FINAL PREBOARD

PRAC1

MULTIPLE CHOICE

1. JayJay Limited estimated that the future cash outflows relating to settlement of warranty
obligations would be as follows:

 In 1 year $40 000

 In 2 years $50 000
 In 3 years. $60 000.

A government rate for bonds with similar terms, is 6%. What is the present value of the total
expected future cash outflow?

a. 132 563 c. 140 510;

b. 150 000; d. 159 000.
ANS: A

2. Whitnall Limited lost $150 on a hedging and had a corresponding gain on the hedged item of
$100. The effectiveness range for these associated transactions is:

a. 100% - 150%; c. 20% - 30%;

b. 66% - 150%. d. 0% - 15%;
ANS: B

3. Farrugia Limited has an asset which cost $300 and against which depreciation of $100 has
accumulated. The accumulated depreciation for tax purposes is $180 and the company tax rate
is 30%. The tax base of this asset is:

a. 120; c. 220;
b. 80; d. 20
ANS: A

4. D’Silva Limited has a product warranty liability amounting to $10 000. The product warranty
costs are not tax deductible until paid out to customers. The company tax rate is 30%. The
company has:

a. a deductible temporary difference of $10 000;

b. an assessable temporary difference of $10 000
c. a tax base of $10 000;
d. a future deductible amount of $0
ANS: A
5. Tracey Limited revalued an item of plant from initial cost of $10 000 to fair value of $15 000.
The company tax rate is 30%. The adjusting journal entry to recognise the tax effect of the
revaluation will include the following item:

a. DR Deferred tax asset $3 500;

b. DR Deferred tax liability $3 500;
c. CR Deferred tax asset $1 500;
d. CR Deferred tax liability $1 500.
ANS: D

6. On 1 April 20X5, the company rate of income tax was changed from 35% to 30%. At the
previous reporting date (30 June 20X4) Montgomery Limited had the following tax balances:

 Deferred tax assets $26 250

 Deferred tax liabilities $21 000

What is the impact of the tax rate change on income tax expense?

a. increase $750; c. decrease $750;

b. increase $875; d. decrease $875.
ANS: C

7. Balchin Limited had the following deferred tax balances at reporting date:

 Deferred tax assets $12 000

 Deferred tax liabilities $30 000

Effective from the first day of the next financial period, the company rate of income tax was
reduced from 40% to 30%. The adjustment to income tax expense to recognise the impact of
the tax rate change is:

a. DR 6 000; c. DR 4 500;
b. CR 6 000; d. CR 4 500.
ANS: D

8. Ming Limited had the following items of inventory at reporting date:

Item Quantity Cost/unit $ NRV/unit

Refrigerators 10 100 95
Stoves 20 80 85

The adjustment necessary at reporting date is:

a. DR Inventory 50; c. DR Inventory 100;

b. CR Inventory 50; d. CR Inventory 0.
ANS: C
 9. Porter Limited owned Land that had been previously revalued up ward by $60 000. The Land
will be revalued downwards at the current reporting date by $20 000. If the company rate of
tax is 30%, the impact of this revaluation on the ‘asset revaluation surplus’ account is:

a. DR 42 000; c. CR 18 000
b. DR 14 000 d. CR 6 000.
ANS: B

10. Chakik Limited acquired Property several years before the current reporting date. The
property has a carrying amount of $90 000. The initial cost was $170 000. At reporting date
the property was revalued down to $50 000; it had not been previously revalued. The
adjusting entry to recognise the revaluation is:

A B C D
a. DR Depreciation 30 000
CR Accumulated depreciation 30 000;
b. DR Accumulated depreciation 80 000
DR Expense – downward revaluation of property 40 000
CR Property 120 000;
c. DR Depreciation 30 000
CR Property 30 000;
d. DR Asset revaluation surplus 40 000
DR Accumulated depreciation 80 000
CR Property 120 000.
ANS: B

11. An item of Equipment was acquired for an initial cost of $50 000. The Equipment was
revalued immediately up to $84 000. The Equipment has an expected useful life of 7 years
and the company rate of tax is 30%. The adjustment that must be recognised in the asset
revaluation surplus account is:

a. DR Asset revaluation surplus $34 000;

b. DR Asset revaluation surplus $23 800;
c. CR Asset revaluation surplus $10 200;
d. CR Asset revaluation surplus $15 000.
ANS: C

