SECTION A

MCQ – 2 MARKS EACH

1. Strength Co produces and sells cement. The following issues have been highlighted during
the finalisation phase of financial statements:

Issue 1: A former employee of the company has started litigation for unfair dismissal.
Strength Co has consulted a professional law firm in this regard. The firm has suggested the
likelihood of the plaintiff's victory to be less than probable.

Issue 2: The mining of limestone, used in the manufacturing of cement, has caused
environmental pollution to the surrounding villages. Strength Co has a valid license to
manufacture cement in the designation location and no anti-pollution legislation exists in the
regime. However, given the environment-friendly slogan of Strength Co, it has contributed
almost $200,000 every year to rectify such damage.
In accordance with IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, which
of these issues should be recorded by creating a provision in the financial statements?

A) 1 Only
B) 2 Only
C) Both 1 and 2
D) Neither 1 nor 2

2. Technology Co has undertaken the following two research and development

projects:

Project 1: After incurring $50 million, the business has been able to develop solarpowered
smartphone. However, the cost of material to be used in each smartphone has turned out to be
far higher than planned. Consequently, there are doubts over commercial viability of the
project. Nevertheless, Technology Co can utilise these findings to make other commercially
viable solar-powered electronic products.

Project 2: This project was started to develop specialised bio-medical equipment, having
ability to detect all types of cancers in a single scan. A sum of $75 million has so far been
incurred on the project. The management of Technology Co considers this project to be
commercially viable and, given the preliminary results, there is a high chance of successful
development. However, to be completed, the project requires another $125 million.
Technology Co has planned an IPO next year which, management believes, can generate the
funds to complete this project.
In accordance with IAS 38 - Intangible Assets, which of these projects can be capitalised?

A) 1 Only
B) 2 Only
C) Both 1 and 2
D) Neither 1 nor 2

3. Roy Co has imported a paper shredder machine. The details of different costs associated
with this purchase are as follows:
$
Purchase price $60,000
Inbound freight costs $4,000
Import duties $2,000
Employee training to operate machine $1,000
Two-year maintenance contract $3,000
Calculate the amount to be capitalized in the initial carrying value of the machine.

A) $64,000
B) $68,000
C) $66,000
D) $69,000

4. Which of the following statements about IAS 41 - Agriculture is correct?

A) Bearer plants are included in the scope of IAS 41.

B) Land related to agricultural activity is included in the scope of IAS 41.
C) If the fair value cannot be measured reliability, biological assets can be measured
at cost less accumulated depreciation and impairment losses.
D) If the fair value cannot be measured reliability, agricultural produce can be
measured at cost less accumulated depreciation and impairment losses.

5. Spicy Co operates a chain of restaurants. One of its franchises, an independent cash

generating unit (CGU), had an unpleasant incident resulting in adverse publicity for the
particular franchise. The details of net assets before the incident are:
Goodwill $100,000
Equipment $400,000
Furniture $200,000
Inventory (at net realisable value) $50,000
Total $750,000
After the incident, Spicy Co estimated the recoverable amount of this CGU to be
$500,000.What would be the combined value of equipment and furniture after the
impairment?

A) $400,000
B) $415,000
C) $425,000
D) $450,000
1. IAS 37 - Provisions, Contingent Liabilities and Contingent Assets, requires certain
disclosures in respect of provisions. Which of the following disclosures is not required by
IAS 37?
A) Reconciliation for each class of provision.
B) Prior year reconciliation.
C) Description of the nature and timing for each class of provision.
D) Description of uncertainties and assumptions for each class of provision.

2. Alpha Co acquired 20% of Beta Co’s 500,000 ordinary shares for $4 per share on 1 July
20X6. Beta Co’s profit after tax for the year ended 31 December 20X6 and 31 December
20X7 was $100,000 and $250,000 respectively. Beta Co also declared a dividend of $20,000
for ordinary shareholders on 15 December 20X7. The cheque for dividend was actually
received and deposited by Alpha Co on 15 January 20X8. Assuming that Beta Co is an
associate of Alpha Co, calculate the amount to be included in the consolidated financial
statements as at 31 December 20X7.
A) $456,000
B) $466,000
C) $460,000
D) $464,000

3. Huge Co acquired 60% of the equity shares of Tiny Co for $500,000 on 1 July 2016. The
information about retained earnings of both companies are as follows:
30 June 2016 30 June 2017
Huge Co $300,000 $400,000
Tiny Co $150,000 $200,000
During the year, Huge Co sold goods to Tiny Co for $10,000. The goods were originally
purchased for $8,000. On 30 June 2017, half of these goods were still in the inventory of Tiny
Co. Calculate the amount of retained earnings to be included in the consolidated financial
statements as at 30 June 2017.
A) $429,000
B) $430,000
C) $428,000
D) $929,000

4. Which of the following is an acceptable reason to exclude a subsidiary from

consolidation?
A) The activities of the subsidiary are substantially different from the activities of rest of the
group members.
B) The subsidiary has suffered considerable loss and the directors may declare it bankrupt in
the near future.
C) The parent, itself, meets the definition of an investment entity.
D) The policies and accounting year end of the subsidiary is different from that of parent.

