and credited by 150 for example, then the correct net entry
would be credit 50.

5. Marks are awarded for partially correct responses to the journal questions.

6. Please note if your time runs out before you finish the assessment, your script will be auto
submitted.

7. The following terminology should be understood:

• PPE: Property, Plant & Equipment
• SPLOCI: Statement of Profit or Loss and Other Comprehensive Income
• SOFP: Statement of Financial Position
• P/L: Profit or Loss
• OCI: Other Comprehensive Income
QUESTION 1
REGAN operates a defined benefit pension scheme for its employees. On 1 January 2xx5, a net
pension liability of €/£ 2,600,000 was correctly recorded on REGAN’s statement of financial position.

The relevant discount rate for the year ended 31 December 2xx5 is 4%. The actuary estimated the
service cost for the year ended 31 December 2xx5 to be €/£ 130,000. The pension plan paid €/£ 80,000
to pensioners during 2xx5 and contributions totalling €/£ 150,000 were paid by REGAN into the pension
plan on 31 December 2xx5.

The actuary has determined that the pension scheme has a net pension liability of €/£ 2,800,000 as at
31 December 2xx5.

Requirement:
Prepare the journal entry required to reflect the information in the financial statements of REGAN for
the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Net pension liability (SOFP)
Bank (SOFP)
Pension expense (P/L)
Pension remeasurement gain / loss (OCI)

QUESTION 2
On 1 January 2xx5 OATZIE purchased a property for a cash amount of €/£ 3,000,000. The property
has an estimated useful life of 20 years and a nil residual value. OATZIE adopts the cost model in
respect of its properties and charges a full year’s depreciation in the year of purchase.

On the same date the government paid a grant of €/£ 1,500,000 to OATZIE in respect of the purchase
of the property. OATZIE has fully complied with all grant conditions. OATZIE has a policy of recognising
government grants using the deferred income method.

Requirement:
Prepare the journal entry required to reflect the information in the financial statements of OATZIE for
the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Property, plant & equipment – net book value (SOFP)
Bank (SOFP)
Depreciation expense (SPLOCI)
Deferred grant income (SOFP)
Grant income (SPLOCI)
QUESTION 3
On 1 September 2xx5, ABAS began the construction of a commercial property. As at 31 December
2xx5, the construction cost totalled €/£ 1,200,000. This construction cost is entirely funded by ABAS’
general borrowings. These borrowings, which were available to ABAS throughout 2xx5, comprise the
following:

Effective interest rate

Bank overdraft of €/£ 1,200,000 6%
Fixed rate loan of €/£ 900,000 4%
Fixed rate loan note of €/£ 2,400,000 3%

It is expected that construction of the property will be completed on 31 December 2xx6.

Requirement
Calculate the carrying amount of the commercial property in the statement of financial position of ABAS
as at 31 December 2xx5.

ANSWER

QUESTION 4
EVEL owns a warehouse in the U.S.A from which it distributes products. The warehouse was
purchased on 1 January 2xx3 for US$ 2,000,000 when the exchange rate was €/£ 1 : US$ 1.25. The
building was determined to have a useful life of 25 years at that date. EVEL has correctly accounted
for the warehouse in its financial statements for the year-ended 31 December 2xx4.

EVEL adopts the revaluation model when valuing its warehouses. On 31 December 2xx5, the
warehouse was revalued for the first time and was independently assessed to have a fair value of
US$ 3,000,000. The exchange rate on this date was €/£ 1 : US$ 1.

Requirement:
Prepare the journal entry required to reflect the information in the financial statements of EVEL for the
year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Property, plant & equipment – net book value (SOFP)
Depreciation expense (SPLOCI)
Revaluation gain / loss (OCI)

QUESTION 5
The carrying value of VIVEK’s property, plant and equipment totalled €/£ 5,600,000 at 1 January 2xx5
and €/£ 6,800,000 at 31 December 2xx5. Depreciation for the year amounted to €/£ 224,000. An item
of plant was disposed at a profit of €/£ 63,000 during 2xx5. The plant’s carrying value at the date of
sale was €/£ 620,000. On 31 December 2xx5, land with a carrying value of €/£ 380,000 was revalued
to its fair value of €/£ 450,000.

Requirement
Calculate the net cash flow impact on the investing activities section of the statement of cash flows of
VIVEK for the year ended 31 December 2xx5.

(If required, use the minus sign “-“ to indicate a net cash outflow.)

ANSWER
QUESTION 6
SHAR acquired 80% of RUD on 1 January 2xx4. At this date, the fair value of RUD’s identifiable net
assets was €/£ 6,500,000. SHAR has a policy of valuing the non-controlling interest at its proportionate
share of the fair value of RUD’s identifiable net assets. Goodwill arising in respect of the acquisition
totalled €/£ 1,200,000.

