FINANCIAL ACCOUNTING & CORPORATE REPORTING

Complete MCQs

Q1: Identify the best option from the following, which represents true statement regarding financial
statements.

a) intangible assets are typically combined with plant assets and extractable natural resources and
shown in the property, plant, and equipment section.

b) since intangible assets lack physical substance, they need to be disclosed only in the notes to the
financial statements.

c) goodwill should be reported as a contra account in the equity section.

d) totals of major classes of assets can be shown in the statement of financial position, with assets
details disclosed in the notes to the financial statements.

Q2: At January 1, 2022 ABC limited received a loan of Rs. 10 million at 6% per annum. The loan will be
redeemable at a premium which means the loan has an effective finance cost of 7.5% per annum. The
loan was specifically issued to finance the construction of a new building. How should the loan be
treated in the financial statements of ABC for the year ended December 31, 2022?

a) Fair value through profit or loss.

b) Amortized cost.

c) Present value.

d) Fair value through other compressive income.

Q3: Which one of the following cannot be recognized as an intangible non-current assets in ABC’s
consolidated statement of financial position as at December 31, 2022.

a) ABC spent Rs. 21 million during the year on the development of a new product, after management
concluded it would be viable in February 2020. The product is being launched on the market on March 1,
2021 and is expected to be profitable.

b) ABC purchased a brand name from a competitor on February 1, 2020 for Rs. 65 million.

c) ABC spent Rs. 132 million developing a new type of product. In September 2020, management
worried that it would be too expensive to fund. The finances to complete the project will come from a
cash injection from a benefactor which will be received in February 2021.

d) ABC purchased a subsidiary during the year. While conducting fair value exercise it was found that the
subsidiary had a brand name with an estimated value of Rs. 50 million but had not been recognized by
the subsidiary as it was internally generated.

Q4: Adjustment of the carrying amount of an asset or a liability or the consumption of an asset as a
result of change in assessment is called:

a) misstatement.

b) accounting policy.

c) correction of error.

d) a change in accounting estimate.

Q5: Which one of the following does not represent a key step in the application of IFRS 8 “operating
segments”?

a) identifying operating segments.

b) determining reportable operating segments.

c) Disaggregating information about reportable segments.

d) Disaggregating reportable segments.

Q1: Which one of the following accounting methods must be applied to all business combinations
under IFRS 3, “Business Combinations”?

a) Pooling of interest method.

b) Proportionate consolidation.

c) Acquisition method.

d) Equity method.

Q2: A company shall measure a non-current asset classified as held for sale at the lower of its carrying
value and .

a) Recoverable amount.

b) Fair value less cost to sell.

c) Value in use.

d) Fair value.
Q3: For users of financial statements, the current liability classification in the statement of financial
statement is important because it is closely tied to the concept of:

a) Materiality.

b) Leverage.

c) Profitability.

d) Liquidity.

Q4: Which of the following is not true regarding IAS 2, inventories:

a) Fixed production overheads must be allocated to items of inventory on the basis of the normal level of
production.

b) Unallocated overheads must be recognized as an expense in the period in which they are incurred.

c) An abnormally high level of production will lead to a lower allocation of fixed production overhead to
each unit.

d) Plant lying idle will lead to a higher fixed overhead allocation to each unit.

Q5: Which of the following could be classified as development expenditure in ABC Limited’s statement
of financial position as at December 31, 2019 according to IAS 38 “intangible Assets”?

a) Rs. 650,000 spent on developing a special type of new packaging for a new energy efficient light
bulb. The packaging is expected to reduce ABC’s distribution cost by Rs. 350,000 a year.

b) a payment of Rs. 900,000 to a local university’s engineering faculty to research new environmental
friendly building technique.

c) Rs. 250,000 spent on developing a prototype and testing a new type of propulsion system. The project
need further work on it as the system is currently not visible.

d) Rs. 800,000 spent on developing an electric bicycle. This is near completion and the product will be
launched soon. As this project is first of its kind it is expected to make a loss.

Q1: Which of the following statements regarding systems of regulation of accounting are true?

i. A principles based system will require more detailed regulations than a rule based system.

ii. A rules based system will tend to give rise to a larger number of accounting standards than a
principles based system.

iii. A principles based system seeks to cover every regulation eventually.

iv. A principles based system requires the exercise of more judgement in application than a rules based
system.
a) Option (ii) and (iv) are correct.

b) Option (i) and (iv) are correct.

c) Option (i) and (iii) are correct.

d) Option (ii) and (iii) are correct.

Q2: Which of the following statements relating to goodwill is correct?

a) If the fair value of a subsidiary’s contingent liabilities can be reliably measured at the date of
acquisition, they should be included in consolidated net assets and will increase goodwill.

b) On the investment in an associate, any related goodwill should be separately identified in the
consolidated financial statements.

c) The testing of goodwill for impairment is only required when circumstances exist which indicate
potential impairment.

d) Goodwill is amortized over its useful life with the charge expensed to profit or loss.

Q3: ABC Limited is developing a new product and is expected to be able to capitalize the costs. Which
one of the following reason would disallow the capitalization of the costs?

a) Development of the product is not yet completed.

b) No patent has yet been registered in respect of the product.

c) It has not been possible to reliably allocate costs to development of the product.

d) No sales contracts have yet been signed in relation to the product.

Q4: Which one of the following is not the way in which an acquirer may obtain control of an acquiree.

a) By providing more than one type of consideration.

b) By purchasing equity interest.

c) By incurring liabilities.

d) By transferring cash and other assets.

Q5: ABC limited leases a machine for fourteen years, but legal title does not pass to the lessee at the
end of the agreement. The company usually depreciate machinery over twenty years. In this case ABC
should depreciate the machine for a period of years.

a) 20
b) ABC should not depreciate the machine.

c) 14

d) 6

Q1: Adjustment of the carrying amount of an asset or a liability or the consumption of an asset as a
result of change in assessment is called .

a) accounting policies.

b) a change in accounting estimate.

c) misstatements.

d) correction of error.

Q2: Select the best option from the following which would not be included within the initial cost of a
right of use asset?

a) payments made to the lessor before commencement of the lease.

b) total lease rentals payable under the lease agreement.

c) estimated cost of dismantling the asset at the end of the lease period.

d) installation cost of the asset.

Q3: Which of the following statements are correct as per IAS 1:

i) All financial statements are prepared using the accrual basis of accounting.

ii) The company shall reclassify comparative amounts unless reclassification is impracticable.

a) option (i) and (ii) are correct.

b) option (i) is correct only.

c) option (ii) is correct only.

d) none of the option is correct.

Q4: Information is obscured if it is communicated in a way that would have a similar effect for primary
users of financial statements for omitting that information. Which one of the following represent an
example of circumstance that may result in material information being obscured.

a) similar items or transactions are appropriately disaggregated.

b) information regarding a material item or transaction is disclosed in the financial statement in clear
language.

c) information regarding a material item or transaction is summarized in the financial statements.

d) dissimilar items or transactions are inappropriately aggregated.

Q5: Which of the following transactions involving the issuing of shares does not come within the
definition of a share based payments under IFRS 2?

a) employee share option plans.

b) employee share purchase plans.

c) share based payments relating to an acquisition of a subsidiary.

d) share appreciation rights.

