Lebanese Association of Certified Public Accountants - IFRS

February Exam 2019

A. MULTIPLE CHOICE QUESTIONS (40%)

1. Which of the following will be treated as a subsidiary of Poulgo Co as at 31 December 20X7?

1) The acquisition of 60% of Zakron Co’s equity share capital on 1 March 20X7. Zakron Co’s
activities are significantly different from the rest of the Poulgo group of companies
2) The offer to acquire 70% of Unto Co’s equity share capital on 1 November 20X7. The
negotiations were finally signed off during January 20X8
3) The acquisition of 45% of Speeth Co’s equity share capital on 31 December 20X7. Poulgo
Co is able to appoint three of the ten members of Speeth Co’s board
a. 1 only
b. 2 and 3
c. 3 only
d. 1 and 2

2. On 1 January 20X6, Gardenbugs Co received a $30,000 government grant relating to

equipment which cost $90,000 and had a useful life of six years. The grant was netted off
against the cost of the equipment. On 1 January 20X7, when the equipment had a carrying
amount of $50,000, its use was changed so that it was no longer being used in accordance
with the grant. This meant that the grant needed to be repaid in full but by 31 December
20X7, this had not yet been done.
Which journal entry is required to reflect the correct accounting treatment of the government
grant and the equipment in the financial statements of Gardenbugs Co for the year ended 31
December 20X7?
a. Dr Property, plant and equipment $10,000
Dr Depreciation expense $20,000
Cr Liability $30,000
b. Dr Property, plant and equipment $15,000
Dr Depreciation expense $15,000
Cr Liability $30,000
c. Dr Property, plant and equipment $10,000
Dr Depreciation expense $15,000
Dr Retained earnings $5,000
Cr Liability $30,000
d. Dr Property, plant and equipment $20,000
Dr Depreciation expense $10,000
Cr Liability $30,000

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 Lebanese Association of Certified Public Accountants - IFRS
February Exam 2019

3. Parket Co acquired 60% of Suket Co on 1 January 20X7. The following extract has been taken
from the individual statements of profit or loss for the year ended 31 March 20X7:
Parket Co Suket Co
$’000 $’000
Cost of sales 710 480
Parket Co consistently made sales of $20,000 per month to Suket Co throughout the year. At
the year end, Suket Co held $20,000 of this in inventory. Parket Co made a mark-up on cost of
25% on all sales to Suket Co.

What is Parket Co’s consolidated cost of sales for the year ended 31 March 20X7?
a. $954,000
b. $950,000
c. $774,000
d. $766,000

4. A company has decided to change its depreciation method to better reflect the pattern of use
of its equipment.
Which of the following correctly reflects what this change represents and how it should be
applied?
a. It is a change of accounting policy and must be applied prospectively
b. It is a change of accounting policy and must be applied retrospectively
c. It is a change of accounting estimate and must be applied retrospectively
d. It is a change of accounting estimate and must be applied prospectively

5. On 1 October 20X1, Bash Co borrowed $6m for a term of one year, exclusively to finance the
construction of a new piece of production equipment. The interest rate on the loan is 6% and
is payable on maturity of the loan. The construction commenced on 1 November 20X1 but no
construction took place between 1 December 20X1 to 31 January 20X2 due to employees
taking industrial action. The asset was available for use on 30 September 20X2 having a
construction cost of $6m.
What is the carrying amount of the production equipment in Bash Co’s statement of financial
position as at 30 September 20X2?
a. $5,016,000
b. $6,270,000
c. $6,330,000
d. $6,360,000

6. Which of the following is not a basic assumption underlying the financial accounting
structure?
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Historical cost assumption.

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February Exam 2019

7. Hill Corp. had 600,000 ordinary shares outstanding on January 1, issued 900,000 shares on
July 1, and had income applicable to common stock of $1,050,000 for the year ending
December 31, 2016. Earnings per share for 2016 would be
a. $1.75.
b. $0.83.
c. $1.00.
d. $1.17.

8. An impairment loss is the difference between the recorded investment and the
a. expected cash flows .
b. present value of the expected cash flows.
c. contractual cash flows.
d. present value of the contractual cash flows.

9. Dilutive convertible securities must be used in the computation of

a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. None of these answers are correct

10. Under IFRS, an entity that acquires an intangible asset may use the revaluation model for
subsequent measurement only if
a. The useful life of the intangible asset can be reliably determined.
b. An active market exists for the intangible asset.
c. The cost of the intangible asset can be measured reliably.
d. The intangible asset is a monetary asset

11. A contingent liability

a. always exists as a liability but its amount and due date are indeterminable.
b. is accrued even though not probable.
c. is always the result of a loss contingency.
d. is not reported as a liability if not probable.

12. Steinert Company has the following items at year-end:

Cash in bank $30,000
Petty cash 500
Commercial paper with maturity of 2 months 8,200
Postdated checks 2,100

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February Exam 2019

Steinert should report cash and cash equivalents of

a. $30,000.
b. $30,500.
c. $38,700.
d. $40,800.

13. Oslo Corporation has two products in its ending inventory, each accounted for at the lower of
cost or net realizable value. Specific data with respect to each product follows:
Product #1 Product #2
Selling price $60 $130
Historical cost 40 70
Cost to sell 10 26
Cost to complete 15 40

In pricing its ending inventory using the lower-of-cost-or-net realizable value, what unit values should
Oslo use for products #1 and #2, respectively?
a. $35 and $64.
b. $50 and $104.
c. $40 and $70.
d. $45 and $90.

14. Which of the following does not describe intangible assets?

a. They lack physical existence.
b. They are monetary assets.
c. They provide long-term benefits.
d. They are classified as long-term assets.