5. Diversity Co has invested in two different entities. The details of these investments are as
follows:
Investment 1: Diversity Co owns 60% of the equity shares in Data Co. It has 2 out of 12
directors on the board. Remaining 40% is owned by the founding family of the business who
continue to make all business decisions for the past 30 years.
Investment 2: Diversity Co owns 38% of the equity shares in Farm Co. Remaining 62%
shares are owned by different farmers, none of whom owns more than 2% of the equity
shares.
Investment 3: Diversity Co owns 40% of the equity shares in Variety Co. Given the expertise,
all financial and operational decisions of Variety Co are made by Diversity Co.
Investment 4: Diversity Co owns 42% of the voting and 100% of the non-voting equity
shares in Estimate Co. Each type of shareholders receives the same percentage of dividend.
Which of these investments should be treated as subsidiaries of Diversity Co?
A) Investment 1 and 2
B) Investment 2 and 3
C) Investment 3 and 4
D) Investment 1 and 4
SECTION B
5 MARKS QUESTION
Q.1 Strangers offers consultancy services. It incurred the following costs on a successful
contract bid:
$ External fees incurred researching potential customer 30,000
Travel costs to deliver proposal 20,000
Commission to sales staff for winning the bid 15,000
Required: Discuss which of the above costs can be capitalised in accordance with IFRS 15.
(pg. 77)

Q. 2 Ten years ago, Innovate developed a video game called ‘Our Sports’. This game sold
over 10 million copies around the world and was extremely profitable. Due to its popularity,
Innovate releases a new game in the Our Sports series every year. The games continue to be
best-sellers. The directors have produced cash flow projections for the Our Sports series over
the next five years. Based on these projections, the directors have prudently valued the Our
Sports brand at $20 million and wish to recognise this in the statement of financial position as
at 30 September 20X3. On 30 September 20X3, Innovate also paid $1 million for the rights to
the ‘Pets & Me’ video game series after the original developer went into administration.
Required: Discuss the accounting treatment of the above in the financial statements of
Innovate for the year ended 30 September 20X3.
(pg. 104)

Q.3 Name and explain 2 approaches to Accounting with suitable examples.

(chatgpt)
Q.4 Paloma purchased a new financial asset on 31 December 20X3. The asset is a bond that
will mature after three years. Paloma buys debt investments with the intention of holding
them to maturity although has, on occasion, sold some investments if cash flow deteriorated
beyond acceptable levels. The bond pays a market rate of interest. The Finance Director is
unsure as to whether this financial asset can be measured at amortised cost.
Required:
Advise the Finance Director on how the bond will be measured.
(pg. 275)

Q.5 Nat is a company that used to prepare financial statements in accordance with local
reporting standards. The first financial statements produced in accordance with IFRS
Standards are for the year ended December 20X5 and they will include comparative
information for the previous financial year. Its previous GAAP financial statements are for
the years ended 31 December 20X3 and 20X4. The directors are unsure about the following
issues:
a. Nat received $5 million in advance orders for a new product on 31 December 20X3.
These products were not dispatched until 20X4. In line with its previous GAAP, the
$5m was recognised as revenue.
b. Nat made estimates of accrued expenses and provisions at 31 December 20X3. Some
of these estimates turned out to be understated. Nat believes that the estimates were
reasonable and in line with the requirements of both its previous GAAP and IFRS
Standards.
Required: In accordance with IFRS 1, how should the above issues be dealt with?
(pg. 375)

Q. 3 Explain the recognition criteria for IAS 41.

(chatgpt)

SECTION C
10 MARKS QUESTIONS
Q.1 On 1 January 20X1, Painting sells an item of machinery to Collage for its fair value of $3
million. The asset had a carrying amount of $1.2 million prior to the sale. This sale represents
the satisfaction of a performance obligation, in accordance with IFRS 15 Revenue from
Contracts with Customers. Painting enters into a contract with Collage for the right to use the
asset for the next five years. Annual payments of $500,000 are due at the end of each year.
The interest rate implicit in the lease is 10%.
The present value of the annual lease payments is $1.9 million. The remaining useful life of
the machine is much greater than the lease term.
Required:
Explain how the transaction will be accounted for on 1 January 20X1 by both Painting and
Collage.
(pg. 177)