12. Wei Wei Limited uses the revaluation model for measuring its property, plant and equipment
assets. At reporting date, prior to revaluing its assets, the company had a balance in its ‘asset
revaluation surplus account of $50 000. On reporting date Wei Wei Limited revalued its Plant
class of assets down from a carrying amount of $400 000 to $320 000. This class of assets
had been previously revalued upwards by $60 000. The closing balance of the asset
revaluation surplus account to be shown in the financial statements, is:

a. CR 50 000; c. DR 10 000;
b. DR 30 000 d. $0.
 ANS: D

13. Jenkins Limited acquired an item of Property at a cost of $50 000. At reporting date
accumulated depreciation amounted to $15 000. The asset was revalued on reporting date to
$45 000. If the company rate of tax is 30%, the deferred tax item that must be recognised at
reporting date is:

a. deferred tax asset 3 000; c. deferred tax liability 3 000;

b. deferred tax liability 7 000; d. deferred tax asset 7 000.
ANS: C

14. Lim Limited acquired a Plant asset on 1 July 20X3 for $10 000. The asset had an expected
life of 5 years and an estimated residual value of $2 000. On 1 January 20X5 the entity sold
the asset for $9 100. Lim Limited uses the straight-line depreciation method. At the date of
sale the accumulated depreciation is:

A $800;
B $900;
C $1 600;
D $2 400.

Question 11

Christou Limited sold an item of Equipment for $16 200. The Equipment initially cost $20
000 and depreciation amounting to $6 400 had accumulated by the date of sale. The
difference on disposal is:

a. a gain of $3 800; c. a gain of $2 600;

b. a loss of $2 600; d. a loss of $3 800.
ANS: C

15. Nguyen Limited estimated that it would receive future cash flows from the use of Equipment:

 End of Year 1 $10 000

 End of Year 2 $50 000
 End of Year 3 $20 000

The discount rate was determined as 8%. The ‘value in use’ of the Equipment is:

a. 80 000; c. 73 600;
b. 68 000; d. 63 500.
ANS: B
16. At reporting date Guilder Limited estimated an impairment loss of $50 000 against its single
cash-generating unit. The company had the following assets: Headquarters Building $100
000; Plant $60 000; Equipment $40 000. The net carrying amount of the Plant after allocation
of the impairment loss is:

a. 60 000; c. 45 000;
b. 35 000; d. 10 000.
ANS: B

17. At reporting date, the carrying amount of a cash-generating unit was considered to be have
been impaired by $800. The unit included the following assets: Land $4 000; Plant $3 000;
Goodwill $1,000. The carrying amount of Goodwill after the impairment loss is allocated, is:

a. 200; c. 900;
b. 1 000; d. 0.
ANS: A

18. Xerri Limited acquired 70% of the shares of Ziems Limited for $35 000 on 1 July 20X5. At
this date the identifiable net assets of Ziems Limited have a fair value of $40 000. How much
is the net fair value acquired by Xerri Limited?

a. 50 000; c. 40 000;
b. 35 000 d. 28 000.
ANS: D

19. Girgin Limited acquired 70% of the shares of Eti Limited for $70 000. At acquisition date the
identifiable net assets of Eti Limited had a fair value of $90 000. What is the amount of the
grossed-up goodwill relating to the acquisition of Eti Limited?

a. 10 000 c. 7 000;
b. 3 000; d. 9 000.
ANS: A

20. A part of a cash-generating unit which had recognised goodwill, was sold for $20 000. The
recoverable amount of the remaining part of the unit is $60 000. How much of the goodwill is
included in the carrying amount of the operation that is disposed of?

a. 33%; c. 30%;
b. 25%. d. 50%;
ANS: B

21. Adam Limited and Davies Limited enter into a finance lease agreement with the following
terms:

 lease term is 3 years

 estimated economic life of the leased asset is 6 years
 3 x annual rental payments of $23 000; each payment is one year in arrears
  residual value at the end of the lease term is not guaranteed by the lessee
 interest rate implicit in the lease is 7%

On inception date, the present value of the minimum lease payments is:

a. 69 000; c. 64 584;
b. 64 170; d. 60 359.
ANS: A

22. Burgess Limited accepts a lease incentive to enter into a 3-year operating lease for a building.
The incentive is a cash amount of $5 000 received on signing of the lease agreement. The
lessee initially records this transaction as follows:

a. DR Lease expense 5 000

CR Cash 5 000;
b. DR Incentive from lessor 5 000
CR Cash 5 000;
c. DR Incentive to lessee 5 000
CR Rent income 5 000;
d. DR Cash 5 000
CR Lease incentive from lessor 5 000.
ANS: D

23. Timely Limited accepts a lease incentive to enter into a 4-year operating lease for equipment.
The incentive is cash amounting to $10 000 that will be paid on the date the lease agreement is
signed. On inception of the lease, the lessor will record:

a. DR Cash 10 000
CR Incentive to lessee 10 000;
b. DR Incentive to lessee 10 000
CR Cash 10 000;
c. DR Rent income 10 000
CR Rent expense 10 000;
d. DR Cash 10 000
CR Rent income 10 000
ANS: B

24. Warner Limited had the following cash flows during a reporting period:

 Acquisition of subsidiary, net of cash flows $250 000

 Dividends paid $65 000
 Repayment of borrowings $90 000
 Interest paid on borrowings $57 000
 Proceeds from sale of plant $215 000