The questions 15 to 17 refer to this case

Omega purchased at the beginning of April year N a real estate which needs renovation and has
incurred the following expenditures:
Land acquisition cost $90,000
Building acquisition cost 410,000
Registration fees 83,000
Contracts expenses 3,500
Commissions 40,700
Architect expenses 22,000
Major Repairs expenses 242,000

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February Exam 2019

15. The amount that must be recorded as expenses :

a. $127,200
b. $0
c. $123,500
d. None of the above

16. In refer to the above case, the land acquisition cost that must be recorded is
a. $ 112,896
b. $ 115,830
c. $ 102,370
d. None of the above

17. In refer to the above case, the building acquisition cost that must be recorded is
a. $ 805,954
b. $ 778,304
c. $ 752,911
d. None of the above

18. Hall Co. incurred research and development costs in 2015 as follows:

Materials used in research and development projects $ 850,000

Equipment acquired that will have alternate future uses in future 3,000,000
research and development projects
Depreciation for 2015 on above equipment 300,000
Personnel costs of persons involved in research and development 750,000
projects
Consulting fees paid to outsiders for research and development 300,000
projects
Indirect costs reasonably allocable to research and development 225,000
projects
$5,425,000

Assume economic viability has not been achieved.

The amount of research and development costs charged to Hall's 2015 income statement
should be

a. $1,900,000.
b. $2,200,000.
c. $2,425,000.
d. $4,900,000.

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February Exam 2019

19. When a company has an obligation or right to repurchase an asset for an amount greater
than or equal to its selling price, the transaction should be treated as a
a. outright sale.
b. financing transaction.
c. repurchase transaction.
d. put option.

20. IAS 41 Agriculture applies to which of the following assets?

a. Seeds awaiting planting
b. Land used for growing trees
c. Trees growing in a forest
d. Lumber harvested and awaiting processing

C- Exercises
Exercise I ( 20%)
Leonard incurs considerable research and development expenditure. It had previously been capitalizing
its development expenditure but this treatment has now been identified as an error as the
capitalisation criteria of IAS 38 Intangible Assets had not been met. The final accounts for the year
ended 30 June 2017 and the 2018 draft accounts reflect this capitalisation policy and show the
following:

2018 2017
$000 $000
Revenue 101,260 97,250
Cost of sales (56,010) (60,530)
Gross Profit 45,250 36,720
Administrative expenses (37,397) (31,260)
Profit before taxation 7,853 5,460
Tax on profit (3,141) (2,260)
Profit for the financial year 4,712 3,200
Statement of changes in equity (extract)
Retained profit for the financial year 4,712 3,200
Retained earnings brought forward 23,950 22,500
Dividends (2,500) (1,750)
Retained earnings carried forward 26,162 23,950

The carrying amount of development costs included in intangible non-current assets has been as
follows:
$000
At 30 June 2016 400
At 30 June 2017 450
At 30 June 2018 180

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 Lebanese Association of Certified Public Accountants - IFRS
February Exam 2019

Amortisation of development costs (charged to cost of sales) and expenditure on development has
been.
Amortisation Expenditure
$000 $000
Year ended 30 June 2017 450 500
Year ended 30 June 2018 870 600

Required:
Show how the errors will be reflected in the financial statements for the year ended 30 June 2018.

Exercise II (25%)
Hever company has held shares in two companies, Spiro and Alridge, for a number of years. As at 31
December 2004 they have the following statements of financial position:

Hever Spiro Alridge

$’000 $’000 $’000

Non-current assets
Property, plant and equipment 370 190 260
Investments 218 -____ -___
588 190 260

Current Assets
Inventories 160 100 180
Trade receivables 170 90 100
Cash 50 40 10
380 230 290
968 420 550

Equity
Share capital ($1 ordinary shares) 200 80 50
Share Premium 100 80 30
Retained Earnings 568 200 400
868 360 480

Current Liabilities
Trade payables 100 60 70
968 420 550

1) The ‘investments’ in the statement of financial position comprise solely Hever’s investment in
Spiro ($128,000) and in Alridge ($90,000).

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February Exam 2019

2) The 48,000 shares in Spiro were acquired when Spiro’s retained earnings balance stood at
$20,000.
The 15,000 shares in Alridge were acquired when that company had a retained earnings
balance of $150,000.
3) When Hever acquired its shares in Spiro the fair value of Spiro’s net assets equalled their book
value s with the following exceptions:
$’000

Property, plant and equipment 50 higher

Inventories 20 lower (sold during 20X4)
Depreciation arising on the fair value adjustment to non-current assets since this date is $5,000.
4) During the year, Hever sold inventories to Spiro for $16,000, which originally cost Hever
$10,000. Three-quarters of these inventories have subsequently been sold by Spiro.
5) No impairment losses on goodwill had been necessary by 31 December 20X4.
6) It is group policy to value non-controlling interests at full (or fair) value. The fair value of the
non-controlling interests at acquisition was $90,000.

Required:
Produce the consolidated statement of financial position for the Hever group.

Exercise III (15%)

Daktari provides a defined benefit pension scheme for its employees. The following information relates
to the balances on the fund’s assets and liabilities at the beginning and end of the year and the year
ending 31 December 2017:

1 Jan 31 Dec
Present value of benefit obligation 1,270 1,450
Fair value of plan assets 1,025 1,130

Service cost for year 70

Contributions to the plan 100
Benefits paid ---
Discount rate 3%

Required:
a) Identify the balance to be included in Daktari’s statement of financial position at 31 December
2017.
b) Calculate the amounts to be included in the statement of profit or loss and other
comprehensive income for the year ended 31 December 2017.
c) Present a journal summarizing the accounting entries.

Good Work!!

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