Q1: How should gain on the sale of an office building owned by a company, be presented in the
statement of cash flow?

a) Added to the sale proceeds and presented in the investing activities section of the cash flows.

b) As an adjustment in the net income in the operating activities section, of the statement of cash
flows prepared under indirect method.

c) As an inflow in the financing activities section of the cash flows because the building was constructed
with a long term loan from a bank that needs to be repaid from the sale proceeds.

d) As an inflow in the investing activities section of the cash flow because it pertains to a long term asset.

Q2: Which one of the following information is not required to be disclosed as per IAS 38 “intangible
assets”?

a) Reconciliation of carrying amount at the beginning and end of the year.

b) Fair value of similar intangible assets used by its competitors.

c) Contractual commitments for the acquisition of intangible assets.

d) Useful lives of intangible assets.

Q3: Which of the following is not an indicator of impairment?

a) The carrying amount of a company’s net assets is higher than the company’s number of shares in issue
multiplied by its share price.
b) The estimated net realizable value of inventory has been reduced due to fire damaged although the
value is greater than its carrying amount.

c) An increase in interest rates which increases the discount rate a company uses.

d) Advances in the technological environment in which an asset is employed have an adverse impact on
its future use.

Q4: IFRS standards require extensive use of fair value when recording the acquisition of a subsidiary,
which of the following statements regarding the use of fair value on the acquisition of subsidiary are
correct?

(i) The use of fair value to record a subsidiary’s acquired assets does not comply with the historical cost
principle.

(ii) The use of fair value to record the acquisition of plant always increases consolidated post-acquisition
depreciation charges compared to the corresponding charge in the subsidiary’s own financial
statements.

(iii) Cash consideration payable one year after the date of acquisition needs to be discounted to reflect
its fair value.

a) option (i) is correct only.

b) option (ii) is correct only.

c) option (i), (ii) and (iii) are correct.

d) option (iii) is correct only.

Q5: What is meant by “tax base”?

a) The amount attributed to an asset or liability for tax purposes.

b) The tax regime under which an entity is assessed for tax.

c) The amount of tax payable in a future period.

d) The amount of tax deductible in a future period.

Q1: Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Select
the best option from the following which does not represent a circumstance giving rise to temporary
difference:

a) Revenue included in accounting profit when invoiced but only liable for tax when the cash received.

b) Development costs amortized in profit or loss but tax was deductible in full when incurred.
c) Accrued expenses which have already been deducted for tax purposes.

d) Depreciation accelerated for tax purposes.

Q2: The international Accounting standards board’s conceptual framework for financial reporting
defines a liability as:

a) A present obligation of the company to transfer an economic resource as a result of past event.

b) An obligation that may arise in the future.

c) An amount owed to another company.

d) Expenditure that has been incurred but not yet charged to the statement of profit or loss.

Q3: Which one of the following information cannot be readily determined from an amortization table
of lease?

a) Interest expense of the liability for the current year.

b) The portion of the unpaid balance that is a current liability.

c) The unpaid balance remaining after each payment.

d) The present value of the future payments under changing market conditions.

Q4: A limited is developing a new product and is expected to be able to capitalize the cost. Which one
of the following reason would disallow the capitalization of the costs?

a) It has not been possible to reliably allocate costs to development of the product.

b) No patent has yet been registered in respect of the product.

c) Development of the product is not yet completed.

d) No sales contracts have yet been signed in relation to the product.

Q5: Which one of the following statements about IAS 20 “Government Grants and Disclosure of
Government assistance” is true?

a) A grant related to purchase of an asset must be deducted from the carrying amount of the asset in the
statement of financial position.

b) Free marketing advice provided by government department is included in the definition of the
government grant.

c) A grant related to purchase of an asset should be recognized in profit or loss over the life of the
asset.

d) Required repayment of a government grant received in earlier reporting period is treated as prior
period adjustment.

Q1: The IAS 7 format for a statement of cash flows using the indirect method opens with adjustments
to net profit before taxation to arrive at cash flow from operating activities. Which of the following
lists consists only of items that would be deducted in that calculation?

a) Loss on sale of non current assets, increase in inventories, decrease in trade payables.

b) Increase in trade receivables, profit on sale of non-current assets, decrease in trade payables.

c) Depreciation, increase in trade receivables, decrease in trade payables.

d) Profit on sale of non-current assets, increase in trade payables, decrease in trade receivable.

Q2: Which one of the following is not included in the definition of an operating segment in accordance
with IFRS 8 Operating Segments?

a) A component of a company that earns the majority of its revenue from sales to external customers.

b) A component of a company whose operating results are regularly reviewed by the company’s chief
operating decision maker, to make decisions about resource allocation and assess performance.

c) A component of a company that engages in business activities from which it may earn revenues and
incur expenses.

d) A component of a company for which discrete financial information is available.

Q3: Which one of the following would not be a line item of a company’s reporting cost by function?

a) utilities expenses.

b) manufacturing.

c) distribution.

d) administration.

Q4: The commencement date of capitalization of borrowing cost is the date when the entity first
meets all of the following conditions, except:

a) Activities necessary to prepare the qualifying assets for its intended use or sell are complete.

b) It incurs borrowing cost.

c) It incurs expenditures for the asset.

d) It undertakes activities that are necessary to prepare the asset for its intended use or sell.

Q5: Which of the following concepts aims to ensure that excess dividends are not paid in times for
charging prices?

a) faithful representation.

b) capital maintenance.

c) amortized cost.

d) going concern.

Q1: Which of the following factors are reasons why key staff cannot be capitalized as an intangible
asset by a company?

(i) they do not provide expected future economic benefits.

(ii) they cannot be controlled by a company.

(iii) their value cannot be measured reliably.

(iv) they are not separable from the business as a whole.

a) option (ii) and (iii) are correct.

b) option (iii) and (iv) are correct.

c) option (i) and (ii) are correct.

d) option (ii), (iii) and (iv) are correct.

Q2: On August 1, 2020, Z Limited acquired 80% of the share capital of P Limited and is preparing its
group financial statements for the year ended Dec 31, 2020. How will P Limited’s results will be
included in the group statement of profit or loss?

a) 100% of P Limited’s revenue and expenses for the period August 1, 2020 to December 31, 2020.

b) 80% of P Limited’s revenue and expenses for the period August 1, 2020 to December 31, 2020.

c) 100% of P Limited’s revenue and expenses for the year ended December 31, 2020.

d) 80% of P Limited’s revenue and expenses for the year ended December 31, 2020.

Q3: A Limited deals extensively with foreign entities and its financial statements reflect those foreign
currency transactions. After statement of financial position date and before the date of authorization
of the issuance of financial statements, there were abnormal fluctuations in foreign currency rates. In
these circumstances which one of the following step the company should take.

a) Adjust the foreign exchange year end balances to reflect the abnormal adverse fluctuations in
foreign exchange rates.

b) Disclose the post statement of financial position event in the notes as a non-adjusting event.

c) Ignore the post statement of financial position event.

d) Adjust the foreign exchange year end balances to reflect all abnormal adverse fluctuations in foreign
exchange rates and not just abnormal movements.

Q4: G Limited’s ending inventory is understated by Rs. 122,000. The effect of this error on the current
year’s cost of goods sold will be and net income will be .

a) understated, overstated.

b) overstated, understated.

c) overstated, overstated.

d) understated, overstated.