On 31 December 2xx5, SHAR sold its holding in RUD for an immediate cash payment of
€/£ 10,000,000. Over the two-year period from 1 January 2xx4 to 31 December 2xx5, RUD recorded
retained profits of €/£ 2,500,000. There was no impairment of goodwill in RUD up to 31 December
2xx5.

Requirement:
Prepare the journal entry required to reflect the information in the consolidated financial statements of
SHAR for the year ended 31 December 2xx5.
Debit Credit
€/£ €/£
Bank (SOFP)
Net assets of subsidiary (SOFP)
Goodwill (SOFP)
Non-controlling interest (SOFP)
Profit / loss on disposal of subsidiary (SPLOCI)

QUESTION 7
On 1 January 2xx5, BOLOGN entered into a 25-year agreement to lease a warehouse. At that date,
the warehouse had an estimated useful life of 30 years. BOLOGN is required to make an annual lease
payment of €/£ 300,000 on 31 December each year. The present value of these lease payments is
€/£ 3,385,000 on 1 January 2xx5. The first lease payment was made on 31 December 2xx5. In addition
to the annual lease payment, BOLOGN paid a non-refundable deposit of €/£ 75,000 and lease
negotiation costs of €/£ 10,000 on 1 January 2xx5. The interest rate implicit in the lease is 6%.
BOLOGN does not have the option to extend the lease.

Requirement:
Prepare the journal entry required to reflect the information in the financial statements of BOLOGN for
the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Bank (SOFP)
Right of use asset – cost (SOFP)
Right of use asset – accumulated depreciation (SOFP)
Lease liability (SOFP)
Depreciation expense (SPLOCI)
Finance costs (SPLOCI)
QUESTION 8
On 1 January 2xx4 GARINBAL introduced a share-based payment scheme as a means of employee
compensation. All 500 employees qualified for ten share appreciation rights each at that date. The
employees are required to remain in the continuous employment of GARINBAL for a period of three
years, at the end of which the rights would vest. On 31 December 2xx4, the share-based payment
liability was correctly measured at €/£ 63,750.

On 31 December 2xx5, it was estimated that 10% of the employees would leave GARINBAL before the
end of the vesting period. The fair value of each share appreciation right at 1 January 2xx4 was €/£ 40.
This had risen to €/£ 48 at 31 December 2xx5.

Requirement
Calculate the share-based payment expense that should be recorded in GARINBAL’s statement of
profit or loss for the year ended 31 December 2xx5.

ANSWER

QUESTION 9
In 2xx5 a former employee of CAFFE claimed they were unfairly dismissed and took a legal action
against the company. The claim is for €/£ 3,200,000. CAFFE’s legal team estimate that there is a 70%
chance that the claim will be successful. Legal costs are expected to total €/£ 600,000.

CAFFE has decided that, as a consequence of the legal action, a company restructure would take
place. The management of CAFFE intends to initiate discussions on a restructuring plan in January
2xx6 which will include possible redundancy costs of €/£ 300,000 and relocation costs of €/£ 220,000.
It is expected that CAFFE’s employees will be informed in February 2xx6.

Requirement:
Calculate the total provision that should be recorded in CAFFE’s statement of financial position as at
31 December 2xx5.

ANSWER

QUESTION 10
On 1 January 2xx5 TAMALL had recorded a deferred tax liability of €/£ 1,200,000. On 31 December
2xx5, the carrying value of TAMALL’s net assets was €/£ 72,500,000 while the tax base of these net
assets was €/£ 60,000,000. Part of this difference was due to the revaluation of a property for the first
time which created a revaluation surplus of €/£ 2,000,000 on 31 December 2xx5. In TAMALL’s tax
jurisdiction, revaluations do not affect the tax base of the asset. The tax rate applicable is 15%.

Requirement:
Prepare the journal entry required to reflect this information in the financial statements of TAMALL for
the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Tax expense (P/L)
Tax expense (OCI)
Deferred tax liability (SOFP)
QUESTION 11
On 1 January 2xx5, CASAR sold a large quantity of custom-made equipment to a company for a total
cash price of €/£ 1,440,000. As part of the contract, CASAR agreed to service the equipment for the
two-year period ending 31 December 2xx6. The list price of the equipment sold was €/£ 1,500,000
while the two-year service would typically be sold for €/£ 300,000.