Q. 1 An entity has a reporting date of 31 December. On 1 January 20X1, it grants 100 share
options to each of its 500 employees. Each grant is conditional upon the employee working
for the entity until 31 December 20X3. At the grant date the fair value of each share option is
$15. During 20X1, 20 employees leave and the entity estimates that a total of 20% of the 500
employees will leave during the three-year period.
During 20X2, a further 20 employees leave and the entity now estimates that only 15% of the
original 500 employees will leave during the three-year period.
During 20X3, a further 10 employees leave.
Required: Calculate the remuneration expense that will be recognised in each of the three
years of the share-based payment scheme.
(pg. 223)

Q.2
a. An entity has a policy of only carrying out work to rectify damage caused to the
environment when it is required to do so by local law. For several years the entity has been
operating an overseas oil rig which causes environmental damage. The country in which the
oil rig is located has not had legislation in place that required this damage to be rectified. A
new government has recently been elected in the country. At the reporting date, it is virtually
certain that legislation will be enacted that will require damage rectification. This legislation
will have retrospective effect.
b.Under a licence granted by a local government, an entity has constructed a rock-crushing
plant to process material mined from the surrounding area. Mining activities have already
started. Under the terms of the licence, the entity must remove the rock crushing plant when
mining activities have been completed and must landscape the mined area, so as to create a
national park.
Required: For each of the situations, explain whether a provision should be recognised.
(pg. 249)

Q.2 GoodWine is a company that grows and harvests grapes. Grape vines, which produce a
new harvest of grapes each year, are typically replaced every 30 years. Harvested grapes are
sold to wine producers. With regards to property, plant and equipment, GoodWine accounts
for land using the revaluation model and all other classes of assets using the cost model. On
30 June 20X1, its grape vines had a carrying amount of $300,000 and a remaining useful life
of 20 years. The grapes on the vines, which are generally harvested in August each year, had
a fair value of $500,000. The land used for growing the grape vines had a fair value of $2m.
On 30 June 20X2, grapes with a fair value of $100,000 were harvested early due to unusual
weather conditions. The grapes left on the grape vines had a fair value of $520,000. The land
had a fair value of $2.1m. All selling costs are negligible and should be ignored.
Required:
Discuss the accounting treatment of the above in the financial statements of GoodWine for
the year ended 30 June 20X2.
(pg. 136)

SECTION – D
15 MARKS QUESTION
Q.1 Middleshop operates in the fashion retail industry and has a year end of 31 December 20X1. It
owns fifteen stores all located in one country (and accounted for using the cost model in IAS 16
Property, Plant and Equipment). Due to an international pandemic, the government of the country in
which Middleshop operates required all non-essential retail and hospitality outlets to close for
several months during 20X1. It is anticipated that further closures will be mandated throughout 20X2
until an effective vaccine is developed and rolled out amongst the population. The pandemic has had
a negative impact on the fashion industry. Demand for new clothing has declined due to national and
localised lockdowns as well as limits on intra-household socialising and the increased uptake of
home-working. Moreover, the full economic impact of the pandemic has yet to be realised with
unemployment expected to rise significantly throughout 20X2.

Middleshop’s stores were open for trading during December 20X1, normally the busiest month of
the year. However, high street footfall was far lower than previous years with many consumers
reducing expenditure or choosing to shop online. Middleshop sells online through its website but the
functionality is poor and customer uptake is low. The website is recognised as an intangible asset and
is being amortised over a remaining life of five years. The directors of Middleshop are considering
closing some larger stores in 20X2 although, as at 31 December 20X1, no firm plans had been drawn
up. A significant operating loss is expected in 20X2. The directors wish to provide for potential
redundancy costs and the future operating loss in the financial statements for the year ended 31
December 20X1. Middleshop has bank loans, some of which are repayable within 12 months of the
reporting date.

Required:

Discuss the financial reporting implications of the above in Middleshop’s financial statements for the
year ended 31 December 20X1.

(pg. 605)

Q.1 Blast has a 30% share in a joint operation. The assets, liabilities, revenues and costs of the joint
operation are apportioned on the basis of shareholdings. The following information relates to the
joint arrangement activity for the year ended 30 November 20X2:
• The manufacturing facility cost $30m to construct and was completed on 1 December 20X1 and is
to be dismantled at the end of its estimated useful life of 10 years. The present value of this
dismantling cost to the joint arrangement at 1 December 20X1, using a discount rate of 8%, was $3m.

• During the year ended 30 November 20X2, the joint operation entered into the following
transactions:

goods with a production cost of $36m were sold for $50m

other operating costs incurred amounted to $1m

administration expenses incurred amounted to $2m.

Blast has only accounted for its share of the cost of the manufacturing facility, amounting to $9m.
The revenue and costs are receivable and payable by the two other joint operation partners who will
settle amounts outstanding with Blast after each reporting date.

Required: Show how Blast will account for the joint operation within its financial statements for the
year ended 30 November 20X2.

(pg. 426)