Q5: Which of the following best describes the role of the IFRS Advisory Council?

a) To provide the Board with the views of its members on standard setting projects.

b) To promote the use of IFRS standards amongst its members.

c) To select the members of the Board.

d) To prepare interpretations of the IFRS standards.

Q1: Which of the following criteria must be met before development expenditure is capitalized
according to IAS 38 “Intangible Assets”?

i. The technical feasibility of completing the intangible asset.

ii. Future revenue is expected.

iii. The intention to complete and use or sell the intangible asset.

iv. There is no need for reliable measurement of expenditure.

a) Option (iii) and (iv) are correct.

b) Option (i) and (iii) are correct.

c) Option (i) and (ii) are correct.

d) All

Q2: In accordance with IAS 24 “Related party Disclosures”, which one of the following information is
not required to be disclosed while preparing financial statements?

a) The amount of outstanding balances including commitments.

b) Provision for product warranties.

c) The expense recognized during the period in respect of doubtful debts due from related parties.

d) The amounts of transactions.

Q3: The process for developing an International Financial Reporting Standard involves a number of
stages. Following receipt and review of comments on a discussion paper, what will be the next step
undertaken by the International Accounting Standard Board (IASB)?

a) Consultation with the Advisory committee.

b) Establishment of an Advisory committee.

c) Publication of an Exposure Draft.

d) Issue of a final IFRS.

Q4: Which of the following meet the definition of a financial asset in accordance with IFRS 9 Financial
Instruments?

i. An equity instrument of another entity.

ii. A contract to exchange financial instruments with another entity under conditions which are
potentially favorable.

iii. A contract to exchange financial instruments with another entity under conditions which are
potentially unfavorable.

iv. Cash.

a) Option (i) and (iv) are correct.

b) Option (i) and (ii) are correct.

c) Option (ii), (iii) and (iv) are correct.

d) Option (i), (ii) and (iv) are correct.

Q5: Capitalization of borrowing cost:

a) Will be suspended only during extended periods of delays in which active developments is delayed.

b) Will be suspended during temporary periods of delay.

c) Should never be suspended once capitalization commences.

d) May be suspended only during extended periods of delays in which active development is delayed.

Q1: The International Accounting Standards Board’s conceptual framework for financial reporting
defines recognition as a process of incorporating within the financial statements an item which meets
the definition of an element and satisfies certain criteria. Which of the following elements should be
recognized in the financial statements of the company in the manner described?

a) In equity: irredeemable preference shares.

b) In revenue: the whole of the proceeds from the sale of an item of manufactured plant which has to
be maintained by seller for three years as part of the sale agreement.

c) As a non current liability: a provision for possible hurricane damage to property for a company located
in an area which experiences a high incidence of hurricanes.

d) As a trade receivables: an amount of Rs. 100,000 due from a customer which has been sold to a
finance company with no recourse to the seller.

Q2: Which one of the following would not be a line item for a company’s reporting cost by nature?

a) Depreciation expense.

b) Manufacturing expense.

c) Interest expense.

d) Salaries and wages expense.

Q3: IAS 20, Government Grants, is applicable on:

a) Government assistance in the form of investment tax credits.

b) Transfer of resources to an entity by government with certain conditions.

c) Government participation in the ownership of an entity.

d) The special problems arising in accounting for government grants in financial statements reflecting the
effects of changing prices or in supplementary information of similar nature.

Q4: IAS 7, Statement of cash flows, defines cash equivalents as highly liquid investments that are held
to meet short term cash commitments rather than for investment or other purposes. Select the best
option from the following that does not represent criteria in order to qualify as cash equivalents.

a) The investments are short term.

b) They are highly liquid.

c) They are subject to significant risk of change in value.

d) They are readily convertible to known amounts of cash.

Q5: is referred as ownership interest of investor-owned entities and owner, member or

participant interest.

a) Equity interest.

b) Mutual entity.

c) Non-controlling interest.

d) Contingent consideration.

Q1: Financial statements represents transactions in words and numbers. To be useful, financial information
must represent faithfully, these transactions, in terms of how they are reported. Which of the following
accounting treatments, would be an example of faithful representation?

a) Including a convertible loan note in equity on the basis that the holders are likely to choose the equity
option on conversion.

b) Continuing to recognize factored receivables sold with resource.

c) Trading redeemable preference shares as equity.

d) Capitalizing development costs as an intangible asset.

Q2: which one of the following is not included in statement of cash flows?

a) A reconciliation of net income to net cash flows from operating activities.

b) The amount of cash and cash equivalents owned by the business at the end of the accounting period.

c) Disclosure of the amount of cash invested in money market funds during the accounting period.

d) Disclosure of investing or financing activities that did not involve cash.

Q3: An acquirer at the acquisition date recognize goodwill acquired in business combination as an asset.
Goodwill is to be accounted as follow:

a) Recognize as an intangible asset and amortize over its useful life.

b) Recognize as an intangible asset and annually test for impairment or more frequently if impairment is
indicated.

c) Write off against retained earnings.

d) Recognize as an intangible assets impairment test when a trigger event occurs.

Q4: If the total external revenue reported by operating segments contribute less than of the
company’s revenue, additional operating segment shall be identified as reportable segment until the
criteria is met.

a) 45 percent.

b) 50 percent.

c) 75 percent.

d) 60 percent.

Q5: In accordance with IAS 1 “Presentation of Financial Statements”, an entity whose financial statements
comply with IFRSs shall make an and statement of such compliance in the notes.

a) Explicit, unreserved.

b) Implicit, unreserved.

c) Explicit, reserved.

d) Implicit, reserved.

Q1: is defined as an amount used as a surrogate for cost or depreciated cost at a given
date.

a) Fair value.

b) Net realizable value.

c) Deemed cost.

d) Depreciable cost.

Q2: The nature, timing and amount of consideration promised by a customer effect the estimate of
the transaction price. Select the best option from the following that a company shall not consider
when determining the transaction price.

a) Constraining estimates of variable consideration.

b) Consideration payable to a customer.

c) Fixed consideration.
d) The existence of a significant financing component in the contract.

Q3: The independent valuation expert of Hasan Limited (HL) is of the view that the salvage value of its
plant and machinery has drastically changed and the change is material, which of the following step
the company should take?

a) Change the annual depreciation for the current year and future years

b) As salvage value effect the future only so ignore the effect of change on annual depreciation.

c) Change the depreciation charge and treat it as a correction of an error.

d) Retrospectively change the depreciation charge based on the revised salvage value.

Q4: Which of the following statement is correct?

a) The use of an accelerated depreciation method causes an asset to wear out more quickly than use
of the straight line method.

b) Accumulated depreciation represents a cash fund being accumulated for the replacement of plant
asset.

c) A company may use different depreciation methods in its financial statements and its income tax
return.

d) The cost of a machine includes the cost of repairing damage to the machine during the installation
process.

Q5: What are the qualitative characteristics of financial statements according to conceptual
framework?

a) Non-qualitative aspects of a company’s position, performance and changes in financial position.

b) Board classes of financial effects of transactions and other events.

c) The attributes that make the information provided in financial statements useful to users.

d) The measurement of the extent to which a company has complied with all relevant standards and
interpretations.