What is the amount of the cash flows in relation to financing activities of Warner Limited for
the reporting period?
 a. net cash inflow $155 000; c. net cash outflow $155 000;
b. net cash inflow $212 000; d. net cash inflow $212 000.
ANS: C

25. Brett Limited had a net profit after tax of $850 000 for the financial year. Included in this
profit was:

 Depreciation expense of $120 000

 Gain on sale of Investments of $28 000

Also, Accounts Receivable increased by $39 000 and Inventories decreased by $12 000. The
cash flow from operating activities during the year was:

a. 785 000; c. 731 000;

b. 915 000; d. 969 000.
ANS: B

26. During the financial year Marina Limited had sales of $720 000. The beginning balance of
Accounts receivable was $103 000, and the ending balance was $139 000. Bad debts
amounting to $34 000 were written off during the period. The cash receipts from customers
during the year amounted to:

a. 718 000; c. 650 000;

b. 790 000; d. 722 000.
ANS: C

27. During the financial year, Cresswell Limited had a Cost of Sales amounting to $260 000.
Beginning and ending balances were:

Beginning balance Ending balance

 Inventory $46 000 $55 000
 Accounts Payable $18 000 $26 000

A discount of $2 000 for prompt payment was received. The amount of cash paid for goods
purchased during the year was:

a. 259 000 c. 263 000;

b. 275 000; d. 279 000
ANS: A

28. Katsis Limited had the following cash flows during the reporting period:

 Purchase of intangibles $30 000

 Proceeds from sale of plant $28 000
 Receipts from customers $832 000
 Payments to suppliers $593 000
 Interest received $17 600
  Income taxes paid $45 500

The net cash connected to operating activities was:

a. 239 100; c. 269 100;

b. 256 600; d. 211 100.
ANS: D

29. At balance sheet date, Dim Limited had the following net balance from cash flows:

 Operating activities, $53 440;

 Investing activities, $45 230;
 Financing activities, $(47 860).

If the company had an ending balance of cash amounting to $107 310, what was the
comparative ending balance of cash for the previous year?

a. (39 220); c. 163 380;

b. 56 500; d. 158 120.
ANS: B

30. For the purposes of equity accounting for an investment in an associate, it is presumed that the
investor has significant influence over the other entity where the investor holds:

a. between 1% and 5% of the voting power of the investee;

b. between 5% and 10% of the voting power of the investee
c. 20% or more of the voting power of the investee
d. 50% or more of the voting power of the investee;
ANS: C

31. Gunawan Limited acquired a 20% share in Juliano Limited for $18 000. Gunawan Limited
has no other investments. At the date on which it became an associate, Juliano Limited had
the following equity:

 Share capital $50 000

 Retained earnings $40 000

At the end of the financial year following the investment, Juliano Limited generated a profit
of $6 000. After applying the equity method of accounting, Gunawan Limited will have the
following carrying amount for the investment:

a. 19 200; c. 18 000;
b. 16 800; d. 9 200.
ANS: A
32. Campbell Limited acquired a 30% investment in Laura Limited for $21 000. Laura Limited
declared and paid a dividend of $5 000. Campbell Limited does not prepare consolidated
financial statements. The appropriate entry for Campbell Limited to record this dividend is:

a. DR Investment in associate 1 500

CR Dividend revenue 1 500;
b. DR Cash 1 500
CR Investment in associate 1 500;
c. DR Dividends received 3 500
CR Cash 3 500;
d. DR Cash 3 500
CR Dividend revenue 3 500.
ANS: B

33. Investor Limited acquired a 30% interest in Investee Limited for $27 000. Investor holds
other equity investments but does not prepare consolidated financial statements. Investee
Limited revalued its Buildings class of assets by $10 000 during the current financial period.
The balance of the investment in associate account at the end of the current financial period is:

a. 18 100; c. 11 100;
b. 30 000; d. 27 000.
ANS: B

34. In investor company acquired a 40% interest in an associate for $30 000. The investor is part
of a consolidated group. In the financial period immediately following the date on which it
became an associate, the investee took the following action:

 revalued assets up to fair value by $5 000

 generated profits of $16 000
 declared a dividend of $3 000

The balance in the investor’s account ‘Shares in associate’, after equity accounting has been
applied, is:

a. 30 000; c. 38 400;
b. 39 600; d. 37 200.
ANS: D

35. Cherry Group has operations in three different geographic locations. It has total assets as
follows:

 Region 1 $400 000

 Region 2 $80 000
 Region 3 $20 000

The reportable geographic segments are:

a. All regions are reportable segments;

b. Regions 2 and 3 are the only reportable segments;
c. Region 1 and 2 are the only reportable segments;
d. Region 1 is the only reportable segment.
ANS: C