F1 Kaplan A

Section 2
ANSWERS TO OBJECTIVE TEST

QUESTIONS
PRINCIPLES OF TAX
1 The competent jurisdiction is the country whose tax laws apply to the entity.
2 A taxable person is the person or entity who is accountable for the tax payment.
3 A and B
4 D
5 Tax evasion is an illegal way of avoiding paying taxes, i.e. not declaring income or claiming
false expenses.
6 C
7 A direct tax is one that is levied directly on the person who is intended to pay the tax.
8 D
75
SU B J E CT F 1 : F INA NCIA L RE P OR T IN G
9 B
The question says ‘a dividend of $350,000 was paid’ which implies this is the gross amount.
Grossing up the $350,000 was not required as it was meant to be assumed that this was the
gross figure. The answer was therefore calculated on the gross figure of $350,000 as
follows:
$
Tax on profits (25% × 750,000) 187,500
Shareholder:
Dividend received
Net – (350,000 × 75%) 262,500
Tax credit (262,500/75 × 25) 87,500
–––––––
Gross dividend 350,000
Tax @ 30% 105,000
Less tax credit (87,500)
–––––––
Tax on dividend 17,500
–––––––
Total (187,500 + 17,500) 205,000
10 C
11 D
12 A
A tax authority is unlikely to have the power of arrest. This power will usually be restricted
to the police or other law enforcement officers.
13 A and D
The OECD’s list of permanent establishments includes a place of management, a workshop
and a quarry. A building site is only included if it lasts more than 12 months. Specifically
excluded from the definition of permanent establishment are facilities used only for the
purpose of storage, display or delivery of goods. A branch is considered as a permanent
establishment not a subsidiary.
14 C
A = 17/75 = 22.7% tax paid on profits
B = 4.8/44 = 10.9% tax paid on profits
Therefore, the greater the profits, the greater the tax percentage, hence this is a
progressive tax.
76
AN S WE R S T O O B JE C TI VE TE S T Q UE S TI ON S : S EC T ION 2
15 A, E and F
B, C and D are possibly results of setting deadlines because if tax is paid on time it is likely it
will cost less to collect it, therefore easier to administer and it is possible payments will be
more accurate if the return is done sooner rather than later. However, these three are not
the main reasons for setting deadlines.
16 C
Equity
17 A, B and F
C is incorrect as although payments may be more accurate if the employer is using a
software package to calculate the tax it is not necessary so. Self-assessment calculations
should also be correctly calculated. D is incorrect as the employee has no cost of using the
PAYE system and E is incorrect as this is a benefit to the employee and not the government.
18 From the revenue authority’s point of view, a commodity is suitable for an excise duty to be
imposed if:
Suitable for excise duties
There are few large producers/suppliers
Demand is inelastic with no close substitutes
Sales volumes are large
19 B
20 A
Hypothecation is the means of devoting certain types of expenditure for certain things,
e.g. Road tax is used for maintaining roads.
21 C
22 A and C
B, D and E are the same as income.
23 C
24 A
25 A
HD has the responsibility to pay the sales tax to the tax authorities and will have direct
contact with them, therefore this is known as formal incidence.
26 B
27 B
77
28 $3,133
DB – Corporate income tax 20X6
$
Profit before tax per accounts 33,950
Add back:
Entertaining 600
Local government tax 950
Depreciation on buildings 1,600
Depreciation on plant and equipment 20,000
––––––
57,100
Less: tax depreciation
Building (70,000 × 4%) (2,800)
Plant and equipment (W1) (25,768)
––––––
Taxable profit 28,532
Tax $
Taxable at 15% (25,000 – 10,000) = 15,000 2,250
Taxable at 25% (28,532 – 25,000) = 3,532 883
––––––
Corporate income tax 20X6 3,133
––––––
(W1)
Plant and New
equipment plant Total
$ $ $
Cost 80,000
20X5 tax depreciation @ 27% (21,600)
––––––
58,400
20X6 tax depreciation @ 27% (15,768) 15,768
Cost 20,000
20X6 first year allowance @ 50% (10,000) 10,000
–––––– –––––– ––––––
42,632 10,000 25,768
–––––– –––––– ––––––
78
29 D
$
Accounting profit 860,000
Add depreciation 42,000
Add amortisation 15,000
–––––––
917,000
Less tax depreciation (51,000)
–––––––
–––––––
Tax @ 25% 216,500
30 D
31 D
32 Under the OECD model tax convention an entity will generally have residence for tax
purposes in the country of its effective management.
33 B
34
Powers of the tax authority
Power to exchange information with tax authorities in other jurisdictions
Power to review and query filed returns
35 C
36 A
37 D
38 Tax avoidance is a legal way of avoiding taxes. It is tax planning to arrange affairs, within
the scope of the law, to minimise the tax liability.
39 C
Entities can use any rate for accounting depreciation, so to ensure that all entities are taxed
equally the tax authority sets rates for tax depreciation for all entities. The tax depreciation
rates then replace accounting depreciation in the tax computations and it can be greater or
less depending on the tax rules in force in the country of residence.
40 D
79
41 $2,837
FB – Corporate income tax
$
Profit for the year 29,800
Add back:
Depreciation building 3,200
Depreciation plant and equipment 6,000
Depreciation furniture and fittings 5,000
Less: Accounting gain on disposal (4,000)
––––––
40,000
Less: Tax depreciation
FYA – plant and equipment ($30,000 × 50%) (15,000)
Buildings ($80,000 × 5%) (4,000)
Disposal balancing allowance (6,812)
(Proceeds $5,000 – TWDV $11,812)
––––––
Tax at 20% 2,837
42 D
Excise duties are placed on inelastic products not elastic.
43
Type of tax Single stage Multi-stage
Characteristic Tax at one level of production Tax at each level of production
Characteristic This could be cascade tax
Characteristic This could be VAT
44 A, C and D
B is incorrect because VAT will not be charged on all supplies, only taxable supplies and E is
incorrect because VAT can only be recovered on purchases if the purchase is used to
produce a taxable supply. F is incorrect as standard returns are made quarterly and not
monthly.
80
45
Year Taxable profits Taxable gains
1 $ nil $6,000
2 $ nil $ nil
3 $ nil $ nil
4 $60,000 $3,000
Year 1: No taxable trading profits and taxable capital gains of $6,000. $50,000 of the
trading losses in Year 2 can be carried back and set off against the profit in Year 1, reducing
the taxable trading profit to 0. The capital loss in Year 2 cannot be carried back to Year 1.
Year 2: No taxable trading profits or gains. Trading loss and capital loss in the year.
Unrelieved trading losses of $40,000 and the unrelieved capital losses of $8,000 are carried
forward to Year 3.
Year 3: No taxable trading profits or gains. Unrelieved trading losses of $40,000 are set
against the trading profits of $30,000. The unrelieved trading loss is now $10,000 and is
carried forward to Year 4. The unrelieved capital loss brought forward is set off against the
capital gain in Year 3, leaving $3,000 of unrelieved capital losses to carry forward to Year 4.
Year 4: Taxable trading profits of $60,000 and taxable capital gains of $3,000. Taxable
trading profits = $70,000 – $10,000 unrelieved losses brought forward. Taxable capital gains
= $6,000 – $3,000 unrelieved losses brought forward.
46 C
Group loss relief allows members of the group to surrender their losses to any other
member of the group. Consolidation of profits and losses does not apply to tax
computations and so answer A is incorrect. Group loss relief is an option that can be taken
by the group, and is not compulsory. Therefore answers B and D are incorrect.
47
Year Corporate income tax due Capital tax due
30 September 20X3 $40,000 $ nil
30 September 20X4 $ nil $ nil
30 September 20X5 $6,000 $6,000
30 September 20X3 Trading profit $200,000 × 20% = $40,000
Capital loss c/f $100,000 so nil taxable
30 September 20X4 Trading loss c/f $120,000 so nil taxable
Capital loss of $100,000 b/f is c/f so nil taxable
30 September 20X5 Trading profit $150,000 – $120,000 = $30,000 × 20% = $6,000
Capital gain $130,000 – $100,000 = $30,000 × 20% = $6,000
48 A and D
Relief can be claimed earlier because if the surrendering entity keeps the loss for their own
use it will be carried forward for many years. The group company may pay tax at a higher
rate, therefore more tax can be saved by reducing the taxable profit.
81
49 A
$
Disposal proceeds 1,200,000
Selling costs (9,000)
––––––––
Net proceeds 1,191,000
Cost (600,000)
Additional costs (5,000)
––––––––
586,000
Indexation (605,000 × 60%) (363,000)
––––––––
Taxable gain 223,000
––––––––
Tax @ 25% 55,750
50 $41,400
$
Less: Costs of disposal (2,000)
––––––––
1,248,000
Acquisition costs:
Purchase cost 630,000
Costs arising on purchase ($3,500 + $6,500) 10,000
Renovation costs 100,000
––––––––
(740,000)
Indexation – 50% × $740,000 (370,000)
––––––––
––––––––
Tax @ 30% 41,400
82
51 $42,625
$
Costs to sell (17,000)
––––––––
Net proceeds 1,183,000
Cost (650,000)
Duties (25,000)
––––––––
508,000
Indexation (675,000 × 50%) (337,500)
––––––––
––––––––
Tax @ 25% 42,625
52 $12,000
$
Disposal proceeds 450,000
––––––––
Net proceeds 435,000
Cost (375,000)
Duties (12,000)
––––––––
Taxable gain 48,000
––––––––
Tax @ 25% 12,000
53 D
The site of the 11 month construction contract is not a permanent establishment according
to the OECD model because it is less 12 months.
54 B
An overseas branch is an extension of the main business activity and not treated as a
separate entity for taxation purposes.
55 C
Withholding tax is a tax deducted at source before payment of interest or dividends.
83
56
Type of tax Cascade tax VAT
Characteristic Multi-stage Multi-stage
Characteristic Tax at each level of production Tax at each level of production
Refunds are provided on purchase
No refunds are provided by local
Characteristic tax provided the purchases are
government on purchase tax
used for a taxable supply
57 $29,000
$
Less: Costs of disposal (6,000)
––––––––
994,000
Acquisition costs:
Costs arising on purchase ($5,000 + $8,000) 13,000
Clearing land costs 15,000
–––––––
(878,000)
––––––––
––––––––
Tax @ 25% 29,000
58 Under the OECD model an entity will have residence in the country of effective management.
59 D
Each of the other three factors can be taken into account in determining tax residence.
60 C
Effective management and control is the over-riding test under the OECD model tax convention.
61 D
The tax deducted at source from the dividend in the foreign country prior to distribution to
EB is called the withholding tax.
62 B
Double tax relief does not prevent you from paying tax twice. For example, suppose that
your company is based in Country A and has a subsidiary operating in Country B, and there
is a double taxation agreement between the countries. If tax on profits in Country B is 10%
and in Country A is 15%, your company would pay tax at 10% in Country B and tax at 15% in
Country A on the subsidiary’s profits. Double tax relief therefore mitigates tax – you don’t
have to pay 35% in tax (10% + 25%) – but you might still have to pay tax on the profits
twice, once in each country.
84
63 C
The country of control overrides the others for residency.
64 D
65 A and B
66 D
67
Type of supply Zero rated Exempt
Entity must register for VAT Entity does not register for VAT
Characteristic
purposes purposes
VAT can be claimed back on VAT cannot be claimed back on
Characteristic
purchases purchases
68 A capital gain is the profit made on the disposal of a chargeable asset.
69 A capital tax is the tax charged on the profit made on the disposal of a chargeable asset.
70 $177,120
$
Charge for year (946,000 × 22%) = 208,120
Over-provision from previous year (31,000)
–––––––
Income tax expense 177,120
71 A
$
Current year charge 320,000
Over-provision for prior year (290,000 – 280,000) (10,000)
–––––––
Charge 310,000
72 A tax base represents what is being taxed.
73 $17,500
(4/12 × $75,000 × 20%) + (8/12 × $75,000 × 25%)
85
74 A, C and E
A tax base is something that is liable to tax, e.g. income or consumption of goods.
Tax bases regularly used by governments are:
• income – for example, income taxes and taxes on an entity’s profits
• capital or wealth – for example, taxes on capital gains and taxes on inherited wealth
• consumption – for example, excise duties and sales taxes/VAT.
75 $22,500
$
Adjustments:
Non-taxable income (15,000)
Non-tax allowable expenditure 10,000
––––––
Taxable profits 90,000
––––––
Tax at 25% 22,500
76 Benefits in kind represent non-cash benefits given to an employee as part of their