Q6: Which of the following events taking place after the year end but before the financial statements
were authorized for issue would require adjustments in accordance with IAS 10?

a) Two lines of inventory held at the year end were discovered to have faults rendering them
unsaleable.
b) The directors announced a major restructuring.

c) The value of company’s investment fell sharply.

d) Three lines of inventory held at the year end were destroyed by flooding in the warehouse.

Q7: Deferred tax income taxes result from .

a) Difference between certain revenue and expense items recognized in financial statements but not in
income tax return.

b) The inability of the bankrupt company to pay its income tax liability on schedule.

c) Depositing income taxes due in future years in a special fund managed by an independent trustee.

d) The fact that bond interest is deductible in the computation of taxable income.

Q8: To determine the transaction price for the contract in which a customer promises consideration in
a form other than cash, the company shall measure the non-cash consideration at .

a) Net realizable value.

b) Carrying amount.

c) Tax written down value.

d) Fair value.

Q9: Which of the following situations requires recording a liability for the financial year ended Dec 31,
2020.

i) A company manufactures and sells stereo equipment that carries a three year warranty.

ii) A company is a defendant in a legal action. At the end of 2020 the lawyer is of the view that it is
possible that the company will lose and the amount of loan might be material.

iii) A theater group receives payment in advance from season ticket holders for production to be
performed in 2021.

iv) During the year ended Dec 31, 2020, an agricultural co-operative is concerned about the risk of loss if
extreme weather destroys the crop.

a) Option (i) and (ii) are correct.

b) Option (i) and (iii) are correct.

c) Option (iii) and (iv) are correct.

d) Option (ii) and (iii) are correct.

Q10: The objective of IFRS 16 Leases is to prescribe the appropriate accounting treatment and
required disclosures in relation to leases. Which of the following among the criteria set out in IFRS 16
for an arrangement to be classified as lease.

i. The lessee has the right to substantially all of the economic benefits from the use of the asset.

ii. The lease term is for substantially all of the estimated useful life of the asset.

iii. The agreement concerns an identified asset which cannot be substituted.

iv. The lessor has the right to direct the use of the asset.

Select the most appropriate option from the above options.

a) Option (ii) and (iv) are correct.

b) Option (iii) and (iv) are correct.

c) Option (i) and (ii) are correct.

d) Option (i) and (iii) are correct.

Q1: Which of the following is not a qualitative characteristic of financial statements according to
conceptual framework?

a) relevance.

b) materiality.

c) comparability.

d) understandability.

Q2: Pagal Limited (PL) has ceased operations overseas in the current accounting period. This resulted
in the closure of a number of small retail outlets. Which of the following costs would be excluded from
the loss on discontinued operations?

a) Redundancy costs for overseas staff.

b) Costs of restructuring head office as a result of closing the overseas operations.

c) Loss on the disposal of the retail outlets.

d) Trading losses of the overseas retail outlets up to the date of closure.

Q3: In accordance with IAS 36 “Impairment of assets” which one of the following statement is true
regarding cash-generating units?
a) A cash generating unit to which goodwill has been allocated should be tested for impairment every
five years.

b) There is no need to consistently identify cash-generating units based on the same types of asset from
period to period.

c) A cash generating unit is the smallest identifiable group of assets for which independent cash flows
can be identified.

d) A cash generating unit must be a subsidiary of the parent.

Q4: What are the qualitative characteristics of financial statements according to conceptual
framework?

a) Non-qualitative aspects of a company’s position, performance and changes in financial position.

b) Broad classes of financial effects or transactions and other events.

c) The measurement of extent to which a company has complied with all relevant standards and
interpretations.

d) The attributes that make the information provided in financial statements, useful to users.

Q5: Which of the following would be treated as a change of accounting policy for Sa Re Ga Ma Pa Da
Ne Sa Limited (SL)?

a) SL has changed the rate of depreciation used for its office equipment from 25% to 20% straight line
basis.

b) SL has received its first government grant and is applying the deferred income method.

c) SL has reclassified development costs from one operating expense to cost of sales.

d) SL has increased its irrecoverable debt allowance from 10% to 12%.

Q1: How does IAS defines operating cycle of a company?

a) The time between acquisition of assets for processing and delivery of finished goods to customers.

b) The time between acquisition of assets for processing and payment of cash to supplier.

c) The time between acquisition of assets for processing and receipt of cash from customers.

d) The time between delivery of finished goods and receipt of cash from customers.

Q2: Identify the best option from the following which does not give rise to deferred tax.
a) Expenses charged in the statement of profit or loss but are not allowable for tax purposes.

b) Unused tax loses.

c) Difference between accounting depreciation and tax depreciation.

d) Revaluation of non current assets but not allowable for tax purposes.

Q3: Identify the best option from the following which represents appropriate statement regarding
compliance with IFRSs:

a) The financial statements have been prepared in accordance with most of IFRSs.

b) The financial statements have been prepared in accordance with selected IFRSs.

c) The financial statements have been prepared in accordance with IFRSs.

d) The financial statements have been prepared in accordance with all the IFRSs except IAS 8 and IAS 2.

Q4: Inventory of ABC company has up to this year been valued using FIFO but the management is
considering changing to the weighted average method for the year to June 30, 2021 in applying the
enhancing qualitative characteristics of comparability, how should the change of inventory valuation
basis be accounted for:

a) The financial statements for June 30, 2021 should show both methods.

b)The change should be disclosed only.

c) The notes should show what the profit would have been if the change had not taken place.

d) The financial statements for the prior period as shown at June 30, 2021 should be restated using the
weighted average basis.

Q5: Which one of the following concept measure profit in terms of an increase in the productive
capacity of a company?

a) Historical cost accounting.

b) Financial capital management.

c) Going concern concept.

d) Physical capital maintenance.

Q6: Select the best option from the following which should not be included in the physical inventory
of a company.
a) Goods held on consignment from another company.

b) All of the stated options should be included in the physical inventory of a company.

c) Goods in transit from another company shipped free on board shipping point.

d) Goods shipped on consignment to another company.

Q7: refers to the removal of all or part of a recognized asset or liability from a company’s
statement of financial position.

a) De-recognition.

b) Control of an economic resource.

c) Combined financial statements.

d) Classification.

Q8: In which of the following situation a prior year adjustment would not be required as per IAS 8
“Accounting Policies, changes in accounting estimates and errors.

a) In last year’s financial statements inventories were understated by a material amount due to system
error.

b) A company has chosen to value inventory using FIFO rather than AVCO as in prior periods.

c) A company has changes its allowance for irrecoverable receivables from 10% of outstanding debt to
everything over 120 days old.

d) A new accounting standard has been issued that require a company to change its accounting policy
but gives no guidance on the specific application of the change itself.

Q9: In order to hold a debt instrument at amortized cost, which of the following test must be applied?

a) Business model test.

b) Contractual cash flow characteristics test.

c) Both contractual cash flow characteristics and business model test.

d) Fair value test.

Q10: What is the primary criterion used to distinguish a financial liability from an equity instrument?

a) The length of the term of financial instrument.

b) Whether the financial instrument pays dividends.

c) The classification of the financial instrument as either a bond or a share.

d) A contractual obligation to make interest, principle or dividend payments.