Requirement:
Prepare the journal entry required to reflect this information in the financial statements of CASAR for
the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Bank (SOFP)
Revenue (SPLOCI)
Deferred income (SOFP)

QUESTION 12
On 1 January 2xx5, LOMP purchased a ten-year franchise for cash of €/£ 700,000. In addition, legal
costs of €/£ 10,000 were paid by LOMP in respect of the franchise acquisition. Research and
development costs were incurred on a new project which commenced on 1 July 2xx5. LOMP spent
€/£ 50,000 per month on this new project. As of 1 November 2xx5, management became confident
that the project would be a success and would yield a substantial profit. The project is still in
development at 31 December 2xx5. Capitalised development expenditure is amortised at 10% per
annum on a straight-line basis.

Requirement
Calculate the total expense that should be recorded in LOMP’s statement of profit or loss for the year
ended 31 December 2xx5.

ANSWER

QUESTION 13
On 1 January 2xx5, MARTIN and BIA jointly launched Nuovo - a revolutionary new tool. The companies
agreed to share the revenues and costs of Nuovo on an equal basis. In addition, it was agreed that
any major decisions regarding the product would require the unanimous consent of both parties. In the
period to 31 December 2xx5, Nuovo generated revenue of €/£ 3,000,000 and incurred costs of
€/£ 2,000,000. To date, BIA has received the revenue of €/£ 3,000,000 and has paid the costs of
€/£ 2,000,000.

Requirement:
Prepare the journal entry required to reflect this information in the consolidated financial statements of
MARTIN for the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Revenue (SPLOCI)
Cost of sales (SPLOCI)
Receivable (SOFP)
QUESTION 14
On 1 January 2xx5, TINAR acquired 30% of the ordinary share capital of SALUD for a cash amount of
€/£ 1,800,000. TINAR exercised significant influence over the financial and operating policies of SALUD
as of that date. SALUD had net assets of €/£ 5,800,000 on 1 January 2xx5 and €/£ 6,200,000 on
31 December 2xx5.

Requirement
Calculate the share of profit of associate that should be recorded in TINAR’s consolidated profit or loss
account for the year ended 31 December 2xx5.

ANSWER

QUESTION 15
ANNEL is constructing a bespoke piece of plant to sell to a customer for an agreed sales price of
€/£ 1,100,000. In accordance with IFRS 15, the entity has determined that the sales revenue for this
plant will be recognised at a single point of time, when it is transferred to the customer. At 31 December
2xx5, ANNEL’s construction costs to date totalled €/£ 760,000. On that date, an internal inspection
revealed that ANNEL had made errors in constructing the plant, and as a consequence, the estimated
costs to complete the construction to the required standard had increased to €/£ 530,000. This amount
comprises raw materials of €/£ 140,000, labour of €/£ 330,000 and an allocation of administrative costs
of €/£ 60,000. The cost of delivering the plant to the customer is estimated at €/£ 30,000.

Requirement
Calculate the value of the plant to be included in ANNEL’s statement of financial position as at
31 December 2xx5.

ANSWER

QUESTION 16
On 1 December 2xx5, MANTRO purchased a vacant building for a cash amount of €/£ 500,000. In
addition, MANTRO paid legal fees of €/£ 15,000 on the purchase. It is the company’s intention to rent
the building to a third party as soon as possible. At 31 December 2xx5, the building was independently
assessed to have a fair value of €/£ 540,000.

It is the policy of MANTRO to apply the cost model to its property, plant and equipment, and to apply
the fair value model to its investment properties. The building is deemed to have a useful life of 20
years. Where relevant, MANTRO charges a full year’s depreciation in the year of acquisition.

Requirement:
Prepare the journal entry required to reflect this information in the financial statements of MANTRO for
the year ended 31 December 2xx5.

Debit Credit
€/£ €/£
Bank (SOFP)
Property, plant and equipment - cost (SOFP)
Property, plant and equipment - accumulated depreciation (SOFP)
Investment property – carrying value (SOFP)
Gain / loss on investment property (SPLOCI)
Other expenses (SPLOCI)
Question 17
LEAF purchased a forest of 600 trees in June 2xx5 for a total cost of €/£ 1,500,000. LEAF intends to
sell these trees in the ordinary course of its trade. Two markets, Fenland and Amesland, are accessible
to LEAF in respect of selling these trees. Details regarding the sale of the trees in these markets are
set out below:
Trees sold to date by Total trees sold to Sales price per tree
LEAF in the market date in the market €/£
Fenland 8,800 1,230,000 2,800
Amesland 10,200 898,000 2,600

LEAF does not expect to incur any selling costs in respect of the trees.

Requirement
Calculate the value of the trees to be included in LEAF’s statement of financial position as at
31 December 2xx5.

ANSWER