remuneration package.
77 $37,250
KQ – Corporate income tax
$
Adjustments:
Add back: disallowed expenses (9,000 + 6,000) 15,000
Add back: accounting depreciation (180,000 + 50,000) × 15% 34,500
Less: tax depreciation (W1) (47,500)
–––––––
Taxable profits 149,000
–––––––
Tax at 25% 37,250
(W1)
Tax depreciation: $
First year allowance 50,000 × 50% = 25,000
Annual allowance (180,000 – 90,000 FYA 50% for 30/9/X1) × 25% = 22,500
––––––
Total tax depreciation 47,500
86
78 A, B and D
Excise Duty is a selective commodity tax, levied on certain types of goods. It is a unit tax
based on the weight or size of the tax base. E.g. Petroleum products, tobacco products
alcoholic drinks and motor vehicles.
From the revenue authority’s point of view, the characteristics of commodities that make
them most suitable for excise duty to be applied are:
• Few large producers
• Inelastic demand with no close substitutes
• Large sales volumes
• Easy to define products covered by the duty
79 $200,250
The accounting profit should be reported before recognising any dividends paid.
$
Add: Entertaining expenses 32,000
Donation to political party 50,000
Less: Government grant income (103,000)
–––––––
801,000
–––––––
Tax @ 25% 200,250
80
Tax avoidance Tax evasion
A legal way of reducing your tax An illegal way of reducing your tax
Characteristic
bill bill
For example AB invests surplus For example AB does not declare
Characteristic income into tax-free securities to his income from his night security
avoid paying tax on the interest job
81 B
82 C
83 D
84 B
85 D
87
86 $35,250
$
Acquisition costs:
Costs arising on purchase 5,000
Indexation ($55,000 + $5,000) × 15% 9,000
–––––––
(69,000)
–––––––
–––––––
Tax @ 25% 35,250
87 B
88 B
89 $2,970
$
–––––––
Net proceeds 78,000
Acquisition costs:
Import duties 8,000
Indexation ($50,000 + $8,000) × 14% 8,120
–––––––
(61,120)
–––––––
Taxable gain 11,880
–––––––
Tax @ 25% 2,970
88
90 A
$
Acquisition costs:
Costs arising on purchase 5,000
Indexation ($45,000 + $5,000) × 35% 17,500
–––––––
(67,500)
–––––––
Taxable gain 42,500
–––––––
Tax @ 25% 10,625
91 An indexation allowance reduces a chargeable gain.
92 B
A = 15/75 = 20% tax paid on profits
B = 8/40 = 20% tax paid on profits
Therefore, the regardless of the profits, the tax percentage remains the same, hence this is
a proportionate tax.
93
Transfer pricing
This results in transactions not taking place at ‘arm’s length’ and profits
Characteristic
being effected by the group members
This arises in group situations when either goods are sold inter-
Characteristic
company or loans take place at a favourable price
THE REGULATORY ENVIRONMENT OF FINANCIAL REPORTING