Q11: Which of the following is not an intangible asset?

a) Patents.

b) Trade marks.

c) Goodwill arising as a result of an equipment.

d) Improvements to a building that the company already owns.

Q12: A sale and lease back transaction involves the sale of an asset and the leasing back of the same
asset. If the arrangement meets the IFRS 15 Revenue from contracts with customers criteria to be
recognized as a sale, how should any profit on the sale be treated.

a) Recognize proportion relating to right of use retained.

b) Recognize whole amount of profit immediately in profit or loss.

c) Defer profit and amortize over the lease term.

d) Recognize proportion relating to right of use transferred.

Q13: Which one of the following properties owned by S Limited would be classified as an investment
property.

a) A stately home used for executive training.

b) Land purchased for its investment potential for which permission has not been obtained for
construction of any kind.

c) A new office building used as SL’s office, purchased specifically in order to exploit its capital gains
potential.

d) A property that has been leased to a tenant but which is no longer required and is now held for being
resale.

Q14: Select the best option from the following which can be classified as an intangible asset:

i. Purchased brand name.

ii. Training of staff.

iii. Internally generated brand.

iv. Licenses and quotas.

a) Option (ii), (iii) and (iv) are correct.

b) Option (i) and (iv) are correct.

c) Option (i) and (ii) are correct.

d) Option (ii) and (iii) are correct.

Q15: When land and building are required at a lump sum consideration:

a) The entire amount should be considered cost of building.

b) The purchase amount should be allocated on the basis of the market value of the two assets.

c) The purchase amount should be allocated on the basis of the historical cost of the two assets.

d) The entire amount should be considered cost of the land.

Q16: Identify the best option from the following in which IAS 12 does not apply:

a) Accounting of foreign taxes.

b) Temporary differences arising from investment tax credits.

c) Accounting for government grants.

d) Accounting of income taxes.

Q17: The statement of cash flows is designed to assist users in assessing each of the following, except:

a) The major source of cash receipts during the period.

b) The company’s profitability.

c) The ability of the company to remain liquid.

d) The reasons why net cash flows from operating activities differ from net income.

Q18: CL, a limited company, granted 100 share appreciation rights to each of its 1000 employees in
January 2020. The management feels that as of December 31, 2020, 90% of the awards will west on
December 31, 2020. The fair value of each share appreciation right on December 31, 2020 is Rs. 10.
What is the fair value of the liability to be recorded in the financial statements for the year ended
December 31, 2020:
a) Rs. 300,000.

b) Rs. 90,000.

c) Rs. 100,000.

d) Rs. 10 million.

Q19: If a company incur transaction costs in issuing loan notes, how should these transaction cost be
accounted for:

a) charged to financial costs.

b) added to the proceeds of the loan notes.

c) deducted from the proceeds of the loan notes.

d) amortized over the life of the loan notes.

Q20: On October 1, 2020, HL limited borrowed Rs. 10 million at the rate of 9% from GBL Bank Limited,
signing a six month note payable for that amount. Select the best option from the following which
represent incorrect statement regarding the above loan.

a) The maturity value for this note is Rs. 10.45 million.

b) HL’s total ability for this loan at November will be Rs. 10.15 million.

c) HL’s liability at October 1, 2020 was Rs. 10 million.

d) At December 31, 2020, HL will have a liability for accrued interest payable of Rs. 450,000.

New Questions

Q1: When it is difficult to distinguish between a change of estimate and change in accounting policy,
which of the following step is most appropriate for the above situation?

a) Treat the entire change as a change in estimate with appropriate disclosure.

b) Ignore the effect in the year of change, wait for the next year to see how the change develops and
then treat it accordingly.

c) Treat the entire change as a change in accounting policy.

d) Apportion on a reasonable basis the relative amount of change in estimate and the change in
accounting policy and treat each one accordingly.

Q2: Which one of the following would be shown in the Other Comprehensive Income section of the
statement of profit and loss and other comprehensive income?

a) Receipt of a government grant.

b) Profit on sale of an investment.

c) A revaluation gain on an investment property.

d) Gain on revaluation of a factory building.

Q3: Which of the following would require a provision to be created by Salman Limited (SL) at its year
end of December 31, 2019?

a) A customer is suing SL for damages alleged to have been caused by SL’s product. SL is contesting the
claim and, at December 31, 2019, the directors have been advised by SL’s legal advisers it is very unlikely
to lose the case.

b) SL makes refunds to customers for any goods returned within 30 days of sale, and has done so for
many years.

c) At the year end, SL is negotiating with its insurance provider about the amount of an insurance claim
that it had filed. On November 20, 2019, the insurance provider agreed to pay Rs. 2 million.

d) None of these events would require a provision.

Q4: In which of the following situation a company would not recognize a deferred tax liability for
taxable temporary differences?

a) Temporary differences associated with investments in subsidiaries when the parent is able to control
the timing of reversal of the temporary differences and is probable that the temporary difference will
not reverse in future.

b) In all of these situations a company would not recognize a deferred tax liability for taxable temporary
differences.

c) The initial recognition of an asset or liability in the transaction that is not a business combination and
does not affect accounting/taxable profit.

d) The initial recognition of goodwill.

Q5: Ali limited (AL) has 300 items of product Alpha in inventory at June 30, 2021. The items were
found to be damaged by a water leak. Those items can be repaired and repacked for a cost of Rs. 225
per item. Once repackaged, the items can be sold at the normal price of Rs. 525 each. The original
price of the items was Rs. 330 each. The replacement cost at June 30, 2021 amounted to Rs. 412.5
each. The above inventory will be valued at in the statement of financial position of AL as
at June 30, 2021.
a) Rs. 121,500.

b) Rs. 99,000.

c) Rs. 90,000.

d) Rs. 123,700.

Q6: On January 1, 2020, BL sold its head office building and continued to use it under a lease
arrangement. The building had a useful life of 25 years. On January 1, 2020, the carrying amount of the
building was Rs. 25 million and company received Rs. 28.75 million as sale proceeds equivalent to its
fair value. would be the carrying amount of the head office building as at December 31,
2020.

a) Rs. 24 million.

b) Rs. 27.6 million.

c) Rs. Nill.

d) Rs. 28.75 million.

Q7: On January 1, 2019, SL had an opening credit balance of Rs. 10,000 on its tax account, which
represented the balance on the account after selling its tax liability for the previous year. The company
had a credit balance on its deferred tax account of Rs. 3.2 million at the same date. Income tax
expense for the year had been estimated at Rs. 2 million which would increase its deferred tax account
balance by Rs. 300,000. The income tax expense that should be recorded in the statement of profit or
loss of SL for the year ended December 31, 2019 is:

a) Rs. 1200,000.

b) Rs. 2290,000.

c) Rs. 890,000.

d) Rs. 2000,000.

Q8: On July 1, 2019, KL entered into an agreement to lease the plant from the manufacturer. An initial
payment was made on July 1, 2019, and the present value of the future lease payments at that date
amounted to Rs. 173,500. Payment in respect of lease are made in advance and are Rs. 100,000 per
annum, commencing on July 1, 2020. The rate of interest implicit in the lease is 10%. The total lease
liability as at June 30, 2020 is:

a) Rs. 273,500.

b) Rs. 173,500.
c) Rs. 100,000.

d) Rs. 190,850.

Q9: Saim limited issued 3% convertible bonds at the nominal value of Rs. 6000,000. Interest is payable
annually in arrears. The bond will be redeemed at par after 3 years. The similar non-convertible bonds
carry an effective market interest rate at 9%. The present value factor at 3% and 9% are given below:

Year 3% 9%
1 0.971 0.917
2 0.943 0.842
3 0.915 0.772

is the amount that would be reported as a financial liability when the convertible bonds
are issued.

a) Rs. 5087,580.

b) Rs. 6000,000.

c) Rs. 4770,960.

d) Rs. 6180,000.

Q10: IFRS 3 organizes groups of identifiable intangible assets acquired in a business combination into
categories. Enlist those categories.

Answer:

Q11: Discuss the requirements that a contract need to fulfill for the purpose of applying IFRS 15
“revenue from contract with customers”:

Answer:

Q12: Enlist the indicators for the impairment of financial instruments.

Answer:
Q13: Comparability is defined as an enhancing qualitative characteristic in the international
accounting standard board’s conceptual framework for financial reporting. Which of the following
does not improve comparability.

a) Applying a company’s current policy to a transaction which a company has not engaged in before.

b) Restating the financial statements of previous years when there has been a change of accounting
policy.

c) Disclosing discontinued operations separately in financial statements.

d) Prohibiting change of accounting policy unless required by an IFRS standard or to give more relevant
and reliable information.

Q14: IFRS 5 ”Non-current assets Held for sale and discontinued operations” is applicable on:

a) Non current assets that are accounted for in accordance with fair value model.

b) Financial assets.

c) Assets that meet the criteria to be classified as held for sale.

d) Deferred tax assets.

Q15: IAS 36 “Impairment of Assets” shall be applied in accounting for the impairment of assets:

a) Inventories.

b) Imported plant.

c) Deferred tax assets.

d) Investment properties that are measured at fair value.

Q16: If inventory is declined in value below its original cost, a company should write down inventory

to and report this loss in the in the period of decline.

a) Net realizable value, statement of financial position.

b) Fair value, statement of profit or loss.

c) Net realizable value, statement of profit or loss.

d) Fair value, statement of financial position.

Q17: Which of the statements about IAS 10 “Events after the reporting period” are correct

i. A material event that occurs before the financial statements are authorized that provides more
evidence of conditions that already existed at the reporting date should be adjusted for in the
financial statements.

ii. The notes to the financial statements must give details of non adjusting events affecting the user’s
ability to understand the company’s financial position.

iii. Financial statements should not be prepared on a going concern basis if after the end of the
reporting period but before the financial statements are authorized the directors have decided to
liquidate the company.

a) Option (i) and (iii) are correct.

b) Option (ii) and (iii) are correct.

c) Option (i) and (ii) are correct.

d) All the statements are correct.

Q18: Omar Limited (OL) acquired Jibran Limited (JL) for Rs. 7 million. The fair value of JL’s assets and
liabilities were as follows:

Rupees
Property, plant and equipment 5000,000
Patent 1000,000
Liabilities 2000,000

Which one of the following amount of goodwill would arise on the acquisition of JL?

a) Rs. 4 million.

b) Rs. No goodwill will arise on the acquisition.

c) Rs. 3 million.

d) Rs. 7 million.

Q19: The following details apply to a contract of Hiba Limited (HL) where performance obligations are
satisfied over time at December 31, 2019:

Cost to date Rs. 480,000

 Total expected profit Rs. 240,000
Estimated cost to completion Rs. 480,000
Amount invoiced Rs. 504,000

Percentage of completion 45%

is the amount of total contract revenue and amount should be recognized as

a contract asset in the statement of financial position of HL as at December 31, 2019:

a) Total contract revenue: Rs. 1200,000 and contract asset: Rs. 588,000.

b) Total contract revenue: Rs. 744,000 and contract asset: Rs. 84,000.

c) Total contract revenue: Rs. 1200,000 and contract asset: Rs. 84,000.

d) Total contract revenue: Rs. 744,000 and contract asset: Rs. 588,000.

Q20: HL granted its Finance manager, Mr. Ali the right to choose either 1 million shares or to receive a
cash payment equal to 750,000 shares. At the grant date, the value of the market price of the share was
Rs. 60. HL estimated that the fair value of the share alternative is Rs. 50 per share. Explain how this
transaction will be accounted for in the books of HL.

Answer:

Q21: Which of the following will not be considered a qualifying asset under IAS 23 borrowing cost?

a) A power generation plant that normally takes two years to construct.

b) A ship that normally takes one to two years to complete.

c) An expensive private jet that can be purchased from a local vendor.

d) A toll bridge that usually takes more than a year to build.

Q22: Which one of the following should not be included within the initial cost of a right of use asset?

a) Gross lease rentals payable under the lease agreement.

b) Amount of initial measurement of the lease liability.

c) Payments made to the lessor before commencement of the lease.

d) Present value of estimated cost of dismantling the asset at the end of the lease period.

Q23: Which of the following would be treated as change of accounting policy by SL company?

i) SL has received its first grant and is applying the deferred income method.

ii) SL has revalued its property previously they all had been carried at historical cost.

iii) SL reclassified development costs from other operating expenses to cost of sales.

iv) SL has increased its recoverable debt allowance from 10% to 12%.

a) Option (i) and (ii) are correct.

b) Option (iii) and (iv) are correct.

c) Option (ii), (iii) and (iv) are correct.

d) Option (ii) and (iii) are correct.

Q24: Select the best option from the following which can be classified as an intangible asset.

a) Legal costs paid to intellectual property lawyers to register a patent.

b) Operating losses during the initial stages of the project.

c) University fees paid to employees who decide to enroll in an executive MBA program while working
with the company.

d) Advertising and promotion on the launch of a huge product.

Q25: TL has interest receivables of Rs. 500,000 and dividend receivables of Rs. 900,000. When
determining taxable profits or loss, interest will be taxed on cash basis. Dividends are deductible against
the economic benefits. The tax base of interest receivables and dividends will be and

respectively.

a) Nill and Rs. 400,000.

b) Nill and Rs. 900,000.

c) Rs. 500,000 and Rs. 900,000.

d) Rs. 500,000 and Nill.

Q26: EL purchased a plant on January 1, 2018, at a cost of Rs. 5 million and uses 25% reducing balance
method for accounting its depreciation. On December 31, 2019, EL received an offer of Rs. 2.9 million
from a company in Dubai interested in buying the plant. The present value of the estimated cash flows
from continued use of the plant in Rs. 2.6 million. The estimated cost of shipping the plant to Dubai is Rs.
50,000 is the amount of the impairment loss that would be recognized on the plant.

a) No impairment loss will arise.

b) Rs. 212,500.

c) Rs. 37,500.

d) Rs. 87,500.

Q27: CL, a public limited company granted 1000 share appreciation rights to each of its 1000 employees
in January 2020. The management feels that as of December 31, 2020, 90% of the awards will vest on
December 31, 2020. The fair value of each share appreciation rights on December 31, 2020 is Rs. 10.

is the fair value of the liability to be recorded in the financial statements for the year ended
December 31, 2020.

a) Rs. 10 million.

b) Rs. 90,000.

c) Rs. 300,000.

d) Rs. 100,000.