94 An asset is a present economic resource controlled by the entity as a result of past events.
95 The objective of financial reporting is to provide information about the reporting entity
that is useful to users in making decisions relating to providing resources to the entity.
96 B
Relevance is a fundamental qualitative characteristic, not an enhancing characteristic.
Prudence is considered when providing a faithful representation, which is another
fundamental qualitative characteristic.
97 D
The IFRS Interpretations Committee interprets International Financial Reporting Standards
and, after public consultation and reporting to the IASB, it issues an interpretation.
89
98 A
The IFRS Foundation is the supervisory body, and consists of trustees whose main
responsibilities are governance issues and ensuring that sufficient funding is available.
99 C and E
100 The elements are assets, liabilities, income, expenses and equity.
101 B, D and E
102 The IASB’s Framework identifies two methods of capital maintenance which are the
financial concept and the physical concept.
103 The IASB’s Framework identifies the underlying assumption as the going concern concept.
104 D
105 D
You should learn the IASB definitions of all the elements of the financial statements. B is the
version of the definition of a liability before the recent revision to the conceptual
framework. Note references to ‘outflow of economic benefits’ has been replaced with
‘transfer of economic resource’.
106 C
The IASB Framework states that materiality is a threshold or cut-off point for reporting
information, but is not a qualitative characteristic that financial information must have to
be useful.
107 Expenses are decreases in assets or increases in liabilities that result in decreases in equity,
other than those relating to distributions to equity participants'
108 A
109 A and E
110 C
The IASB Framework defines equity as the residual interest in the assets of the enterprise
after all the liabilities have been deducted from total assets. It is important to recognise this
idea that equity is a balancing figure: Assets – Liabilities. Statements of financial position
should be prepared with a view to measuring assets and liabilities in the best manner, and
equity is the amount left over when liabilities are subtracted from assets.
111 D
90
112 D
E stands to make a gain if he manipulates the figures to get a better bonus, hence E is in a
position of a self-interest threat.
113
Factors influencing accounting and disclosure
Social
Economic
Political
114 B
115 C
116
Functions of the IFRS Advisory Council
To give advice to the IASB on agenda decisions
To give advice to the IASB on the priorities in its work
To give any other advice to the IASB or the Trustees
117 The TWO fundamental qualitative characteristics are relevance and faithful representation.
118 D
119 A
120 D
91
121
Modelling local
Adopting accounting Develop its own
International standards on the accounting
Financial Reporting IASB’s IFRSs, but standards with little
Standards (IFRS) as amending them to or no reference to
its local standards reflect local needs IFRSs
and conditions
Standards should be
more relevant to Any standards
local needs and developed will be
Advantage Quick to implement
compliant with specific to C’s
International requirements
Standards
It will take longer to
Standards may not
implement and
take into account
requires an It will not be quick to
Disadvantage any specific local
adequate level of implement
traditions or
expertise to exist
variations
within the country
122
The purpose of the Framework
Assist all parties to understand and interpret the Standards.
Assist the IASB in the development of future IFRSs and in its review of existing IFRSs
123
Principle-based accounting standards Prescriptive accounting standards
The standard would be applied using The standard would require a certain
professional judgement treatment to be used, regardless of the
situation
Flexible Less flexible
Standards should ensure the spirit of the Standards more likely to lead to the letter of
regulations are adhered to the law being followed rather than the spirit
124 Income is increases in economic benefits during the accounting period in the form of
inflows or enhancements of assets; or decreases of liabilities that result in increases in
equity, other than those relating to combinations from equity participants.
125 The Framework criteria states to be recognised in the financial statements, items must:
• meet the definitions of one of the elements of the financial statements
• provides relevant information regarding the particular element
• provides a faithful representation of the particular element
92
126 A and D
Self-interest – A professional accountant should not allow their own interests to override
professional or business judgements. CX will be worried that her job may be lost if she does
not comply with management’s orders. As a result she may knowingly publish misstated
information.
Intimidation – A professional accountant should not allow threats or intimidation to
compromise their professional judgements. The management board are attempting to
override CX’s professional and business judgement. This would be deemed an intimidation
threat.
127
Dealing with an ethical dilemma
1 Gather evidence and document the problem
2 Report internally to immediate management
3 Report internally to higher management
4 Report externally
5 Remove herself from the situation
128 D
RS may be tempted to action the suggestions made by other employees simply to ensure
they gained personally through the receipt of the bonus and the incentives. This would be a
self-interest ethical threat.
There is nothing in the scenario that suggests RS relationship with the other employees is
close enough to create a familiarity threat.
129
International
Accounting IFRS Advisory IFRS Interpretations
IFRS Foundation
Standards Board Council Committee
(IASB)
Governance and Responsibility for all Provides strategic Provides timely
fund raising technical matters advice to the IASB guidance on the
including the and informs the IASB application and
preparation and of public views on interpretation of
publication of major standard IFRSs
international setting projects
financial reporting
standards
93
130 A, C and D
The ethical problem that XQ faces is that a professional accountant in business should
prepare or present information fairly, honestly and in accordance with relevant
professional standards so that the information will be understood in its context. A
professional accountant is expected to act with integrity and objectivity and not allow any
undue influence from others to override his professional judgement.
XQ is facing pressure from others to change the results and therefore break the CIMA Code.
XQ is being asked to misrepresent the facts of the actual situation which would be contrary
to the CIMA Code’s fundamental principles of integrity and objectivity. XQ would also be
breaking the due care requirement of the CIMA Code.
131 C
He should start by gathering all relevant information so that he can be sure of the facts and
decide if there really is an ethical problem. All steps taken should be fully documented.
Initially he should raise his concern internally, possibly with the team’s manager or a
trusted colleague.
If this is not a realistic option, for example because of the relationship of the manager and
the team member that Ace is concerned about, he may have to consider escalating the
issue and speak to the manager’s boss, a board member or a non-executive director. If
there is an internal whistle blowing procedure or internal grievance procedure he should