Q28: A company entered into a five year lease agreement on January 1, 2019 paying Rs. 164,625 per
annum, commencing on December 31, 2019. The present value of the minimum lease payments was Rs.
675,000 and the interest rate implicit in the lease was 7%. The amount to be shown within non-current
liabilities as at December 31, 2019:

a) Rs. 546,105.

b) Rs. 432,034

c) Rs. 557,625.

d) Rs. 393,000.

Q29: QL is facing a number of legal claims from its customers with regard to a faulty product sold. The
total amount being claimed is Rs. 40 million. The company’s lawyer is of the view that the customers
have a chance of 80% being successful. What amount, if any, should be recognized in respect of the
above in QL’s statement of financial position as at June 30, 2020.
Answer:

Q30: ZL’s non current assets include property, plant and equipment a machine that was purchased five
years ago. New technology is possibly threating the value of the machine. Discuss how ZL should present
information in its financial statements in order to be complete, neutral and free from error.

Answer:

Q31: A company owns a number of nuclear plants. The company is obliged to dismantle one of these
plants in 3 year’s time. The last nuclear plant is dismantled by the company cost Rs. 2 million dismantle,
but the company expects to dismantle this nuclear plant at a reduced cost of Rs. 1.6 million due to
increased experience.

There is also a chance that completely new technology may be available at the time of dismantling,
which could lead to a further cost saving of Rs. 400,000.

Required: Discuss the measurement of the above provision.

Answer:

Q32: On January 1, 2019, IL received a government grant of Rs. 2 million in order to facilitate purchase
on the same day of an asset which cost of Rs. 3 million. The asset has a useful life of five years and is
depreciated on a 25% reducing balance basis. IL has a policy to account for all grants received as
deferred income. What amount of income will be recognized in respect of the grant for the year ended
December 31, 2020?
Answer:

Q33: On July 1, 2019, AL sold out its factory having a carrying value of Rs. 12 million to KL to Rs. 16
million. At this date the factory had a fair value of Rs. 30 million. AL continued to use the factory and was
responsible for the insurance and maintenance of the factory. Al has the right to repurchase the factory
for Rs. 19.6 million on July 1, 2022, representing a 7% growth in value each year.

Required: Discuss how the above transaction would be treated in the financial statement of AL for the
year ended June 30, 2020.

Answer:

Q34: The following information has been extracted from the records of A Limited, pertaining to financial
year ended March 31, 2020.

1. The company has been sued for the non-payment of end service compensation and gratuity to 6
employees who were terminated without giving any notice . The claim amounts to Rs. 3 million. The
lawyer of the company is of the view that the company would have to pay to the displaced employees,
but the estimate of the amount that would be payable if plaintiff succeeds against the company is Rs. 2
million.

2. The company is facing litigation due to an alleged breach of contract. The contract contains a clause
that prescribes damages of Rs. 4 million in case of default. The management has assessed 60%
probability that the damages will have to be paid.

Required:
Discuss how each of the above matter should be dealt with in the financial statements of A Limited for
the year ended March 31, 2020.

Answer:

Q35: Extracts from SL’s statement of financial position are as follows:

2020 2019
Rupees.
Non-current Assets
Right of use asset 6500,000 2500,000

Non-current Liabilities
Lease obligations 4800,000 2000,000
Current Liabilities
Lease obligations 1700,000 800,000

During the year ended December 31, 2020, depreciation charged on leased plant amounted to Rs.
1800,000.

Required:

Calculate the amount that will be shown in the statement of cash flows of SL for the year ended
December 31, 2020 in respect of payments made under leases.

Answer:
Q36: On January 1, 2019, B Limited received Rs. 2500,000 from the government on the condition that
they employee at least 100 staff each year for the next four years. On this date, it was almost certain that
BL would meet these requirements. However, on January 1, 2020 due to downturn and reduced
consumer demand. BL could not manage to employ 100 staff. The conditions of the grant required full
payment.

Required:

Explain how the above event will be dealt in the financial statements of B Limited?

Answer:

Q37: During the year ended December 31, 2019, SL exchanged an automobile from FL which has a
carrying amount of Rs. 1.2 million. (Rs. 3 million cost less accumulated depreciation of Rs. 1.8 million) for
a tooling machine which has a fair market value of Rs. 1.5 million. No cash is exchanged in the
transaction. The fair value of the auto mobile is not readily determinable.

Required:

Determine the gain or loss that SL would record in its financial statements in respect of the above
transaction for the year ended December 31, 2019.

Answer:

Q38: ML, a construction company, entered into a contract with NL for the construction of a building of
NL’s new branch office.

ML agrees to complete the project within eight month period. Project manager has provided following
data:

Material cost Rs. 4000,000.

Labor cost Rs. 6400,000 (out of which Rs. 400,000 was paid when labor was on strike).

Other land preparation cost amounted to Rs. 2650,000.

Rs. 1200,000 paid to government authorities in order to obtain approval for the design of building.

Annual depreciation of machine amounted to Rs. 1200,000. It is used for months in project.

General and administration cost amounted to Rs. 100,000.

Required:

Calculate ML’s cost of fulfilling the contract as per IFRS 15.

Answer:

Q39: On January 1, 2020, TL purchased 70% share capital of RL. TL agreed to pay Rs. 9 million on
December 31, 2021, TL has a cost of capital of 8%.

Following are the extracts of statement of profit or loss for the year ended June 30, 2020 for both TL and
RL.

TL Limited RL Limited
Rs. 000
Cost of sales (478,800) (264,600)

Operating expenses (75,915) (49,680)

Required:

Calculate the liability that should be recorded in respect of the deferred consideration in TL’s
consolidated statement of financial position as at June 30, 2020.
Answer:

Q40: Shapuntala Limited signed a contract with a customer to sale the car for Rs. 2 million, consider, the
following scenarios and explain whether the additional term is explicit or implicit and whether this fact
would affect how the transaction price is allocated.

1. During the last five years, all customers have been given a maintenance plan for free. This is not stated
in the contract. Similar maintenance plans are currently valued at Rs. 50,000.

2. The contract specifically mentions that a 3 year maintenance plan will be provided for free. The
maintenance plan is currently valued at Rs. 50,000.

Answer:

Q41: As at December 31, 2020, a company had the following inventories:

Name Original cost Selling price Estimated cost to

sell
Rupees
Cold paper cups 640,000 656,000 48,000

Food container 320,000 288,000 16,000

Folding cartons 480,000 496,000 8000
Paper plates 240,000 256,000 8000
 Paper bags 288,000 240,000 16,000
Required:

Determine the amount at which company will record the above transaction in its financial statements as
per IAS 2.

Answer:

Q42: ML developed a new online platform during the year ended December 31, 2020, and spent Rs.
500,000 per month evenly from February 1, 2020 to October 31, 2020. ML became sure for the success
of the project on May 1, 2020 and was expected to last five years. Calculate the amount that should be
recorded in ML’s statement of profit or loss for the year ended December 31, 2020, in relation to the
development of the online platform.

Answer:

Q43: Extracts from SL statement of financial position are as follows:

Rupees.
Nom-current liabilities
2020 2019
8% loan notes 4080,000 4000,000
Deferred tax 1500,000 800,000
Current liabilities
 Trade payables 2650,000 2100,000
Current tax payables 1250,000 725,000
Additional Information:

 SL recorded finance cost on loan notes in its statement of profit or loss amounted to Rs. 400,000.
 Income tax expense for the year amounted to Rs. 1 million.