use that.
132 C
133 D
134 C
135
Fundamental Enhancing
Relevance Comparability
Faithful representation Timeliness
Understandability
Verifiability
136 C
137 B
138 The purpose of corporate governance is to protect the shareholders.
139 Corporate governance is the means by which a company is operated and controlled.
140 D
94
141
Rules-based Principle-based
Applied in the US Applied in the UK
Instils the code into law Comply with the code or explain why
Penalties for transgression Adhere to the spirit rather than the letter of
the code
FINANCIAL STATEMENTS
142 $13,778
The calculation is as follows:
$000
Profit before tax 12,044
Add Depreciation 1,796
Loss on sale of tangible non-current assets 12
––––––
13,852
Increase in inventories (398)
Increase in receivables (144)
Increase in payables 468
––––––
Cash generated from operations 13,778
––––––
143 $105,000
$000
Balance at 30 September 20X4 180
Revaluation (30 – 10) 20
Disposal at CA (90 – 85) (5)
Depreciation (40)
––––
155
Balance at 30 September 20X5 (260)
––––
Purchases 105
––––
Disposal
$000 $000
Cost 90 Bank 15
Profit 10 Dep’n (balance) 85
–––– ––––
100 100
–––– ––––
95
144 A
$
Accrued interest b/f 12,000
Interest payable per statement of profit or loss 41,000
Accrued interest c/f (15,000)
–––––––
Paid 38,000
–––––––
145 B $360,000
$000
Total opening balance 460
Add: Tax charge for the year 460
––––
920
Less: Total closing balance (560)
––––
Tax paid during the period 360
––––
The interest income from the statement of profit or loss would be used as part of the
interest received calculation which, within the statement of cash flow, is shown separately
from interest paid.
146 A
Interest payable
B/f 133
Statement of profit or
Paid 98 loss 122
C/f 157
–––– ––––
255 255
–––– ––––
147 A and E
148 A, C and E
96
149 $3,641
$
Cost 100,000
Depreciation 31/3/X3 (25,000)
–––––––
75,000
–––––––
56,250
–––––––
42,188
–––––––
31,641
Recoverable amount (28,000)
–––––––
Impairment loss 3,641
–––––––
150 $580,000
Land Buildings Total
$000 $000 $000
Cost 120 200
Accumulated depreciation to the revaluation date – (100)
–––– ––––
Carrying value at the revaluation date 120 100 220
Revalued amount 200 600 800
Credit to revaluation reserve 580
151 C
The four definitions might all seem similar, but property, plant and equipment are tangible
assets, not any assets. IAS 16 states that a tangible asset should be held for more than one
accounting period (rather than for more than 12 months) to qualify as property, plant and
equipment.
97
152 $129,000
$
Cost of basic machine 100,000
Special modifications made to basic design 15,000
Supplier’s engineer’s time installing and initial testing of machine 2,000
Concrete base 12,000
–––––––
129,000
We do not include the three year maintenance cost as this is not a one off cost and would
be expensed to the statement of profit or loss.
JT can reclaim back VAT hence would not form part of the cost of non-current assets.
153 A
IAS 16 states that when the revaluation model is used, revaluations should be made with
sufficient regularity to ensure that the carrying value of the assets remain close to fair
value. IAS 16 also states that, if one item in a class of assets is revalued, all the assets in that
class must be revalued.
154 A and D
$
1 July 20X2 Cost 50,000
30 June 20X3 Carrying amount 80% × 50,000 40,000
30 June 20X4 Carrying amount 60% × 50,000 30,000
On 1 July 20X4 the asset is revalued from a carrying amount of $30,000 to a fair value of
$60,000, establishing a revaluation reserve of $30,000. There are three years of useful life
remaining.
$
30 June 20X5 Carrying amount = ⅔ × 60,000 40,000
1 July 20X5 Disposal proceeds 35,000
––––––
Loss on disposal (5,000)
––––––
There is a loss on disposal of $5,000, and the $30,000 revaluation reserve is transferred to
retained earnings as a movement on reserves.
155 A
As the lining of the furnace was identified as a separate item in the accounting records, its
replacement will be viewed as capital expenditure. The other three options all involve
either replacing part of an asset or restoring it to its original condition.
98
156 $5,250 PA
$
1.10.X2 purchase 21,000
Depreciation to 30.9.X5
21,000/6 × 3 (10,500)
––––––
Balance 30.9.X5 10,500
––––––
The machine will be used for two more years, at which point it will be worthless. Assuming
that production is still profitable with the increased depreciation charge, it should be
written off over its remaining useful life, such that the charge recognised in the year to
30 September 20X6 should be $5,250 ($10,500 × ½).
157 $66,500
Workings:
$
Cost 1/4/X1 100,000
$100,000/10 × 2 years (20,000)
–––––––
Carrying amount 31/03/X3 80,000
To revaluation reserve 15,000
–––––––
Revaluation (1/4/X3) 95,000
Depreciation $95,000/8 years (11,875)
–––––––
B/f 1/4/X4 83,125
Depreciation $83,125/5 years (16,625)
–––––––
Carrying amount at 31/3/X5 66,500
–––––––
158 D
The allocation of EW’s administration costs would not be included as these costs are not
directly incurred as a result of carrying out the construction.
159 C
The asset was previously revalued by $200,000, therefore when it is devalued by $250,000
the reserve is removed and the balance charged to the statement of profit or loss.
99
160 B
The plant is an item of property, plant and equipment and is capitalised at cost. This
includes directly attributable costs of bringing the asset to its current condition and
location. IAS 16 states that purchase price and any decommissioning costs are part of the
directly attributable costs and should be capitalised.
The amount to include in the cost of the asset for decommissioning costs is the present
value of the expected future decommissioning costs. The present value is calculated by
multiplying the expected future cost by a discount factor, which in this case is the discount
factor for Year 5 (20X9) at 12%. $4,000,000 × 0.567 = $2.268 million.
The asset is depreciated on a straight-line basis over five years.
$000
Cost of the plant 10,000
Decommissioning cost 2,268
Depreciation charge ($12.268 million/5 years) (2,454)
–––––––
Carrying amount 9,814
–––––––
161 A and E
$ million $ million $ million
At 30 June 20X5
Carrying amount 1.00 4.80 5.80
Building depreciation = $5 million/50 years = $100,000 per year
Revalued amount 1.24 5.76 7.00
––––
Transfer to revaluation reserve 1.20
––––
At 30 June 20X7
Carrying amount 1.24 5.52 6.76
Building depreciation = $5.76 million/48 years = $120,000 per year
Disposal value 6.80
––––
Gain on disposal 0.04
––––
The gain on disposal is $40,000. The $1.2 million balance on the revaluation reserve is
transferred from the revaluation reserve to retained earnings in the SOCIE but is not
reported through the statement of profit or loss for the year.
10 0
162 $8,912
$
Carrying amount at the time of the impairment review 38,912
($76,000 × 80% × 80% × 80%)
Revised carrying amount after impairment review 30,000
––––––
Impairment (charge in the statement of profit or loss) 8,912
––––––
Note: The revised carrying amount (recoverable amount), is the higher of value in use
$30,000 or fair value less costs to sell $27,000.
163 B $80,000
An asset should be valued at the lower of carrying amount and recoverable amount.
Recoverable amount is the higher of (a) fair value less costs to sell and (b) value in use.
A B C
Carrying amount 200 300 240
Recoverable amount 240 260 200
–––– –––– ––––
Impairment loss nil 40 40
–––– –––– ––––
80
164 C
The recoverable amount of an asset is the higher of (a) fair value less costs to sell ($18,000)
and (b) value in use ($22,000).
10 1
165 Property, plant and equipment note 31 December 20X5

Plant and Under
machinery construction
Cost/valuation $000 $000 $000 $000 $000
Balance at 1 January 20X5 2,743 3,177 1,538 53 7,511
Revaluation of assets 375 – – 0 375
Disposal of assets – – (125) – (125)
Transfers – – 350 (350) 0
Additions 402 526 890 297 2,115
––––– ––––– ––––– ––––– –––––
Balance at 31 December 20X5 3,520 3,703 2,653 0 9,876
Depreciation
Balance at 1 January 20X5 – 612 671 – 1,283
Disposal of assets – – (111) – (111)
Depreciation for the year – 75 212 – 287
––––– ––––– ––––– ––––– –––––
Balance at 31 December 20X5 0 687 772 0 1,459
––––– ––––– ––––– ––––– –––––
Carrying amount 31 December 20X5 3,520 3,016 1,881 0 8,417
––––– ––––– ––––– ––––– –––––
Carrying amount 31 December 20X4 2,743 2,565 867 53 6,228
––––– ––––– ––––– ––––– –––––
166 $55,800
Cost Recoverable amount Lower of cost and
(Net Realisable Value) recoverable amount
Item 1 $24,000 See note 1 $24,000
Item 2 $33,600 $31,800 (note 2) $31,800
–––––––
$55,800
–––––––
Notes:
1 The recoverable amount is not known, but it must be above cost because the
contract is expected to produce a high profit margin. The subsequent fall in the cost
price to $20,000 is irrelevant for the inventory valuation.
2 The recoverable amount is $36,000 minus 50% of $8,400.
167 B, D and E
IAS 2 states that:
(a) selling costs cannot be included in inventory cost, therefore A cannot be included
(b) general overheads cannot be included C
(c) overhead costs should be added to inventory cost on the basis of normal capacity of
the production facilities, therefore F cannot be included in cost
(d) the cost of factory management and administration can be included, so that item D
can be included in inventory values.
10 2
168 D
The fire is an example of a non-adjusting event as it arose after the reporting date and does
not provide evidence of a condition that existed at the reporting date.
169 C
The warehouse fire is an adjusting event as it occurred before the reporting date.
Settlement of the insurance claim should therefore be included in the financial statements.
The other events are non-adjusting as they occurred after the reporting date and do not
provide evidence of conditions existing at the reporting date.
170 C and E
The share issue takes place after the reporting date is not an adjusting event. Plans to
acquire another entity after the reporting date are not adjusting events.
171 B
172 D and E
Dividends declared after the reporting date but before the accounts are signed are not
provided for but should be disclosed by way of note.
The dividend is shown as a deduction in the statement of changes in equity for the year in
which it is actually paid.
173
Adjusting events Non-adjusting events
One month after the reporting date a court A month after the reporting date XS’s
determined a case against XS and awarded directors decided to cease production of
damages of $50,000 to one of XS’s one of its three product lines and to close
customers. XS had expected to lose the case the production facility
and had set up a provision of $30,000 at the
reporting date
One month after the year end XS’s main A dispute with workers caused all
customer goes into liquidation owing XS a production to cease six weeks after the
substantial amount of money reporting date
XS discovers a material error in the closing Three weeks after the reporting date a fire
inventory value one month after the destroyed XS’s main warehouse facility and
reporting date most of its inventory
174 A
175 B and D
Expenses are analysed into cost of sales, distribution costs and administrative expenses.
176 C
Both items must be shown on the face of the statement of profit or loss. Other items to
include in the statement of profit or loss include revenue, the tax expense and the profit or
loss for the period (IAS 1).
10 3
177 A
IAS 1 states that the financial statements must be prepared on a going concern basis, unless
management intends to liquidate the entity or to cease trading, or has no realistic
alternative but to do so. When the financial statements are not prepared on a going
concern basis, this fact must be disclosed. It is not therefore a requirement of IAS 1 that a
note should state that the accounts are prepared on a going concern basis. (However, there
might be a similar requirement, for example in a corporate governance code, that the
directors should state in the annual report and accounts that the entity is a going concern.)
178 B and D
Revenue and finance costs must be shown on the face of the statement of profit or loss.
179 A
A revaluation of a non-current asset is not reported through the statement of profit or loss,
but as an adjustment to the equity reserves (revaluation reserve account). The revaluation
will therefore affect the statement of financial position and the statement of changes in
equity, but not the statement of profit or loss. A revaluation is not a cash flow transaction,
and so would not appear in the statement of cash flows.
180 C and D
At the date when an asset meets the criteria as an asset held for sale it should be shown
separately on the statement of financial position and depreciation should cease.
181 A and D
According to CIMA’s Code of ethics for professional accountants the finance director is in a
position where he may be compromising his integrity and objectivity.
Integrity – This principle imposes an obligation to be truthful and honest on the
accountant. A professional accountant should not be associated with reports and other
information where she/he believes that the information contains misleading statements.
This seems to be the case with the revised treatment of the property, the finance director
believes that the revised financial statements will not follow IFRS 5 and may not show a
true and fair view of the situation.
Objectivity – A professional accountant should not allow conflict of interest or undue
influence of others to override professional or business judgements or to compromise
her/his professional judgements. The management board is overriding the finance
directors’ professional and business judgement as it is imposing its business judgement
over the professional accountant’s.
182 B
The earthquake occurred after the end of the accounting period. Assets and liabilities at
31 August 20X9 were not affected. The earthquake is indicative of conditions that arose after
the reporting period and does not give any further evidence in relation to assets and liabilities
in existence at the reporting date. Therefore according to IAS 10 Events after the Reporting
Period it will be classified as a non-adjusting event after the reporting period. The cost of the
repairs will be charged to the Statement of profit or loss and other comprehensive income in
the period when it is incurred. Due to the impact on MN, i.e. closure and loss of earnings for 6
months, the earthquake and an estimate of its effect will need to be disclosed by way of a
note in MN’s financial statements for the year ended 31 August 20X9.
10 4
183
Treatment of the discontinued operation
The assets have met the criteria of an asset held for sale
The assets should be shown separately as assets held for sale in the statement of financial
position
The assets should be valued at $398,000
Impairment of $45,000 should be treated as an expense to the statement of profit or loss
EK can treat the sale of its retailing division as a discontinued operation as defined by IFRS 5
Non-current Assets Held for Sale and Discontinued Operations as it is held for sale. There is a
plan to dispose of the separate major line of business as a single transaction, such that the
economic value of the assets will be realised by selling, rather than continuing to use them.
The assets should be recognised at the lower of:
• the value under normal accounting standards, i.e. $443,000
• the value on sale, being the fair value less the costs of sale, i.e. $423,000 less
$25,000.
Therefore, EK should value the assets at $398,000.
This results in an impairment loss of $45,000 ($443,000 – $398,000), which should be
recognised as an expense to the statement of profit or loss.
Once this valuation exercise has been performed, no depreciation or amortisation should
be recognised.
The trading performance of the continuing divisions should be shown in the statement of
profit or loss (or disclosed by way of note), as well as the overall performance, so that
readers can evaluate the likely impact of the disposal.
184 $170
Non-current assets – PPE
$million $million
Bfwd 645 Depn 120
Disposal (CA) 60
Additions 170 Dep’n (balance) 635
–––– ––––
815 Cfwd 815
–––– ––––
10 5
185 DV will reduce the revaluation reserve for the impact of the revaluation of the building on
31 August 20X6.
Workings $
1.9.W6 Cost 200,000
Useful life 20
At first revaluation – 31.8.X1 – CA (200,000 × 15/20) 150,000

Revaluation gain 30,000
Valuation carried forward 180,000
At second revaluation – 31.8.X6 – CA (180,000 × 10/15) 120,000

Revaluation (loss) (20,000)
Revaluation 100,000
The impairment is less than the revaluation reserve of $30,000, so the impairment is
debited against the revaluation reserve, leaving a balance on that reserve of $10,000.
186 The answer is $7,500 impairment.

Building B $
1.9.W6 Cost 120,000
Useful economic life 15
At first revaluation – 31.8.X1 – CV 120,000 × 10/15 = 80,000

Revaluation gain/(loss) (5,000)
Valuation carried forward 75,000
At second revaluation – 31.8.X6 – CV 75,000 × 5/10 = 37,500

Revaluation gain/(loss) (7,500)
Revaluation 30,000
The impairment on B of $7,500 goes to the statement of profit or loss, as there is no
revaluation reserve in respect of that building.
187 $72,000
Proceeds from share issue = (460 + 82 – 400 – 70)
188 C
The inflow and outflow of the loans should be shown separately on the statement of cash
flows.
Long term borrowings
$000 $000
Payments 25 B/fwd 105
C/fwd 129 Additions 49
–––– ––––
154 154
–––– ––––
10 6
189 B
Hotel G should be revalued to $650,000 and Hotel H to $820,000 from 1 January 20X4. The
transfer to the revaluation reserve for Hotels G and H should be the difference between
their carrying amount at 1 January 20X4 (before the revaluation) and their revalued
amount. The carrying amount of the hotels is their cost less accumulated depreciation to
1 January 20X4. For Hotel G this was $346,000 ($650,000 – $304,000) and for Hotel H this
was $126,000 ($820,000 – $694,000). This is a total of $472,000.
The reduction in value of Hotel K of $110,000 is not charged against this reserve. It is an
impairment which is expensed.
190 A discontinued operation is a component of an entity that either has been disposed of or is
classified as held for sale, and that represents a separate major line of business or
geographical area of operations that is part of a single co-ordinated plan to dispose of a
separate major line of business or geographical area of operations.
191 A, C and D
192 C
The machine must be valued at the lower of carrying amount ($250,000) and recoverable
amount ($230,000), i.e. $230,000. Recoverable amount is the higher of fair value less costs
to sell ($230,000) and value in use ($150,000).
Working:
$
Cost 500,000
Accumulated depreciation (500,000 × 5/10) (250,000)
––––––––
––––––––
The impairment loss of $20,000 ($250,000 – $230,000) must be charged to the statement
of profit or loss in the year ended 30 September 20X5.
193 B
Building
$
Cost 1,000,000
Y/e 30/9/X3 – Depreciation (1,000,000/20) (50,000)
Y/e 30/9/X4 – Depreciation (1,000,000/20) (50,000)
––––––––
Revaluation 1,800,000
––––––––
Credit to revaluation reserve 900,000
––––––––
10 7
194 $100,000
Depreciation will be based on the revalued figure: $1,800,000/18 years.
195 C
Following the revaluation, depreciation must be calculated on the revalued figure. There
seems to have been no change to the estimate of the building’s life, so 18 years of life remain.
Y/e 30/9/X5 $
Valuation b/f 1,800,000
Depreciation (1,800,000/18) (100,000)
––––––––
Carrying amount 1,700,000
Revaluation 1,500,000
––––––––
Debit to revaluation reserve 200,000
––––––––
As the building had previously been revalued upwards, the impairment loss can be debited
to the revaluation reserve rather than being charged to the statement of profit or loss.
196 $88,235
Future depreciation will be based on the revalued figure: $1,500,000/17 years = $88,235 p.a.
197 $15,949
Lease liability = present value of lease rentals for 4 years discounted using rate implicit with
the lease of 9%.
$70,000 × 3.240 = $226,800
Subsequent treatment – add finance cost less rental repayments
Year Bal b/f Interest at 9% Paid Bal c/f
$ $ $ $
20X1 226,800 20,412 (70,000) 177,212
20X2 177,212 15,949 (70,000) 123,161
198 $56,250
$
Total lease payments (9 × $125,000) 1,125,000
Lease term /10 years
––––––––
Annual charge to profit or loss 112,500
––––––––
Charge in year ended 31 December 20X1 = 6/12 × 112,500 = $56,250
10 8
199 A
Initial value of liability = present value of lease rentals for 5 years discounted using rate
implicit with the lease 7%
$110,000 × 4.100 = $451,000
Year Bal b/f Interest at 7% Paid Bal c/f
$ $ $ $
20X1 451,000 31,570 (110,000) 372,570
20X2 372,570 26,080 (110,000) 288,650
Non-current liability = amount outstanding after next year’s payment
Direct costs would be capitalised as part of the right-of-use asset, not the lease liability
200 C
Depreciation of leased plant $68,000 ($340,000/5 years)
Finance cost $25,000 (($340,000 – $90,000) × 10%)
Rental of equipment $13,500 ($18,000 × 9/12)
Total $106,500.
201 B
B/f Interest 7% Payment c/f
Year end $ $ $ $
31 October 20X3 45,000 3,150 (10,975) 37,175
31 October 20X4 37,175 2,602 (10,975) 28,802
The figure to the right of the payment in the next year is the non-current liability. Once
20X4’s payment has been made, $28,802 will still be owed, making this the non-current
liability. The current liability will be the difference between the total liability of $37,175
and the non-current liability of $28,802, which is $8,373.
If you selected C, you chose the total year-end liability rather than the non-current liability.
If you selected A, you deducted the payment of $10,975 from the total. If you selected D
you recorded the payment in advance and chose the year end liability rather than the non-
current liability.
202 D
Assets permitted to be exempted from recognition are low-value assets and those with a
lease term of 12 months or less. The use of the asset is irrelevant, and, although IFRS 16
Leases does not define low-value, it is the cost when new that is considered rather than
current fair value.
10 9
203 A
Initial value of lease liability is the present value of lease payments, $86,240.
Interest
Balance b/f Payment Subtotal @ 8% Balance c/f
20X3 86,240 (20,000) 66,240 5,299 71,539
20X4 71,539 (20,000) 51,539 4,123* 55,662
20X5 55,662 (20,000)* 35,662*
The non-current liability at 20X4 is the figure to the right of the payment in 20X5, $35,662.
The current liability is the total liability of $55,662 less the non-current liability of $35,662,
which is $20,000.
The finance cost is the figure in the interest column for 20X4, $4,123.
If you chose B you have done the entries for year one. If you chose C or D, you have
recorded the payments in arrears, not in advance.
204 C
The transfer of ownership at the end of the lease indicates that Pigeon will have use of the
asset for its entire life, and therefore 7 years is the appropriate depreciation period.
Potential transactions at market rate would be ignored as they do not confer any benefit on
Pigeon, and Pigeon’s depreciation policy for purchased assets is irrelevant.
205 $58,000
The asset would initially be capitalised at $87,000. This is then depreciated over six years,
being the shorter of the useful life and the lease term (including any secondary period).
This would give a depreciation expense of $14,500 a year. After two years, accumulated
depreciation would be $29,000 and therefore the carrying amount would be $58,000.
206 B
Interest
b/f @ 10% Payment c/f
Year end $000 $000 $000 $000
30 September 20X4 23,000 2,300 (6,000) 19,300
30 September 20X5 19,300 1,930 (6,000) 15,230
Current liability at 30 September 20X4 = 19,300,000 – 15,230,000 = $4,070,000
207 D
The value recognised in respect of the lease payments will be the present value of future
lease payments rather than the total value.
11 0
MANAGING CASH AND WORKING CAPITAL

208 C
Businesses that regularly fail to pay their suppliers on time may find it difficult to obtain
future credit.
209 C
A conservative working capital policy would hold higher levels of working capital creating a
longer working capital cycle.
Options A and B describe aggressive policy characteristics. D describes moderate policy
characteristics.
210 $755,760
Cash
received
$
April sales 20% × $780,000 156,000
March sales 80% × 0.98 × $770,000 × 60% 362,208
February sales 80% × 0.98 × $760,000 × 30% 178,752
January sales 80% × 0.98 × $750,000 × 10% 58,800
–––––––
755,760
–––––––
211 $4,800
Current Current
assets liabilities
$ $
Credit purchase:
Inventory + 18,000
Trade payables + 18,000
Credit sale:
Trade receivables + 24,000
Inventory (24,000 × 100/125) – 19,200
Working capital will increase by $4,800, as a result of the credit sale.
11 1
212 $252,000
$
Budgeted sales 240,000
Expected decrease in receivables 12,000
–––––––
252,000
–––––––
The reduction in receivables means that the entity will expect to receive more cash next
month than the total of its credit sales for the month. Changes in inventory levels have no
effect on expected cash receipts.
213 47 DAYS
Receivables
$ $
B/f 68,000 Returns 2,500
Sales 250,000 Cash 252,100
Irrecoverable debts
(68,000 × 0.05) 3,400
C/f 60,000
––––––– –––––––
318,000 318,000
––––––– –––––––
Receivable days = 64/495 × 365 = 47.19 days, round down to 47 days
Average receivables = (68 + 60)/2 = $64,000
(Note: That the estimated sales cover a period of only six months, so the annual sales figure
is $495,000 (2 × (250,000 – 2,500))
214 B
Working capital cycle Days
Inventory (8/30) × 365 97.3
Trade receivables (4/40) × 365 36.5
Trade payables (3/15) × 365 (73.0)
–––––
Cash conversion cycle 60.8
–––––
Note: The annual cost of purchases would be useful for measuring the inventory turnover
period for raw materials. Since the question does not state whether inventory is mainly raw
materials, work-in-progress or finished goods, it is probably appropriate to use the annual
cost of sales to measure the average inventory turnover time. However, it is probably
reasonable to assume that most trade payables relate to purchases of raw materials, and
the annual purchases figure has therefore been used to calculate the payment cycle for
trade payables.
11 2
215 C
Average receivables = ($10 million + $12 million)/2 = $11 million
Average trade-related receivables = 90% × $11 million = $9.9 million
Annual sales on credit = $95 million
Average collection period = (9.9 million/95 million) × 365 days = 38 days
216 B
$
Balance b/fwd 22,000
Credit sales 290,510
–––––––
312,510
Less: Balance c/fwd ($290,510 × 49/365) (39,000)
–––––––
Receipts 273,510
–––––––
217 $345,000
$
Purchases on credit 360,000
Increase in trade payables (15,000)
–––––––
Therefore payments to suppliers 345,000
–––––––
218 C
($82,000 – 12,250) × 97% = $67,657
219 $345,379
Trade payable days = Payable/credit purchases × 365
50 = (Payables/351,534) × 365
Payables = 50/365 × 351,534
Payables = $48,155
$
Owed to credit suppliers at 1 November 20X6 42,000
Purchase on credit 351,534
Less: Amounts owed to credit suppliers at 31 October 20X7
50/365 × 350,000 (48,155)
–––––––
Amount paid to credit suppliers during the year to 31 October 20X7 345,379
–––––––
11 3
220 88 DAYS
Trade receivable days = 290/2,400 × 365 = 44.1 days
Inventory days (assuming that inventories are finished goods) = 360/1,400 × 365 = 93.9
days
Trade payable days = 190/1,400 × 365 = 49.6 days
Working capital cycle = Inventory days + Receivable days – Payable days
= 93.9 + 44.1 – 49.6 = 88.4 days, round down to 88 days
221 $19,800
Received in
Sales in Total sales Cash sales Credit sales May
$ $ $ $
April 20,000 8,000 12,000 (97% × 12,000) 11,640
May 20,400 8,160 12,240 8,160
––––––
19,800
––––––
222 B
Overtrading is associated with fast-growing companies that have insufficient long-term
capital, and rely on short-term liabilities to finance their growth. The finance is largely
provided by suppliers (trade payables) and a bank overdraft. As a result, there is an
increasing bank overdraft (higher borrowing) and very low or even negative working capital.
A typical overtrading enterprise is experiencing rapid growth and rising sales. Although it
should be profitable, its problem will be a shortage of cash and liquidity. Cash balances will
be not be rising, since the overdraft is increasing.
223 An aged trade creditor’s analysis (aged trade payables analysis) is a breakdown of trade
payables according to length of time elapsing since the purchase was made.
An aged analysis for trade payables is an analysis of unpaid invoices from suppliers according
to the length of time since the issue of the invoice. It is not a list (therefore answer A and
answer B are incorrect), but a table. A spreadsheet might be used to construct the analysis.
The analysis can be used to decide which suppliers should be paid, and how much.
An aged analysis for trade receivables is similar, except that it relates to unpaid invoices sent
to credit customers. This analysis is used to decide which customers to ‘chase’ for payment.
224 C
The equivalent annual return offered by supplier P is:
(100/99)12 – 1 = 12.82%
This is below the minimum required rate of return of 12.85% and should not be accepted.
The equivalent annual return offered by supplier Q is:
(100/98)12/2 – 1 = 12.89%
This is just above the minimum required rate of return of 12.85% and therefore should be
accepted.
11 4
225 27.86%
Annual rate of interest = (100/98)(365/30 – 0) – 1
= 0.2786 or 27.86%
226 A, C and E
227 Invoice discounting normally involves selling an individual invoice for cash to a factor
organisation at a discount.
Invoice discounting is a method of obtaining short-term funds. Specific invoices are ‘sold’ to
a finance organisation, typically a factor, which provides finance up to a proportion (about
70%) of the value of the invoice. The invoice discounter is repaid with interest out of the
money from the invoice payment, when it is eventually paid.
228 D
If $1 million is invested for one year at 7%, the value of the investment will be $1,000,000 ×
1.07 = $1,070,000 after one year.
If $1 million is invested for three months at 6.5% per year and then for nine months at 7.5%
per year, this means that the interest for the first three months will be 6.5% × 3/12 =
1.625%, and the interest for the next nine months will be 7.5% × 9/12 = 5.625%. The value
of the investment after one year will therefore be:
$1,000,000 × 1.01625 × 1.05625 = $1,073,414.
This is $3,414 more than the income that would be obtained by investing at 7% for the full
year. However, there is a risk that interest rates will not rise during the first three months,
and XYZ will not be able to invest at 7.5% for the nine months, but only at a lower rate.
229 A
The customer cannot be asked for immediate payment once a bill of exchange has been
accepted.
230 C
The instrument is a bill of exchange drawn on the bank. This is often called a bank bill (as
distinct from a commercial bill, which is a bill drawn on a non-bank company). A bill drawn
on a bank under a short-term financing arrangement is also known as an acceptance credit.
231 A
Forfaiting is a method of obtaining medium-term export finance, involving the issue of
promissory notes by the importer/buyer, which the exporter is able to sell to a forfaiting
bank at a discount to obtain finance. Promissory notes are promises to pay a specified
amount of money at a specified future date. The importer’s promissory notes have
settlement dates spread over a number of years, often the expected useful economic life of
the imported items. The importer is therefore able to pay for the imported goods over a
period of several years, whilst the exporter can obtain immediate payment by selling the
promissory notes.
11 5
232
Forms of short-term finance
Trade payables
Factoring
Invoice discounting
The other items are forms of short-term investments.
233 41.2%
AL offers 1.5% interest for 16 days
(100/98.5) (365/16) – 1 =
= 41.2%
234 A
235 14.8%
Annual cost = (100/98.5)(365/(60 – 20)) – 1
= (100/98.5)9.125– 1
= 14.8%
236
Aged analysis
$
June 295
July 0
August 231
September 319
––––
845
––––
Workings:
$
June debts: 345 + 520 + 150 – 200 – 520 295
July debts: 233 – 233 0
Augusts debts: 197 + 231 – 197 231
September debts: 319 319
––––
845
––––
11 6
237 B
With JIT purchasing, the objective is to receive deliveries exactly at the time required, so
that the ideal inventory level is always 0. Therefore inventory holding costs should be
lower. There will be an increased dependence on suppliers to deliver exactly on time, but
there will be a risk (probably an increased risk) of inventory shortages due to failure by
suppliers to deliver on time. However, since purchases will be made to meet demand
requirements, there are likely to be much more frequent deliveries.
238 A
The simple EOQ model formula is:
2cd
EOQ =
h
Where: d = annual demand
h = cost of holding one unit for one year
c = cost of placing order
239 C
2C oD 2 × $185 × 2,500
EOQ = =
Ch $25
= 37,000
= 192 units
2,500
Each week = 48 units are required.
52
192
Therefore each order of 192 units will last = 4 weeks.
48
240 895 UNITS

2 × $15 × 32,000
= 800,000 = 894.43 units = rounded to 895 units
$1.2
241 A, B and C
The cost of placing an order under the EOQ formula includes administrative costs, postage
and quality control costs.
242 98 ORDERS
2CoD
Q=
Ch
2 × 15 × 95,000
= 974.68
3
95,000/975 = 97.4.
11 7
243
Factors to consider for offering a discount
Borrowing on overdraft might be more risky
It is cheaper to finance the higher receivables by borrowing than it would be to offer the
cash settlement discount
Other customers might demand the same settlement discount terms as FF
The cash settlement discount arrangement may be difficult to withdraw at a future time, if
DF no longer wants to offer it
1 The bank would charge annual interest of 12% which is less than the rate above. This
means that it is cheaper to finance the higher receivables by borrowing than it would
be to offer the cash settlement discount.
2 If DF borrows on overdraft from a bank, there is a risk that the bank might withdraw
or reduce the overdraft facility without notice. Borrowing on overdraft might
therefore be more risky.
3 Other customers might demand the same settlement discount terms as FF.
4 Once it has been established, the cash settlement discount arrangement may be
difficult to withdraw at a future time, if DF no longer wants to offer it.
244 27.86%
Taking the discount is equivalent to receiving interest at a rate of 27.86%. Therefore if DN
needs to increase its overdraft to make the payment, it is beneficial to do so as long as the
interest rate charged is less than 27.86%.
Alternatively, it would be beneficial for DN to use any surplus cash in its current account or
cash in any short-term investments yielding less than 27.86%.
Workings:
If DN pays $98 on day 10 instead of day 40, it will need to borrow $98 for 30 days.
The effective annual interest rate is:
365
= 12.1667%
30
12.1667
 100 
1+r=  
 98 
1 + r = 1.2786
r = 0.2786 or 27.86%
11 8
245 $152,000
Annual sales $2 million × 12 = £24 million.
$
Factor’s annual fee (2.5% × $24 million) (600,000)
Saving in administration costs 300,000
$
Current average receivables ($24 million × 90/360) 6,000,000
Receivables with the factor (0.20 × $24m × 60/360) 800,000
––––––––
Reduction in average receivables 5,200,000
––––––––
Savings in interest at 9% 468,000
Factor finance interest ((0.80 × $24m × 60/360 × 10%) (320,000)
––––––––
Net annual cost (152,000)
––––––––
246
Aged analysis
$
July 160
August 0
September 204
October 233
––––
597
––––
July = AC212 $192 – CN92 $53 = $160
September = AC690
October = AC913
247 An aged analysis of receivables allows an entity to focus its collection efforts to enforce its
credit terms. It makes it more obvious whether an increase/decrease in a balance is due to
changed activity levels or a change in payment policy by a customer. This makes it easier for
the company to assess whether it should carry on doing business, how it should set credit
limits and whether it needs to take any action in respect of large balances.
248 1,041 UNITS

2cd
EOQ =
h
Where d = annual demand
h = cost of holding one unit for one year
c = cost of placing order
2 × 25 × 65,000
Therefore: = 1,041
3
11 9
249 B, E and F
DF could obtain short-term finance from any of the following sources:
• by increasing the overdraft, however, this is unlikely as the overdraft is already quite
high
• by taking out a short-term loan
• by taking additional credit from suppliers
DF currently has trade payable days outstanding of 49 days (16/120 × 365). An
increase of $2 million to $18 million would be 55 days (18/120 × 365), this needs to
be viewed against the credit period offered by the suppliers. As the typical payables
days are 45, the increase would probably not be acceptable and could cause
problems obtaining future credit.
• by improving the receivables collection period:
DF’s trade receivables collection period is currently 30 days (20/240 × 365), which is
quite low and in line with the industry average. So this is unlikely to be a viable
option as it would involve reducing the trade receivables collection period to 27 days
(18/240 × 365).
• by factoring or invoice discounting.
250
Forms of short-term investments
Negotiable instruments
Short-term government bonds
Interest bearing bank accounts
The other items are types of short-term finance.
251
Bank overdrafts Bank loans
Advantage Flexible Fixed finance cost
Advantage Generally cheaper Repayment date known
Disadvantage Repayable on demand Generally more expensive
Disadvantage Variable finance cost Less flexible
252 B and E
253 B
254 D
255 C
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Section 2

ANSWERS TO OBJECTIVE TEST

68 A capital gain is the profit made on the disposal of a chargeable asset.

72 A tax base represents what is being taxed.

76 Benefits in kind represent non-cash benefits given to an employee as part of their

91 An indexation allowance reduces a chargeable gain.

THE REGULATORY ENVIRONMENT OF FINANCIAL REPORTING

138 The purpose of corporate governance is to protect the shareholders.

165 Property, plant and equipment note 31 December 20X5

At first revaluation – 31.8.X1 – CA (200,000 × 15/20) 150,000

At second revaluation – 31.8.X6 – CA (180,000 × 10/15) 120,000

186 The answer is $7,500 impairment.

At first revaluation – 31.8.X1 – CV 120,000 × 10/15 = 80,000

At second revaluation – 31.8.X6 – CV 75,000 × 5/10 = 37,500

MANAGING CASH AND WORKING CAPITAL

240 895 UNITS

248 1,041 UNITS

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