Required:

Calculate the amount that will be recorded in respect of loan notes and tax payment in the statement of
cash flows of SL for the year ended December 31, 2020.

Answer:

Q44: AL owns 80% shares of SL. In the year ended June 30, 2020. AL reported total revenues of Rs. 5.5
million and SL of Rs. 2.1 million. SL sold goods to AL during the year for an amount of Rs. 1 million,
earning a margin of 20%. Half of the goods remained in the inventory at the year end.

Required:

Calculate the consolidated revenue amount of AL for the year ended June 30, 2020.

Answer:

Q45: Mr. Rehan, a customer, sues Diamond Hotels for providing him with raw food that resulted in his
sickness. The holder’s lawyer is of the view that it is unlikely (but not remote) that the company will have
any obligation under his lawsuit. Management estimated that the hotel would have to pay rs. 300,000 if
it were to lose the lawsuit. Discuss how the above event should be dealt by diamond Hotels as per IAS
37, Provisions, contingent asset and contingent liabilities.

Answer:

Q46: A company owns a machine that has a carrying value of Rs. 8500,000 at the year end of December
31, 2020. Its market value is Rs. 7800,000 and costs of disposal are estimated at Rs. 250,000. A new
machine would cost Rs. 15000,000. LL expects its existing machine to produce net cash flows of Rs.
3000,000 per annum for the next three years. The cost of capital of LL is 8%. Calculate the impairment
loss on the machine to be recognize in the financial statements as at December 31, 2020. (Presnt value
factor at 8% for year 1 = 0.926, year 2 = 0.857, year 3 = 0.794).

Answer:

Q47: On December 31, 2018 RL has accrued interest payable of Rs. 84,000. During the year ended
December 31, 2019 the company charged Rs. 1050,000 to statement of profit or loss in respect of
unwinding the discount related to a provision. The statement of cash flows showed Rs. 203,000 as
interest paid. The closing balance on accrued interest payable account was Rs. 105,000. The company
has a discount rate of 6%.

Required: What is the amount of interest expense that the company had charged to its statement of
profit or loss for the year ended December 31, 2019?

Answer:

Q48: Which of the following items should be recognized as an intangible asset:

(i) Patent for new drug.

(ii) License for new vaccine.

(iii) Specialist training courses.

a) Option (i) and (ii) are correct.

b) Option (i) and (iii) are correct.

c) Option (ii) and (iii) are correct.

d) Option (i) is correct.

Q49: Factors that effect the election of inventory costing method do not include:

a) Tax effects.

b) Income statement effects.

c) Statement of financial position effects

d) Perpetual vs periodic inventory system.

Q50: In the statement of cash flows, a decrease in accounts payable would be shown as:

a) An increase in the operating activities category.

b) A decrease in operating activities category.

c) A decrease in the operating activities category.

d) An increase in the financing category.

Q51: HL bought a machine for Rs. 5000,000 on January 1, 2018, which had an expected useful life of four
years and an expected residual value of Rs. 1 million, the asset was to be depreciated on the straight line
basis. On December 31, 2020, the machine was sold for 1.6 million is the amount of
income/loss on disposal to be recorded in the statement for profit or loss for the year ended December
31, 2020.

a) Profit of Rs. 350,000.

b) Profit of Rs. 600,000.

c) Loss of Rs. 400,000.

d) Loss of Rs. 600,000.

Q52: On January 1, 2019, SL had an opening credit balance of Rs. 10,000 on its tax account which
represented the balance on the account after selling its tax liability for the previous year. The company
had a credit balance on its deferred tax account of Rs. 3.2 million at the same date. Income tax expense
for the year has been estimated at Rs. 2 million which would increase its deferred tax account balance by
Rs. 300,000. The income tax expense that should be recorded in the statement of profit or loss of SL for
the year ended December 31, 2019:

a) Rs. 1200,000.

b) Rs. 2000,000.

c) Rs. 890,000.

d) Rs. 2290,000.

Q53: At December 31, 2019, BN limited had finished goods inventory of juice packets with a carrying
amount of Rs. 560,000 (28,000 juice packets at a cost of Rs. 20 per unit). Out of total 15000 juice packets
were set aside for SR limited as terms of sale commitment at Rs. 30 per unit. The current selling price is
Rs. 35 per unit. Selling cost for the 15000 packets amounts to Rs. 70,000 while the normal estimated
selling cost is Rs. 5 per unit. The net realizable value of juice packets at Dec 31, 2019:

a) Rs. 905,000.

b) Rs. 845,000.

c) Rs. 835,000.

d) Rs. 770,000.

Q54: A cash generating unit of Supreme limited has the following balance in its financial statements:

Rupees
Goodwill 1050,000

Building 3450,000

Plant 1425,000
Intangibles 1200,000
Other net assets 645,000

The recoverable amount of the cash generating unit is estimated to be Rs. 6 million. On June 30, 2020
the building was at its fair value amounted to Rs. 3.75 million. The other net assets are at their
recoverable amount. The company uses cost model for valuing building and plant.

Required: Discuss how the impairment would be allocated amount the abov assets of cash generating
unit.

Answer:
Q55: In accordance with IAS 8 “Accounting policies, changes in accounting estimates and errors” how is a
change in accounting estimate accounted for:

a) By changing the current year figures and the previous year figures.

b) No alteration of any figures but disclosure in the notes.

c) Neither alteration of any figures nor disclosure in the notes.

d) By changing the current year figures but not the previous year’s figures.

Q56: Which one of the following is not a purpose of the International Accounting Standard Board?

a) To assist the board in the preparation and review of IFRS standards.

b) To assist auditors in forming an opinion on whether financial statements comply with IFRS standards.

c) To be authoritative when a specific IFRS standard conflict with the conceptual framework.

d) To assist in determining the treatment of items not covered by an existing IFRS.

Q57: FL has built a new factory incurring the following costs:

Rupees
Land 1200,000
Material 2400,000
Labor 3000,000
Architect’s fee 25,000
Surveyor’s fee 15,000
Site overhead 300,000
Apportioned overhead 150,000
Testing of fire alarms 10,000

What is the amount of capital expenditure?

a) Rs. 7112,000.

b) Rs. 7100,000.
c) Rs. 6112,000.

d) None.

Q58: QL is facing a number of legal claims from its customers with regard to a faulty product sold. The
legal amount being claimed is Rs. 40 million. The company’s lawyer is of the view that the customers
have a chance of 80% being successful. What amount, if any, should be recognized in respect of the
above in QL’s statement of financial position as at June 30, 2020?

Answer:

Q59: IAS 37 ensures that appropriate recognition criteria and measurement basis are applied to
provisions, contingent liabilities and contingent assets. Explain how the terms “Provisions” and
contingent liabilities can be distinguished from each other?

Answer:

Q60: refers to the correcting the recognition, measurement and disclosure of amounts in
financial statements as if prior-period error had never occurred.

a) change in accounting estimate.

b) prospective restatement.

c) retrospective statement.

d) retrospective application.

Q61: Differentiate between “share based payment arranged” and “share based payment transaction”.
Answer: