Test Bank For Applying IFRS Standards, 5th Edition by Ruth Picker, Leo van der Tas, David Kolitz, Gi

Test Bank For to accompany Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

CHAPTER 1 The IASB and its Conceptual Framework

Learning Objectives 1.1 Describe the organisational structure of the key players in setting International Financial Reporting Standards (IFRSs) 1.2

Describe the purpose of a conceptual framework – who uses it and why

1.3 Explain the qualitative characteristics that make information in financial statements useful 1.4

Discuss the going concern assumption underlying the preparation of financial statements

1.5 Define the basic elements in financial statements – assets, liabilities, equity, income and expenses 1.6

Explain the principles for recognising the elements of financial statements

1.7 Distinguish between alternative bases for measuring the elements of financial statements 1.8 Outline concepts of capital.

Multiple Choice Questions

1.

Which of the following statements is INCORRECT? Learning Objective 1.1 Describe the organisational structure of the key players in setting IFRSs: *a.

The International Accounting Standards Board was replaced by the International Standards Committee in 2001. b.

The International Accounting Standards Board is funded by the IASC Foundation. c.

The responsibility for issuing International Financial Reporting Standards lies with the International Accounting Standards Board. d.

Members of the International Accounting Standards Board are appointed by the IFRS Foundation.

2.

Which of the following bodies report to the IFRS Foundation?

Learning Objective 1.1 Describe the organisational structure of the key players in setting IFRSs: a.

The IASB and AASB b.

The IASB, AASB and the IFRS Advisory Council c.

The IASB and the FASB *d.

The IASB and the IFRS Advisory Council

3.

Which of the following statements is INCORRECT? Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a.

The Framework identifies the qualitative characteristics that make information in financial statements useful. *b.

The Framework defines principles for accounting recognition, measurement and disclosure. c.

The Framework defines the objective of financial statements. d.

The Framework defines the basic elements of financial statements and the concepts for recognizing and measuring them in financial statements.

4.

Which of the following statements is CORRECT? Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why *a.

IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors requires that The Framework be followed in the absence of a specific standard or interpretation. b.

IAS 8 Accounting Policies, Changes in Accounting Estimates, and Errors recommends, but does not require The Framework to be followed in the absence of a specific standard or interpretation. c.

The Framework is used solely by the IASB when considering new accounting issues. d.

The Framework is non-binding guidance which does not have to be followed by preparers of financial statements.

5.

The Framework focuses on: Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a. privately owned business entities only. *b. business entities only, including private and state owned business entities. c. business entities, although the concepts may be applied to other types of entities, such as not-for profit entities. d. all types of entities, including business entities, government and not-for profit entities.

6.

General Purpose Financial Statements: Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a. are only necessary for users who do not have the power to obtain information in addition to that contained within the General Purpose Financial Statement. b. provide all the information that users may need to make economic decisions. c. focus on disclosing information relevant to assessing the ability of an entity to generate future cash flows. *d. meet the information needs that are common to all users.

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7.

Which of the following statements is INCORRECT in relation to the preparation of financial statements?

Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a.

General Purpose Financial Statements must be prepared in accordance with accounting standards. b.

General Purpose Financial Statements are reports intended to meet the information needs common to users who are unable to command the preparation of reports tailored so as to specifically meet all their information needs. *c.

The sole objective of a General Purpose Financial Statement is to serve an economic decision making objective. d.

The objective of a General Purpose Financial Statement is to provide information useful to users for making and evaluating decisions about the allocation of scarce resources.

8.

Which of the following statements is INCORRECT? Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a.

Information about the variability of profits helps in forecasting future cash flows from an entity‘s existing resources. *b.

Performance of an entity is determined solely through examination of the Statement of Profit or Loss and Other Comprehensive Income of an entity. c.

An entity‘s Statement of Cash Flows provides insight into changes in assets and liability balances during an accounting period. d.

The Statement of Financial Position presents information relating to economic resources, the financial structure of an entity, liquidity and solvency and capacity to adapt to changes in an entity‘s environment.

9.

The purpose of the notes to the financial statements is to: Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a. explain any resources and obligations not recognised in the Statement of Financial Position b. provide information meeting the disclosure requirements under national laws or regulations. c. disclose risks and uncertainties affecting the entity. *d. all of the above.

10.

Which category of user is most likely to be interested primarily in the Statement of Profit or Loss and Other Comprehensive Income of an entity?

Learning Objective 1.2 Describe the purpose of a conceptual framework – who uses it and why a. suppliers and trade creditors *b. shareholders c. employees d. lending institutions

11.

The qualitative qualitative characteristics that make information in financial statements useful to investors identified within The Framework are: Learning Objective 1.3 Explain the qualitative characteristics that make information in financial statements useful a.

Relevance, faithful representation, timeliness and comparability b.

Relevance and faithful representation *c.

Relevance, faithful representation, comparability, verifiability, timeliness and understandability d.

Comparability, verifiability, timeliness and understandability

12.

Information that is able to confirm or correct past evaluations that have been made by users of financial information is an example of information that satisfies which of the following characteristics of financial information identified in The Framework?

Learning Objective 1.3 Explain the qualitative characteristics that make information in financial statements useful a.

Understandability *b.

Relevance c.

Verifiability d.

Comparability

13.

An asset is defined in the conceptual framework as: Learning Objective 1.3 Explain the qualitative characteristics that make information in financial statements useful concepts in the IASB Framework. a. a resource controlled by the entity as a result of past events b. a resource controlled by the entity as a result of future events and from which possible future economic benefits may flow to the entity. c. a resource controlled by the entity from which future economic benefits are expected to flow to the entity. *d. a resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity.

A liability is defined in conceptual framework as: Learning Objective 1.3 Explain the qualitative characteristics that make information in financial statements useful concepts in the IASB Framework. a. possible obligation of the entity, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. b. a possible obligation of the entity expected to arise from future events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

14.

4

*c.

d.

15.

a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. a present obligation of the entity arising from past events, the settlement of which is expected to result in an inflow to the entity of resources embodying economic benefits.

The fundamental qualitative characteristics that make financial information useful for decision-making are: Learning Objective 1.3 Explain the qualitative characteristics that make information in financial statements useful.

comparability relevance understandability faithful representation a.

I; b.

II; c.

III; *d.

IV.

16.

I Yes Yes Yes Yes

II Yes Yes No No

III No No No No

IV No Yes No Yes

The enhancing qualitative characteristics that make financial information useful for decision-making are: Learning Objective 1.3 Explain the qualitative characteristics that make information in financial statements useful.

comparability verifiability timeliness understandability *a.

I; b.

II; c.

III; d.

IV.

I Yes Yes Yes Yes

II Yes Yes No No

III No No No No

IV No Yes No Yes

17.

The going concern assumption underlying the preparation of financial statements is also know as: Learning Objective 1.4 Discuss the going concern assumption underlying the preparation of financial statements *a. the continuity assumption b. the matching principle c. the prudence principle d. the historical cost measurement basis

18.

If management intends to liquidate the entity‘s operations, financial statements are prepared on the basis of

Learning Objective 1.4 Discuss the going concern assumption underlying the preparation of financial statements a. b. *c. d.

Historical cost Historical cost with a note that the entity is about to liquidate Expected liquidation values Financial statements do not have to be prepared.

19.

The IASB conceptual framework for financial reporting describes the basic concepts that underlie financial statements and defines: Learning Objective 1.5 Define the basic elements in financial statements – assets, liabilities, equity, income and expenses. a. the principles for measurement; b. disclosure principles; *c. the elements of financial statements d. accounting recognition criteria.

20.

Which of the following income and expense items is NOT recorded initially directly in equity?

Learning Objective 1.5 Define the basic elements in financial statements – assets, liabilities, equity, income and expenses *a.

The impairment of goodwill in accordance with IAS 36 Impairment of Assets, where the entity is confident that the factors giving rise to the impairment will reverse in a future period. b.

An increase in the fair values of land & buildings, where the revaluation method is used to account for land & buildings in accordance with IAS 16 Property, Plant and Equipment. c.

Foreign currency translation adjustments arising on the translation of a foreign operations financial statements from their functional currency in accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates. d.

None of the above.

21.

Which of the following statements in relation to income is true?

Learning Objective 1.6 Explain the principles for recognising the elements of financial statements *a.

Gains are normally reported separately from revenue in the Statement of Profit or Loss and Other Comprehensive Income due to the different probabilities attached to that type of income. b.

The Framework requires that all items of income are reported on a net basis. c.

Gains and revenue are different in nature and therefore are recognised as separate elements of the financial statements per The Framework. d.

The Framework defines income as an increase in economic benefits which results in an increase in equity.

22.

Which of the following statements is INCORRECT in relation to the recognition criteria for elements of the financial statements?

6

Learning Objective 1.6 Explain the principles for recognising the elements of financial statements a.

Assets are recognised when it is probable that future economic benefits will flow to the entity and the asset has a cost or value that can be measured reliably. b.

Because equity is the arithmetic difference between assets and liabilities, a separate recognition criteria for equity is not needed in The Framework. c.

Liabilities are recognised when it is probable that an outflow of resources embodying economic benefits will result from the settlement of a present obligation and the amount at which settlement will take place can be measured reliably. *d.

Income is recognised when an increase in future economic benefits related to a decrease in an asset or an increase in a liability that has arisen can be measured reliably.

23.

In relation to the concept of recognition of an item in the financial statements: Learning Objective 1.6 Explain the principles for recognising the elements of financial statements a.

Items of equity must satisfy both the probability and measurement criteria before they can be recognised. b.

Assets can only be recognised where there is a high probability of future economic benefits flowing to the entity. c.

Expenses are recognised when a decrease in a future economic benefit related to an increase in an asset or a decrease in a liability has arisen that can be measured reliably. *d.

For items to qualify for recognition in the financial statements as liabilities or income they must first satisfy the definition of an element, and then meet both the probability and measurement requirements in relation to recognition.

24.

In accordance with the conceptual framework, income is recognised in the statement of profit or loss and other comprehensive income when: Learning Objective 1.6 Explain the principles for recognising the elements of financial statements. a. an decrease in future economic benefits relating to an decrease in an asset or an increase in a liability can be measured reliably. *b. an increase in future economic benefits relating to an increase in an asset or a decrease in a liability can be measured reliably. c. an increase in future economic benefits relating to an increase in an asset can be measured reliably. d. an increase in future economic benefits relating to an decrease in an asset or an increase in a liability can be measured reliably.

25.

Expenses are recognised in the statement of profit or loss and other comprehensive income when: Learning Objective 1.6 Explain the principles for recognising the elements of financial statements. a. increase in future economic benefits related to a increase in an asset or an increase in a liability can be measured reliably.

*b. c. d.

a decrease in future economic benefits related to a decrease in an asset or an increase in a liability can be measured reliably. a decrease in future economic benefits related to a decrease in an asset or a decrease in a liability can be measured reliably. none of the options are correct.

26.

In relation to measurement of the elements of financial statements Learning Objective 1.7 Distinguish between alternative bases for measuring the elements of financial statements *a.

The Framework acknowledges that a variety of measurement bases are used to different degrees and in varying combinations in financial statements. b.

The Framework includes detailed concepts and principles for selecting which measurement basis should be used for particular elements of financial statements. c.

Net realisable value is the preferred basis for measurement of assets. d.

The Framework adopts a mixed attribute accounting model

27.

The measurement method most commonly used in the preparation of financial statements is: Learning Objective 1.7 Distinguish between alternative bases for measuring the elements of financial statements: a. present value; b. current cost; c. realisable value; *d. historical cost.

8

Testbank to accompany

Applying ® IFRS Standards 5e Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

CHAPTER 2 Owners’ equity: share capital and reserves

Learning Objectives 2.1 Describe the essence of the equity section in the statement of financial position 2.2 Describe in general terms what a for-profit company is 2.3 Outline the key features of the corporate structure 2.4 Discuss the different forms of share capital 2.5 Account for the issue of both no-par and par value shares 2.6 Account for share placements, rights issues, options, and bonus issues 2.7 Discuss the rationale behind and accounting treatment of share buy-backs 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends 2.9 Prepare note disclosures in relation to equity, as well as a statement of changes in equity.

10

Multiple Choice Questions

1.

For-profit companies may be Learning Objective 2.2 Describe in general terms what a for-profit company is I Unlimited II Listed III Limited by guarantee IV No-liability a. b. c. *d.

II and III only; I, II and III only; II, III and IV only; I, II, III and IV.

2.

Which of the following statements is incorrect?

Learning Objective 2.3 Outline the key features of the corporate structure a.

Each share in a company carries a right to share in the assets on the liquidation of the company; *b. Each share in a company carries a right to share proportionately in all new share issues of a company; c.

A share represents an ownership right in a company; d.

Each share in a company carries a right to vote for directors of the company.

3.

In respect to the issue of shares by a company, what is an IPO? Learning Objective 2.5 Account for the issue of both no-par and par value shares a.

Investment in Preference and Ordinary shares; *b.

Initial Public Offering of shares; c.

Investment Prospectus for an issue of Options; d.

Instruments Providing Options to ordinary shareholders.

4.

When a public share issue is made, the offer comes from: Learning Objective 2.5 Account for the issue of both no-par and par value shares a. the company issuing the shares; b. the relevant oversight body once it has reviewed the prospectus documentation; c. the broker handing the share issue for the company; *d. the applicant.

5.

ABC Ltd was registered as a corporation on 1 July 2024. On 4 July 2024, ABC Ltd issued a prospectus offering 100 000 ordinary shares at an issue price of £2.50 each, payable £1.50 on application and £1.00 on allotment.

Application closed on 1 August 2024 with the company having received applications for 110 000 shares. The shares were allotted on 15 August 2024, with the over-subscription amount being refunded to unsuccessful applicants. All allotment monies were received by 31 August 2024. Following the allotment the balance in the Share Capital account would be: Learning Objective 2.5 Account for the issue of both no-par and par value shares a. £100 000 Credit; *b. £250 000 Credit; c. £100 000 Debit; d. £250 000 Debit.

Use the following information to answer questions 6 to 8.

A company‘s capital consists of 50 000 ordinary shares issued at £2 and paid to £1 per share.

On 1 September, a first call of 50c was made on the ordinary shares. By 30 September, the call money received amounted to £22 500. No further payments were received, and on 31 October, the shares on which calls were outstanding were forfeited. On 15 November, the forfeited shares were reissued as paid to £1.50 for a payment of £1 per share. The appropriate cash amount from the reissue was received on 19 November. Costs of reissue amounted to £2 000.

The company‘s constitution provided for any surplus on resale, after satisfaction of unpaid calls, accrued interest and costs, to be returned to the shareholders whose shares were forfeited.

6.

The entry to record the forfeiture of shares is: Learning Objective 2.5 Account for the issue of both no-par and par value shares *a. Share capital Dr 7 500 First Call – Ordinary shares Cr 2 500 Forfeited shares Cr 5 000 b.

c.

d.

Share capital First call – Ordinary shares Forfeited shares

Dr Cr Cr

7 500

Share capital Forfeited shares

Dr Cr

5 000

Forfeited shares Share capital

Dr Cr

2 500

5 000 2 500

5 000

2 500

12

7.

The entry to record the reissue of forfeited shares is: Learning Objective 2.5 Account for the issue of both no-par and par value shares *a. Cash Dr 5 000 Forfeited shares Dr 2 500 Share capital – Ordinary Cr 7 500 b.

c.

d.

Cash Forfeited shares Share capital – Ordinary

Dr Dr Cr

2 500 2 500

Cash Share capital – Ordinary

Dr Cr

5 000

Share capital Forfeited shares

Dr Cr

7 500

5 000

5 000

7 500

8.

The amount of the surplus payable to the shareholders whose shares were forfeited is: Learning Objective 2.5 Account for the issue of both no-par and par value shares a. £5000; *b. £500; c. £2500; d £3000.

9.

If the balance in a forfeited shares account is refundable to the owners of those shares, then the forfeited shares account is classified as a component of: Learning Objective 2.5 Account for the issue of both no-par and par value shares a. income; *b. liabilities; c. equity; d. expense.

10.

The appropriate account to record any excess proceeds received and retained (not refunded) by a company from an oversubscription to a share offer application, is the: Learning Objective 2.5 Account for the issue of both no-par and par value shares a.

Share issue costs account; b.

Forfeited Shares account; c.

Share capital account; *d.

Calls in advance account.

11.

Which of the following journal entries demonstrates the appropriate accounting treatment for share issue costs?

Learning Objective 2.5 Account for the issue of both no-par and par value shares a.

Dr Deferred asset Cr Cash; b.

Dr Cash Cr Deferred asset; *c. Dr Share capital Cr Cash; d.

Dr Cash Cr Share capital.

12.

The bonus issue of shares has the following impact on the equity of a company; Learning Objective 2.6 Account for share placements, rights issues, options, and bonus issues a. total equity increases; b. total equity decreases; *c. one equity account increases and another equity account decreases by an equal amount; d. only the amount of issued share capital changes.

13.

A company issued share option is an instrument that gives the holder the right but not the obligation to: Learning Objective 2.6 Account for share placements, rights issues, options, and bonus issues *a. buy a certain number of shares in the company by a specified date at a stated

price; b.

sell a certain number of shares in the company by a specified date at a stated

c. d.

receive a certain dividend declared by the company by a specified date; receive a bonus issue of shares in a proportion as notified by the company.

price;

14.

Valdez Limited issued 10 000 share options to subscribe for ordinary shares. The exercise price on the options was $3 per share. If all options were exercised on due date the following journal entry would be recorded: Learning Objective 2.6 Account for share placements, rights issues, options, and bonus issues a.

Share capital - Ordinary Dr 30 000 Cash Cr 30 000 b.

c.

*d.

Share options – Ordinary Share capital - Ordinary

Dr Cr

30 000

Share options reserve Cash

Dr Cr

30 000

Cash Share capital - Ordinary

Dr Cr

30 000

30 000

30 000

30 000

14

15.

Which of the following is not a reason that companies may undertake a share buy-back?

Learning Objective 2.7 Discuss the rationale behind and accounting treatment of share buy-backs *a. as a defence against a hostile takeover; b. to manage the capital structure; c. to increase the worth per share of the remaining shares; d. as a way to efficiently manage surplus funds.

16.

In relation to an asset revaluation surplus, an entity Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends a. is not able to use this surplus for the payment of future dividends; *b. is able to use this surplus for the payment of future dividends; c. is not able to transfer this surplus to any other reserve account; d. can transfer the surplus to current period profit or loss when the asset is disposed of.

17. of:

The balance in the retained earnings account is affected by the transfer to that account Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends I Issued share capital II Dividends paid or provided for III Transfers to or from other reserve accounts IV Changes in accounting policies and errors a. b. *c. d.

18.

II and III only; I, II and III only; II, III and IV only; I, II, III and IV.

Dividends declared after the balance date but before the financial statements are authorised for issue: Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends a. meet the criteria for recognition as a liability; b. satisfy the criteria for recognition as an expense; c. are recognised in the Statement of Financial Position as they meet the definition of equity; *d. do not meet the IAS 37 criteria of a present obligation.

19.

IAS 1 Presentation of Financial Statements requires the following items to appear on the face of the Statement of Changes in Equity Learning Objective 2.9 Prepare note disclosures in relation to equity, as well as a statement of changes in equity I The net amount of cash from the issue of any securities during the period II The cumulative effect of changes in accounting policy and the correction of errors III Each item of income or expenses that are required to be recognised directly in equity IV Profit or loss for the period. a. *b. c. d.

I, II, III and IV; II, III and IV only; I, III and IV only; II and IV only.

20.

Laws in relation to share buy-backs are primarily designed to protect the interests of the company‘s: Learning Objective 2.7 Discuss the rationale behind and accounting treatment of share buy-backs a. shareholders; *b. creditors; c. directors; d. option holders.

21.

Accounting for share buy-backs is prescribed by Learning Objective 2.7 Discuss the rationale behind and accounting treatment of share buy-backs a. an IFRS; b. an IFRIC interpretation; c. an IAS; *d. generally accepted accounting practices.

22.

Whether a dividend is paid by a company depends on the decisions made by the: Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends a. creditors of the company; b.

International Accounting Standards Board; c. auditors of the company; *d. directors of the company.

16

23.

Gains or losses that arise as a result of translating foreign currency denominated operations into the reporting currency are recognised in income: Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends a. in the reporting period in which they arise; *b. only when the interest in the foreign operation is sold; c. only if they are material items; d. only when they are settled in cash.

24.

Gains and losses on available-for-sale financial assets are recognised directly in equity until the financial asset is derecognised. At this time the cumulative gain or loss previously recognised is: Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends *a. recognised in profit and loss; b. transferred to a revaluation reserve account in equity; c. charged against a provision for gains and losses account; d. set-off against the relevant financial asset.

25.

Retained earnings are a component of Learning Objective 2.8 Outline the nature of reserves and account for movements in retained earnings, including dividends a.

Contributed equity; *b.

Reserves; c.

Other equity; d.

Comprehensive income.

26.

IAS 1 requires that a reconciliation between the carrying amount of each class of contributed equity capital and each reserve at the beginning and end of each period be disclosed in: Learning Objective 2.9 Prepare note disclosures in relation to equity, as well as a statement of changes in equity a. the Statement of Changes in Equity only; b. the notes only; *c. either the Statement of Changes in Equity or the notes; d.

Statement of Comprehensive Income.

27.

Which of the following does not appear in the Statement of Changes in Equity?

Learning Objective 2.9 Prepare note disclosures in relation to equity, as well as a statement of changes in equity *a.

The non-controlling interest share of equity; b.

Dividends declared but not yet paid at year end; c.

Appropriations from retained earnings; d.

The payment of a bonus dividend from a reserve.

28.

In relation to share capital, IAS 1 does not require disclosure in the financial report of: Learning Objective 2.9 Prepare note disclosures in relation to equity, as well as a statement of changes in equity a. the number of shares on issue at the end of the year; *b. the amount of any over or under subscription of new share issues during the

year; c. d.

29.

restrictions on dividends payable to certain classes of shareholders; the total dollar value of share capital at the end of the year.

IAS 1 requires that information in relation to dividends paid or declared during the year be disclosed in: Learning Objective 2.9 Prepare note disclosures in relation to equity, as well as a statement of changes in equity a. the Statement of Changes in Equity only; b. the notes only; *c. either the Statement of Changes in Equity or the notes; d. the Statement of Comprehensive Income.

Testbank to accompany

Applying ® IFRS Standards 5e 18

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

CHAPTER 3 Fair value measurement

Learning Objectives 3.1 Explain the need for an accounting standard on fair value measurement 3.2 Understand the key characteristics of the term ‗fair value‘ 3.3 Explain the steps in determining the fair value of non-financial assets 3.4 Understand how to measure the fair value of liabilities 3.5 Explain how to measure the fair value of an entity‘s own equity instruments 3.6 Discuss issues relating to the measurement of the fair value of financial instruments 3.7 Prepare the disclosures required by IFRS 13 Fair Value Measurement 3.8 Discuss the issues associated with the measurement and use of fair values.

20

Multiple Choice Questions

1.

Which of the following is not one of the key reasons given by the IASB for a standard on fair value measurement?

Learning Objective 3.1 Explain the need for an accounting standard on fair value measurement a. to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application; b. to clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly; *c. to require the use of fair value when accounting for all non-financial assets; d. to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values.

2.

Which of the following documents issued alongside IFRS 13 do not form an integral part of the standard?

I Basis for Conclusions II Illustrative Examples III Appendix A: Defined terms IV Appendix B: Application guidance Learning Objective 3.1 Explain the need for an accounting standard on fair value measurement *a.

I and II; b.

II and III; c.

III and IV; d.

I and IV.

3.

Which of the following is the definition of fair value per IFRS 13?

Learning Objective 3.2 Understand the key characteristics of the term ‗fair value‘ a.

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm‘s length transaction; *b. The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; c.

The price that would be received to sell an asset or paid to transfer a liability; d.

A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (eg a forced liquidation or distress sale).

4.

At which date is fair value determined?

Learning Objective 3.2 Understand the key characteristics of the term ‗fair value‘ *a. the measurement date; b. the settlement date; c. the transaction date; d. the exchange date.

5.

When determining the fair value of an asset its fair value is based on its: Learning Objective 3.2 Understand the key characteristics of the term ‗fair value‘ a.

Current use; b.

Proposed use; *c.

Highest and best use; d.

Value in use.

6.

Which of the following is not a valuation technique prescribed by IFRS 13?

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets *a. the fair value approach; b. the income approach; c. the cost approach; d. the market approach.

7.

The market with the greatest volume and level of activity for the asset or liability is defined as the: Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets a. active market; *b. principal market; c. liquid market; d. most advantageous market.

8.

Valuation techniques that convert future amounts to a single current amount and determines the fair value on the basis of the value indicated by current market expectations about those future amounts is an example of: Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets a. the fair value approach; *b. the income approach; c. the cost approach; d. the market approach.

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9.

Unobservable inputs for the asset or liability are an example of: Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets a. a Level 1 input; b. a Level 2 input; *c. a Level 3 input; d. a Level 4 input.

10.

Which of the following is not an example of a level 2 input?

Learning Objective 3 Explain the steps in determining the fair value of non-financial assets *a. a financial forecast of cash flow or earnings; b. quoted prices for identical or similar assets or liabilities in markets that are not active; c. inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves, volatilities, prepayment speeds, and credit risks; d. inputs that are derived from or corroborated by observable market data by correlation or other means.

11.

Trademarks would be measured primarily using which type of inputs?

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets a.

Level 1 inputs; b.

Level 2 inputs; *c.

Level 3 inputs; d.

Level 4 inputs.

12.

Which of the following steps in not relevant when valuing liabilities?

Learning Objective 3.4 Understand how to measure the fair value of liabilities a. the particular liability that is the subject of the measurement; *b. the valuation premise that is appropriate for the measurement; c. the principal (or most advantageous) market for the liability; d. the valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised.

13.

When measuring the fair value of a liability, which of the following is assumed?

Learning Objective 3.4 Understand how to measure the fair value of liabilities a. the liability is settled by the holder; *b. the liability will be settled by the market participant; c. the liability will not be settled; d. the liability is settled with the counterparty on measurement date.

14.

Where a liability is held as a corresponding asset by another entity the fair value of the liability is determined by: Learning Objective 3.4 Understand how to measure the fair value of liabilities a. applying a present value technique to measure the liability; b. applying the cost approach to valuing the liability; *c. measuring the fair value of the corresponding asset; d. determining the amount required to settle the present obligation.

15.

In which circumstance will it be necessary to determine the fair value of an entity‘s own equity instruments?

Learning Objective 3.5 Explain how to measure the fair value of an entity‘s own equity instruments a. where the entity is preparing for listing; *b. where the entity undertakes a business combination and issues its own equity instruments in exchange for a business; c. where the entity undertakes a share buy-back; d. where there is a change in the shareholding of the entity.

16.

Which of the following is not assumed when measuring the fair value of an equity instrument?

Learning Objective 3.5 Explain how to measure the fair value of an entity‘s own equity instruments a.

The market participant transferee will take on the rights and responsibilities associated with the instrument; *b. An entity‘s own equity instruments are transferred to a market participant at transfer date; c.

An entity‘s own equity instrument would remain outstanding; d.

The instrument would not be cancelled or otherwise extinguished on the measurement date.

17.

Where a market has both a bid and an ask process, the price used in measuring fair value is: Learning Objective 3.6 Discuss issues relating to the measurement of the fair value of financial instruments a. the bid price; b. the ask price; c. the bid-ask spread; *d. the most representative price for the transaction.

24

18.

An entity holding both financial assets and liabilities is allowed to offset and determine fair value on the net position as long as: I they hold a net long position II they hold a net short position III they have a documented risk management strategy IV the manage the group of net financial assets and liabilities on a net exposure

basis V. transactions are conducted in an orderly market Learning Objective 3.6 Discuss issues relating to the measurement of the fair value of financial instruments a.

I and III; b.

II and IV; *c.

III and IV; d.

II and V.

19.

Which of the following disclosures are not required under IFRS 13?

Learning Objective 3.7 Prepare the disclosures required by IFRS 13 Fair Value Measurement a. the valuation techniques used to measure fair value; b. the inputs used to measure fair value; c. the level of the fair value hierarchy within which the fair value measurements are categorised; *d. quantitative information about all unobservable inputs used in the fair value measurement.

20.

Which of the following does Whittington (2008) see as a main feature of the fair value view?

Learning Objective 3.8 Discuss the issues associated with the measurement and use of fair values. a.

Stewardship, defined as accountability to present shareholders, is a distinct objective, ranking equally with decision usefulness; *b. Reliability is less important and is better replaced by representational faithfulness, which implies a greater concern for capturing economic substance, and less with statistical accuracy; c.

Present shareholders of the holding company have a special status as users of financial statements; d.

Future cash flows may be endogenous: feedback from shareholders and markets in response to accounting reports may influence management decisions.

21.

Which are the two most common measures used by IFRS? Learning Objective 3.1 Explain the need for an accounting standard on fair value measurement.

a. b. *c. d.

22.

fair value less costs to sell and cost; value in use and cost; cost and fair value; net realisable value and fair value.

Which of the following is the definition of exit price per IFRS 13?

Learning Objective 3.2 Understand the key characteristics of the term ‗fair value‘. a.

A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale); b.

The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm‘s length transaction; c.

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; *d.

The price that would be received to sell an asset or paid to transfer a liability.

23.

Which of the following is not a characteristic of a market participant under IFRS 13?

Learning Objective 3.2 Understand the key characteristics of the term ‗fair value‘. a.

Buyers and sellers that are able to enter into a transaction for the asset or liability; b.

Buyers and sellers that are willing to enter into a transaction for the asset or liability; *c.

Buyers and sellers that are dependent on each other; d.

Buyers and sellers that are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information.

24.

Which of the following is an indication of an active market?

Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets. a. there are few recent transactions; b. price quotations vary substantially over time; c. price quotations vary substantially among market-makers; *d. price quotations are based on current market information.

25.

Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date are an example of: Learning Objective 3.3 Explain the steps in determining the fair value of non-financial assets. a. a Level 2 input; *b. a Level 1 input; c. a Level 3 input; d. a Level 4 input.

26

26.

Non-performance risk refers to the risk that: Learning Objective 3.4 Understand how to measure the fair value of liabilities. a. a market participant will not fulfil an obligation; *b. the holder of the liability will not fulfil an obligation; c. the counterparty will not fill an obligation; d. the holder of a corresponding asset will not fulfil an obligation.

27.

Which of the following is an example of a liability where there is no corresponding asset?

Learning Objective 3.4 Understand how to measure the fair value of liabilities *a. a provision for decommissioning; b. a debenture issued by a listed company; c. a loan owing to a financial institution; d. a provision for warranties.

28. at

In measuring an equity instrument at fair value the objective is to estimate an exit price measurement date from the perspective of: Learning Objective 3.5 Explain how to measure the fair value of an entity‘s own equity instruments. a. the issuer of the equity instrument; b. the party to whom the instrument will be transferred; c. the party who intends to repurchase the instrument; *d. a market participant who holds the instrument as an asset.

29.

The fair value of an equity instrument is based on determining a/an _________ price which may relate to the price paid for an entity to repurchase its shares.

Learning Objective 3.5 Explain how to measure the fair value of an entity‘s own equity instruments. a. transfer; b. settlement; c. entry; *d. exit.

30.

Which of the following disclosure are required under IFRS 13?

Learning Objective 3.7 Prepare the disclosures required by IFRS 13 Fair Value Measurement. a. the valuation techniques used to measure fair value b. the level of the fair value hierarchy within which the fair value measurements are categorised c. quantitative information about the significant unobservable inputs used in the fair value measurement *d. all of the options are correct.

Testbank

to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by Elisabetta Barone

John Wiley & Sons, Ltd 2024

28

CHAPTER 4 Revenue from contracts with customers

Learning Objectives 4.1 Understand the background to the issuance of IFRS 15 4.2 Identify the types of contracts that are within the scope of IFRS 15 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 4.4 Understand how to account for contract related costs 4.5 Identify other significant application issues associated with IFRS 15 4.6 Explain the presentation and disclosure requirements of IFRS 15.

Multiple Choice Questions

1.

Which of the following is a reason why the IASB and FASB jointly developed a revenue standard?

I.

remove inconsistencies and weaknesses in the current revenue recognition literature; II. provide a more robust framework for addressing revenue recognition issues; III. improve comparability of revenue recognition practices across the various industries, entities, jurisdictions and capital markets; IV. provide a single reference point in order to reduce the volume of the relevant standards and interpretations that entities will need to refer to; V. provide more useful information to users through enhanced-disclosure requirements.

Learning Objective 4.1 Understand the background to the issuance of IFRS 15 a. b. c. *d.

2.

I, II only II, III and IV only I, III and IV only I, II, III, IV and V

Which of the following are excluded from the scope of IFRS 15?

I II III IV

the initial recognition of agricultural produce insurance contracts within the scope of IFRS 4 Insurance Contracts the extraction of mineral ores lease agreements

Learning Objective 4.2 Identify the types of contracts that are within the scope of IFRS 15 a.

I, II only b.

II, III and IV only c.

I, III and IV only *d.

I, II, III and IV

30

3.

Which of the following contracts with customers to provide goods or services in the ordinary course of business are included within the scope of IFRS 15?

I II III

IV

lease contracts accounted for under IAS 17 Leases; insurance contracts accounted for under IFRS 4 Insurance Contracts; financial instruments and other contractual rights or obligations accounted for under IFRS 9 Financial Instruments or IAS 39 Financial Instruments: Recognition and Measurement, IFRS 10 Consolidated Financial Statements, IFRS 11 Joint Arrangements, IAS 27 Separate Financial Statements and IAS 28 Investments in Associates and Joint Ventures non-monetary exchanges between entities in the same line of business to facilitate sales to customers or potential customers.

Learning Objective 4.2 Identify the types of contracts that are within the scope of IFRS 15 a.

I., II. and III. b.

III. only c.

I., II. and IV. *d. None of the above

4.

According to IFRS 15, an entity will recognise revenue at an amount that reflects the consideration to which the entity expects to be entitled in exchange for transferring goods or services to a customer, which requires entities to apply a five-step model as follows: Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 1. Identify the contract(s) with a customer a.

2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Recognise revenue when (or as) the entity satisfies a performance obligation 5. Allocate the transaction price to the performance obligations in the contract b.

1. Identify the performance obligations in the contract 2. Identify the customer 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when (or as) the entity satisfies a performance obligation

*c.

1. Identify the contract(s) with a customer 2. Identify the performance obligations in the contract 3. Determine the transaction price 4. Allocate the transaction price to the performance obligations in the contract 5. Recognise revenue when (or as) the entity satisfies a performance obligation

d.

None of the above

5.

In which circumstances arrangements with customers are contracts within the scope of IFRS 15?

I.

the contract might be approved by all parties in writing, or in accordance with other customary business practices, II. the parties are committed to carrying out their respective obligations; III. the entity cannot identify the rights of each party with regard to the goods or services that are to be transferred under the contract; IV. the entity cannot identify the payment terms for the goods or services to be transferred; V. the entity has completed performing all of its obligations under the contract and has received all, or substantially all, of the consideration promised by the customer.

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 a.

I., II. and III. b.

II. and V. c.

I., II. and IV. *d. None of the above

6.

According to IFRS 15, which method should be used to estimate the stand-alone selling prices?

I. II. III.

Adjusted market assessment approach.

Expected cost plus a margin approach.

Residual approach, in limited circumstances.

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 *a. I., II. and III. b.

I. and II. c.

II. and III. d.

None of the above

32

7.

Blue Marine Limited sells boats and provides mooring facilities for its customers. Blue Marine sells the boats for €60,000 each and provides mooring facilities for €10,000 per year. Blue Marine sells these goods and services separately; therefore, they are distinct and accounted for as separate performance obligations. Blue Marine enters into a contract to sell a boat and one year of mooring services to a customer for €65,000.

Blue Marine Limited will allocate the transaction price of €65,000 to the performance obligations as follows:

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 Boat Mooring services a. €65,000 Nil b.

Nil €65,000 c. €55,000 €10,000 *d. €55,714 €9,286

8.

Seller enters into a contract with a customer to sell Products A, B and C for a total transaction price of £100,000. Seller regularly sells Product A for £25,000 and Product B for £45,000 on a stand-alone basis. Product C is a new product that has not been sold previously, has no established price, and is not sold by competitors in the market.

Products A and B are not regularly sold together at a discounted price. Product C is delivered on 1 March, and Products A and B are delivered on 1 April.

How should Seller determine the stand-alone selling price of Product C? Seller can use the residual approach to estimate the stand-alone selling price of Product C, because Seller has not previously sold or established a price for Product C. II. Prior to using the residual approach, Seller should assess whether any other observable data exists to estimate the stand-alone selling price. For example, although Product C is a new product, Seller might be able to estimate a stand-alone selling price through other methods, such as using expected cost plus a margin.

III. Seller has observable evidence that Products A and B sell for £25,000 and £45,000 respectively, for a total of £70,000. The residual approach results in an estimated stand-alone selling price of £30,000 for Product C (£100,000 total transaction price less £70,000).

I.

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 *a. I., II. and III. b.

I. and II. c.

II. and III. d.

None of the above

9.

According to IFRS 15, the methods for recognising revenue on arrangements involving the transfer of goods or services over time are: I. II.

Output methods Residual method

III. Input methods IV. Adjusted assessment method

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 a. I., II. and III. b. I. and IV. *c. I. and III. d. II., III. and IV.

10.

Construction Co lays railroad track and enters into a contract with Railroad to replace a stretch of track for a fixed fee of €100,000. All work in process is the property of Railroad.

Construction Co has replaced 75 units of track out of 100 total units of track to be replaced by year end. The effort required of Construction Co is consistent across each of the 100 units of track to be replaced.

Construction Co determines that the performance obligation is satisfied over time, as Railroad controls the work in process asset being created.

Construction Co should recognise revenue totalling:

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 a. €100,000. *b. €75,000 c. €25,000 d. €175,000

34

11.

In 2024 Contractor enters into a contract with Government to build an aircraft carrier for a fixed price of €4 billion. The contract contains a single performance obligation that is satisfied over time.

Additional contract characteristics are:  

Total estimated contract costs are €3.6 billion, excluding costs related to wasted labour and materials.

Costs incurred in year one are €740m, including €20m of wasted labour and materials.

Contractor concludes that the performance obligation is satisfied over time, because Government controls the aircraft carrier as it is created. Contractor also concludes that an input method using costs incurred relative to total cost expected to be incurred is an appropriate measure of progress towards satisfying the performance obligation.

How much revenue and cost should Contractor recognise as of the end of 2024?

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 Revenue Cost *a. €800m €740m b. €800m €760m c. €800m €720m d. €760m €740m

12.

Equipment Dealer enters into a contract to deliver construction equipment to Landscaping Inc. Equipment Dealer operates in a country where it is common to retain title to construction equipment and other heavy machinery as protection against non-payment by a buyer.

Equipment Dealer‘s normal practice is to retain title to the equipment until the buyer pays for it in full. Retaining title enables Equipment Dealer to more easily recover the equipment if the buyer defaults on payment.

Equipment Dealer concludes that there is one performance obligation in the contract that is satisfied at a point in time when control transfers. Landscaping Inc has the ability to use the equipment and move it between various work locations once it is delivered.

Normal payment and credit terms apply.

When should Equipment Dealer recognise revenue for the sale of the equipment?

Learning Objective 4.3 Apply the five-step model for measuring and recognising revenue under IFRS 15 a. when entering the contract *b. upon delivery c. when full payment is made d. none of the above

13.

Biotech licenses intellectual property (IP) to an early-stage drug compound to Pharma.

Biotech also provides research and development (R&D) services as part of the arrangement. Biotech is the only vendor able to provide the R&D services based on its specialised knowledge of the technology.

How is this arrangement defined?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 a. licence b. distinct licence *c. non distinct licence d. patent

14.

Software Co provides a perpetual software licence to Engineer. Software Co will also install the software as part of the arrangement. Software Co offers the software licence to its customers with or without installation services, and Engineer could select a different vendor for installation. The installation does not result in significant customisation or modification of the software.

How is this arrangement defined?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 a. patent *b. distinct licence c. non distinct licence d. trademark

15.

Web Co operates a website selling used books. Web Co enters into a contract with Bookstore, a used bookshop, to sell books sold by Bookstore. The terms and conditions of the contract include:      

Web Co will transport the books sold to the end customer.

Web Co does not take possession of the books sold to the customers; however, the customer returns the books to Web Co if they are dissatisfied.

Web Co has the right to return books to Bookstore without penalty if they are returned by the customer.

Web Co will invoice the customer for the sale.

Web Co earns a fixed margin on the books sold, and has no flexibility in establishing the sales price of the book.

Bookstore retains credit risk for sales to the customer.

Web Co should recognise revenue on the transfer of the books to the customer: Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 a. on a gross basis *b. on a net basis c. on a gross basis as Bookstore retains all credit risk d. on a net basis as Web Co does not set the sales price

36

16.

Travel Co negotiates with major airlines to obtain access to airline tickets at reduced rates, and it sells the tickets to its customers through its website. Travel Co contracts with the airlines to buy a specific number of tickets at agreed rates and must pay for those tickets regardless of whether it is able to resell them. Customers visiting Travel Co‘s website search Travel Co‘s inventory of tickets, and Travel Co has latitude to set the prices for the tickets that it sells to its customers.

Customers pay for airline tickets using credit cards, and Travel Co is the merchant of record. Credit card charges are pre-authorised; however, Travel Co incurs occasional losses as a result of disputed charges.

Travel Co is responsible for delivering the ticket to the customer. Travel Co will also assist the customer in resolving complaints with the service provided by the airlines. The airline is responsible for fulfilling all other obligations associated with the ticket, including the air travel and related services (that is, the flight), and remedies for service dissatisfaction.

Travel Co should recognise revenue:

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 a. for the ticket price agreed with the airlines *b. for the fee charged to customers on a gross basis c. for the fee charged to customers net of the amounts paid to the airlines d. for the fee charged to customers net of credit card charges

17.

Data Co enters into a two-year contract with a customer to build a data centre in exchange for consideration of €1m.

Data Co incurs incremental costs to obtain the contract and costs to fulfil the contract that are recognised as assets and amortised over the expected period of benefit.

The economy subsequently deteriorates, and the parties agree to renegotiate the pricing in the contract, resulting in a modification of the contract terms.

The remaining amount of consideration to which Data Co expects to be entitled is €650,000. The carrying value of the asset recognised for contract costs is €600,000. An expected cost of €150,000 would be required to complete the data centre.

How should Data Co account for the asset after the contract modification?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 *a. Data Co should recognise an impairment loss of C100,000. b. Data Co should record the contract asset for €1m. c. The carrying value of the asset recognised for contract cost should be €500,000 (€650,000 less €150,000). d. Data Co should recognise an impairment loss of €150,000.

18.

On 1 January 2024, Producer enters into a contract to deliver a product to Customer on 31 March 2024. The contract is non-cancellable and requires Customer to make an advance payment of €5,000 on 1 February 2024. Customer does not pay the consideration until 1 March.

How should Producer reflect the transaction in the statement of financial position?

Learning Objective 4.5 Identify other significant application issues associated with IFRS 15 a.

1 February 2024 Dr Trade Receivables €5,000 Cr Contract Liability €5,000 31 March 2024 Dr Contract Liability Cr Revenue *b.

c.

€5,000 €5,000

1 February 2024 Dr Trade Receivables Cr Contract Liability

€5,000 €5,000

1 March 2024 Dr Cash Cr Trade Receivables

€5,000

31 March 2024 Dr Contract Liability Cr Revenue

€5,000

€5,000

€5,000

1 January 2024 Dr Trade Receivables Cr Contract Liability

€5,000 €5,000

1 February 2024 Dr Cash Cr Trade Receivables

€5,000

31 March 2024 Dr Contract Liability Cr Revenue

€5,000

€5,000

€5,000

d. None of the above

38

19.

Which of the following disclosure are required by IFRS 15?

Total income, allocated between revenue and other gains qualitative and quantitative information about contracts with customers qualitative and quantitative information about any assets recognised from the costs to obtain or fulfil a contract with a customer IV. the opening and closing balances of receivables, contract assets and contract liabilities from contracts with customers, if not otherwise separately presented or disclosed I. II. III.

Learning Objective 4.6 Explain the presentation and disclosure requirements of IFRS 15 a. I and II only *b. II, III and IV only c. I, II and III only d. I, II, III and IV

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

40

CHAPTER 5 Provisions, contingent liabilities and contingent assets Learning Objectives 5.1

Describe the background to IAS 37

5.2

Identify which items are included within the scope of the standard

5.3

Outline the concept of a provision

5.4

Discuss how to distinguish provisions from other liabilities

5.5

Outline the concept of a contingent liability

5.6

Describe how to distinguish a provision from a contingent liability

5.7

Explain when a provision should be recognised

5.8

Explain how a provision, once recognised, should be measured

5.9

Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations

5.10

Outline the concept of a contingent asset

5.11

Describe the disclosure requirements for provisions, contingent liabilities and contingent assets

5.12

Compare the requirements of IFRS 3 regarding contingent liabilities with those of IAS 37

5.13

Explain the expected future developments for IAS 37.

Multiple Choice Questions

1.

Provisions in relation to which of the following balances are within the scope of IAS 37?

Learning Objective 5.2 Identify which items are included within the scope of the standard *a. warranties b. employee benefits c. financial instruments d. operating leases

2.

The uncertainty that exists in relation to provisions is one of: Learning Objective 5.3 Outline the concept of a provision a. timing b. amount c. timing and amount *d. timing or amount

3.

Which of the following is an example of a provision falling within the scope of IAS 37?

Learning Objective 5.4 Discuss how to distinguish provisions from other liabilities a. accruals *b. onerous contracts c. employee benefits d. future operating losses

4.

An event that gives rise to a present obligation, but which cannot be measured with sufficient reliability is an example of a: Learning Objective 5.5 Outline the concept of a contingent liability a. liability b. accrual c. provision *d. contingent liability

5.

Entity A has provided a bank guarantee to a bank in relation to a loan provided to entity B. Entity B is solvent and shows no signs of defaulting on the loan. The treatment of the bank guarantee in the records of entity A is to: Learning Objective 5.6 Describe how to distinguish a provision from a contingent liability a. recognise a liability b. recognise a provision *c. recognise a contingent liability d. do nothing

42

6.

Provisions shall be recognised when: I an entity has a present obligation II it is possible that an outflow of resources will be required to settle the obligation III the amount of the obligation can be reliably estimated IV there has been a past event Learning Objective 5.7 Explain when a provision should be recognised a.

I, II and III b.

II, III and IV *c.

I, III and IV d.

I, II and IV

7.

Liabilities which fail the recognition criteria and where the possibility of an outflow is remote should: Learning Objective 5.7 Explain when a provision should be recognised a. be recognised as an accrual b. be recognised as a provision c. be recognised as a contingent liability *d. not be recognised in the financial statement at all

8.

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?

Learning Objective 5.8 Explain how a provision, once recognised, should be measured *a. $132 563; b. $140 510; c. $150 000; d. $159 000.

9.

According to IAS 37, when providing for the future, a future event such as the clean-up of a contaminated site, gains and other cash inflows that are expected to arise on the sale of asset related to the clean-up, must be treated as follows: Learning Objective 5.8 Explain how a provision, once recognised, should be measured a. set-off against the provision for the clean-up; *b. measured separately of the provision; c. recognised directly in equity in the period in which the cash inflows arose; d. recognised as a deferred asset.

10.

Purcell Limited is a manufacturer of swimming pools and provides its customers with warranties at the time of sale. The warranty applies for three years from the date of sale.

Past experience shows that there will be some claims under the warranties. The appropriate treatment of this item under IAS 37 Provisions, Contingent Liabilities and Contingent Assets, is to: Learning Objective 5.8 Explain how a provision, once recognised, should be measured a. disclose in the notes, but do not recognise in the financial statements; *b. recognise the best estimate of costs as a provision; c. charge the costs directly to profit or loss in the period in which the economic outflows occur; d. transfer the expected amount of the warranty from retained earnings to a special reserve account in equity.

11.

A railway company is required, under law, to overhaul its rail-tracks every three years as a safety measure. The appropriate treatment of this event for the purposes of preparing financial statements is: Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations a. recognise as a provision for future maintenance costs; *b. estimate the future maintenance costs and charge as depreciation over the next three years; c. disclose in the notes as a contingent liability, but do not recognise; d. estimate the future cash outflows and discount to determine the amount to be recognised as a deferred liability.

12.

The following is statement made in IAS 37: ‗a contract in which the unavoidable costs of meeting the obligations under the contract exceed the economic benefits expected to be received under it‘.

This statement provides a definition of: Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations *a. an onerous contract; b. a deferred liability; c. a future operating loss; d. a present obligation.

44

13.

McCann Limited announced its plans for a major restructuring of its operations. Under IAS 37, the entity is able to: Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations a. capitalise all direct and indirect restructuring costs; b. set up a provision for the best estimate of all restructuring costs; *c. provide only for restructuring costs that are directly and necessarily caused by the restructuring; d. provide for restructuring costs that are associated with the ongoing activities of the entity.

14.

According to IAS 37, the appropriate accounting treatment for future operating losses is to: Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations a. determine a reasonable estimate of the cost and provide for the future liability; b. determine the cost and charge it directly against retained earnings; *c. not recognise such items in the financial statements; d. measure on the basis of estimated future cash flows.

15.

The following statement, contained in IAS 37, defines: ‘a possible asset that arises from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the entity’ Learning Objective 5.10 Outline the concept of a contingent asset a. a deferred liability; b. a contingent liability; c. a deferred asset; *d. a contingent asset.

16.

At balance sheet date, Raschella Limited was awaiting the final details of a court case for damages awarded in its favour. The amount and possible receipt of damages is unknown and will not be decided until the court sits again in several months‘ time. How is this event dealt with in the preparation of the financial statements?

Learning Objective 5.10 Outline the concept of a contingent asset a. do not recognise or disclose in the financial statements as the possibility of receiving damages is remote; b. recognise as an asset in the financial statements as the receipt of damages is probable; *c. disclose in the notes to the financial statements as it is possible that the entity will receive the damages and the court decision is out of its control; d. recognise as a deferred asset in the statement of financial position and re-classify as a non-current asset when the court decision is known.

17.

According to IAS 37, the appropriate treatment for a contingent asset in the financial statements of an entity is: Learning Objective 5.10 Outline the concept of a contingent asset *a. disclosure of information in the notes, but do not recognise in the financial statements; b. recognition in the financial statements, and note disclosure; c. recognition in the financial statements, but no further disclosure in the notes; d. do not recognise in the financial statements, and do not disclose in the notes.

18.

In respect to a contingent liability, IAS 37 requires disclosure of Learning Objective 5.11 Describe the disclosure requirements for provisions, contingent liabilities and contingent assets a. any increase in the contingent liability during the period; *b. an estimate of its financial effect; c. the carrying amount at the beginning and end of the period; d. an indication of the uncertainties about the amount or timing of expected outflows.

19.

For each class of provision, an entity is required by IAS 37 to disclose the following information: I The carrying amount at the beginning and end of the period.

II Amounts incurred and charged against the provision during the period.

III Comparative information.

IV Unused amounts reversed during the period.

VAdditional provisions made during the period.

Learning Objective 5.11 Describe the disclosure requirements for provisions, contingent liabilities and contingent assets *a.

I, II, IV and V only; b.

I, II, and III only; c.

II, III and IV only; d.

I, III, IV and V only.

20.

The June 2005 Exposure Draft issued in relation to proposed changes to IAS 37: Learning Objective 5.13 Explain the expected future developments for IAS 37 a. will be issued as a standard applicable for reporting periods ending on or after 1 June 2014 b. has been withdrawn by the IASB *c. is still under consideration by the IASB d. is already applicable

46

21.

Which of the following is not within the scope of IAS 37?

Learning Objective 5.2 Identify which items are included within the scope of the standard. a.

The treatment of future operating losses b.

The treatment of contingent assets *c.

The treatment of restructuring provisions arising from a business combination d.

The treatment of onerous contracts

22.

An example of where an entity has a present obligation is: Learning Objective 5.3 Outline the concept of a provision. *a. a public announcement made by an entity‘s management to undertake restructuring. b. a recommendation from the HR manager to the Board as to the level of bonuses to be paid at year end. c. a historical pattern of performing a major overhaul of machinery every two years. d. the declaration of a dividend by directors which is required to be ratified at a meeting of shareholders

23.

Which of the following statements is correct?

Learning Objective 5.3 Outline the concept of a provision. a.

A present obligation is an example of a legal obligation. b.

A legal obligation is an example of a constructive obligation. c.

A constructive obligation is an example of an equitable obligation. *d.

An equitable obligation is an example of a present obligation.

24.

Which of the following statements is correct?

Learning Objective 5.4 Discuss how to distinguish provisions from other liabilities. *a. a provision is a class of liabilities b. a contingent liability is a class of liabilities c. a provision is a class of contingent liabilities d. contingent liabilities and provisions are classes of liabilities

25.

A contingent liability is defined as a: possible obligation that arises from past events possible obligation whose existence will be confirmed by the occurrence of an uncertain future event

I

II

III

IV

Yes

Yes

No

No

Yes

No

Yes

No

Learning Objective 5.5 Outline the concept of a contingent liability. *a.

I; b.

II; c.

III; d.

IV.

26.

Contingent liabilities are: Learning Objective 5.6 Describe how to distinguish a provision from a contingent liability. a. recognised in the financial statements unless the possibility of an outflow in settlement is remote. *b. recognised in the notes to the financial statements unless the possibility of an outflow in settlement is remote. c. recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote. d. not recognised in the notes to the financial statements because the possibility of an outflow in settlement is remote.

27.

An entity sells goods under warranty and past experience shows that minor defects account for 10% of sales and major defects account for 2% of sales. If all minor defects were repaired the warranty cost would be €300 000, and if all major defects were repaired the warranty cost would be €800 000. The expected value of the warranty cost is: Learning Objective 5.8 explain how a provision, once recognised, should be measured. a. €0; b. €22 000; *c. €46 000; d. €86 000.

28.

The costs under an onerous contract are measured using which valuation method?

Learning Objective 5.9 Apply the definitions, recognition and measurement criteria for provisions and contingent liabilities to practical situations. a. the lower of cost or net market value; *b. the lower of the cost of fulfilling the contract and the penalties arising from failure to fulfil the contract; c. the present value method using a risk-free discount rate; d. the unavoidable costs of meeting the obligations discounted by reference to market yields at reporting date.

29.

Entities are not required to disclose which of the following in relation to provisions?

Learning Objective 5.11 Describe the disclosure requirements for provisions, contingent liabilities and contingent assets. a. carrying amounts of provisions at the beginning of the period b. amounts used during the period c. the effect of any change in the discount rate used *d. comparatives

48

30.

The June 2005 exposure draft issued in relation to IAS 37 proposed changes to: I II III IV

the name of the standard recognition and measurement criteria the definition of contingencies the method of disclosure for provisions

Learning Objective 5.13 Explain the expected future developments for IAS 37. *a.

I, II and III b.

II, III and IV c.

I, III and IV d.

I, II and IV

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by

John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

50

CHAPTER 6 Income taxes Learning Objectives 6.1 6.2

Understand the nature of income tax Understand differences in accounting treatments and taxation treatments for a range of transactions 6.3 Explain the concept of tax-effect accounting 6.4 Calculate and account for current taxation expense 6.5 Discuss the recognition requirements for current tax 6.6 Account for the payment of tax 6.7 Explain the nature of and accounting for tax losses 6.8 Calculate and account for movements in deferred taxation accounts 6.9 Apply the recognition criteria for deferred tax items 6.10 Account for changes in tax rates 6.11 Account for amendments to prior year taxes and identify other issues 6.12 Explain the presentation requirements of IAS 12 6.13 Implement the disclosure requirements of IAS 12.

Multiple Choice Questions 1.

Generally, when considering the differences between the accounting treatment and the income tax treatment of a particular item the accounting treatment is based on: Learning Objective 6.1 Understand the nature of income tax a. cash flows; b. cash flows adjusted for depreciation charges; *c. accrual accounting and is subject to the requirements of accounting standards; d. the income tax legislation.

2.

The following information relates to Godfrey Limited for the year ended 30 June 2024: Accounting profit before income tax (after all expenses have been included) £300 000 Fines and penalties (not tax deductible) 20 000 Depreciation of plant (accounting) 40 000 Depreciation of plant (tax) 100 000 Long-service leave expense (not a tax deduction until the leave is paid) 8 000 Income tax rate 30% On the basis of this information the current tax liability is: Learning Objective 6.4 calculate and account for current taxation expense a. £74 400; b. £78 000; *c. £80 400; d. £99 600.

3.

Differences between the carrying amounts of an entity‘s net assets determined under accounting standards, and the tax bases of those net assets, are described as: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts *a. temporary differences; b. permanent differences; c. tax losses; d. the current income tax liability.

4.

A taxable temporary difference is expected to lead to the payment of: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a. more tax in the future and gives rise to a deferred tax asset; b. less tax in the future and gives rise to a deferred tax asset; *c. more tax in the future and gives rise to a deferred tax liability; d. less tax in the future and gives rise to a deferred tax liability.

5.1

5.

A deductible temporary difference is expected to lead to the payment of: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a. more tax in the future and gives rise to a deferred tax asset; *b. less tax in the future and gives rise to a deferred tax asset; c. more tax in the future and gives rise to a deferred tax liability; d. less tax in the future and gives rise to a deferred tax liability.

6.

CTT Limited has an asset which cost $300 with related accumulated depreciation of $100.

The accumulated depreciation for tax purposes is $180 and the company tax rate is 30%.

The tax base of this asset is: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts *a. $120; b. $220; c. $80; d. $20.

7.

At what point in time are deferred tax accounting adjustments recorded?

Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a.

As each transaction arises or is incurred; b.

As the cash flows from each transaction occur; c.

At the end of each month; *d. At the reporting date.

8.

Under IAS 12 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a. applied at the beginning of the reporting period; b. at the end of the reporting period; c. at the rates that prevail at the reporting date; *d. are expected to apply when the asset is realised or the liability is settled.

9.

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: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts *a. a deductible temporary difference of $10 000; b. an taxable temporary difference of $10 000; c. a tax base of $10 000; d. a future deductible amount of $0.

2

10.

The following information was extracted from the financial records of Pamakari Limited: Equipment purchased on 1 July 2015 for $100 000 (accounting depreciation 10% straight line tax depreciation 20% straight line). If the company tax rate is 30%, the deferred tax item that will be recorded by Pamakari Limited at 30 June 2024 is: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a. debit Deferred tax asset $3000; b. credit Deferred tax asset $3000; c. debit Deferred tax liability $3000; *d. credit Deferred tax liability $3000.

11.

Malarky Limited accrued €30 000 for employees‘ long service leave in the year ended 30 June 2024. This item will not be tax deductible until it is paid in approximately 10 years‘ time. If the company tax rate is 30%, Malarky Limited must record the following tax effect adjustment at the reporting date: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts *a. debit Deferred tax asset €9000; b. debit Deferred tax liability €9000; c. credit Deferred tax asset €9000; d. credit Deferred tax liability €9000.

Use the information below to answer questions 12 and 13.

A company commenced business on 1 July 2014. On 30 June 2015, an extract of the statement of financial position prepared for internal purposes, but excluding the effect of income tax, disclosed the following information: Assets Cash Inventory Plant Accumulated depreciation

£40 000 100 000 300 000 (30 000)

Liabilities Trade payables Long service leave

£80 000 5 000

Additional information: 1.

The plant was acquired on 1 July 2014. Depreciation for accounting purposes was 10% (straight-line method), while 15% (straight-line) was used for tax purposes.

2.

The tax rate is 30%.

Using the following worksheet, determine the deferred tax asset and deferred tax liability.

5.3

Carrying amount

Future taxable amount

Future deductibl e amount

Tax base

Taxable temporary differences

Deductible temporary differences

Assets Cash Inventory Plant Liabilities Trade payables Long-service leave

Deferred tax liability Deferred tax asset

12.

The deferred tax liability is: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a. £1500; *b. £4500; c. £15 000; d. £34 500.

13.

The deferred tax asset is: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts *a. £1500; b. £4500; c. £5000; d. £25 500.

14.

In jurisdictions where the impairment of goodwill is not tax deductible, IAS 12 Income Taxes: Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts *a. does not permit the application of deferred tax accounting to goodwill; b. allows the recognition of a deferred tax item in relation to goodwill; c. requires that any deferred tax items in relation to goodwill be recognised directly in equity; d. requires that any deferred tax items for goodwill be capitalised in the carrying amount of goodwill.

4

15.

On 1 April 2015, the company rate of income tax was changed from 35% to 30%. At the previous reporting date (30 June 2014) Montgomery Limited had the following tax balances:  

Deferred tax assets Deferred tax liabilities

$26 250 $21 000

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

Learning Objective 6.10 Account for changes in tax rates *a. increase $750; b. decrease $750; c. increase $875; d. decrease $875.

16.

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

Deferred tax assets Deferred tax liabilities

€12 000 €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: Learning Objective 6.10 Account for changes in tax rates a.

DR €6000; b.

DR €4500; c.

CR €6000; *d. CR €4500.

17.

Tax losses can be viewed as providing: Learning Objective 6.7 Explain the nature of and accounting for tax losses a. taxable temporary differences, and therefore a current tax liability; b. taxable temporary differences, and therefore a current tax refund; *c. deductible temporary differences, and therefore a deferred tax asset; d. deductible temporary differences, and therefore deferred tax liabilities.

18.

The tax expense related to profit or loss of the period is required to be presented: Learning Objective 6.12 Explain the presentation requirements of IAS 12. a. on the face of the statement of financial position; *b. on the face of the statement of profit or loss and other comprehensive income; c. in the statement of cash flows; d. in the statement of changes in equity.

19.

Unless a company has a legal right of set-off, IAS 12 Income Taxes, requires disclosure of all of the following information for deferred tax in the statement of financial position: I The amount of deferred tax assets recognised II The amount of the deferred tax liabilities recognised III The net amount of the deferred tax assets and liabilities recognised IV The amount of the deferred tax asset relating to tax losses

5.5

Learning Objective 6.12 Explain the presentation requirements of IAS 12 *a. I, II and IV only; b.

I, II and III only; c.

III and IV only; d.

IV only.

20.

During the year ended 30 June 2015 Barry Ltd, pays quarterly tax instalments as follows: €4000 on 28 October 2014 €11 000 on 28 February 2015 €12 000 on 28 April 2015 On 30 June 2015, Barry Ltd determines its total current tax liability for the year to be €33 000.

The final tax instalment for the year will be: Learning Objective 6.6 Account for the payment of tax a. a refund of €2000; *b. a payment of €6000; c. a payment of €12 000; d. a payment of €33 000.

21.

According to IAS 12, current tax for current and prior periods shall, to the extent unpaid, be recognised as a: Learning Objective 6.5 Discuss the recognition requirements for current tax a.

Note to the financial statements; b.

Contingent liability; *c. Liability; d.

Expense.

22.

The tax effect method of accounting for a company‘s income tax is based on an assumption that: Learning Objective 6.3 Explain the concept of tax-effect accounting a. income tax expense is equal to income tax payable; b. an accounting balance sheet and a tax balance sheet are the same; c. a tax balance sheet is prepared according to accounting standards; *d. income tax expense is not equal to current tax liability.

23.

Current tax consequences of business operations give rise to: Learning Objective 6.2 Understand differences in accounting treatments and taxation treatments for a range of transactions a. a deferred liability for income tax payable; *b. a current liability for income tax payable; c. a non-current liability for taxes payable; d. a contingent liability for taxes payable.

6

24

When assessing the probability that a deferred tax asset from a tax loss can be recognised an entity should consider: Learning Objective 6.9 Apply the recognition criteria for deferred tax items a. whether the unused tax losses result from identifiable causes which are likely to recur; *b. whether tax planning opportunities are available to the entity that will create sufficient future taxable profits to recover the tax losses; c. whether it is guaranteed that the entity will have future taxable profits before the tax losses expire; d. whether the entity has sufficient deductible temporary differences which will result in taxable amounts in future so that the tax losses can be used.

25.

Which of the following disclosures are optional under IAS 12?

Learning Objective 6.13 Implement the disclosure requirements of IAS 12 a. the major components of income tax expense; b. the aggregate current tax or deferred tax that arises relating to items that are charged or credited directly to equity; c. the amount of deductible temporary differences and unused tax losses, for which no deferred tax asset is recognised in the statement of financial position; *d. a numerical reconciliation between the average effective tax rate and the applicable tax rate, disclosing also the basis of calculating the applicable tax rate.

26.

If a taxation authority amends a company‘s assessment, the company should: Learning Objective 6.11 Account for amendments to prior year taxes and identify other issues a.

Debit income tax expense if more tax needs to be paid; b.

Credit income tax expense if less tax needs to be paid; *c. Analyse the reason for the adjustment and consider whether both current and deferred tax are affected; d.

Treat the adjustment as a prior period adjustment.

27.

Carry-forward tax losses create: Learning Objective 6.7 Explain the nature of and accounting for tax losses a. a deductible temporary difference and therefore a deferred tax asset in that the company will pay more tax on future taxable profits; b. a taxable temporary difference and therefore a deferred tax asset in that the company will pay less tax on future taxable profits; c. a deductible temporary difference and therefore a deferred tax liability in that the company will pay more tax on future taxable profits; *d. a deductible temporary difference and therefore a deferred tax asset in that the company will pay less tax on future taxable profits.

28.

To the extent that tax payable exists and has NOT yet been paid, a company will recognise: Learning Objective 6.2 Understand differences in accounting treatments and taxation treatments for a range of transactions a. current tax asset; b. non-current asset;

5.7

c. *d.

non-current liability; current tax liability.

29.

Beta Limited has an accounting profit before tax of €200 000. All of the following items have been included in the accounting profit: depreciation of equipment €30 000 (tax deductible depreciation is €20 000); entertainment expenses €15 000 (non-deductible for tax purposes); Long service leave expense provided €6000 (no employee took long service leave during the year). The tax rate is 30%. The amount of current tax liability is: Learning Objective 6.4 Calculate and account for current taxation expense a. €81 300; b. €50 700; *c. €69 300; d. €38 700.

30.

ABC Limited has an asset with a carrying value of €50 000. The tax base of this asset is €40 000. The tax rate is 30%. As a result, which of the following deferred tax items does Roland Limited have?

Learning Objective 6.8 Calculate and account for movements in deferred taxation accounts a.

A deferred tax asset of €10 000; *b. A deferred tax liability of €3000; c.

A deferred tax liability of €10 000; d.

A deferred tax asset of €3000.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

8

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

5.9

CHAPTER 7 Financial Instruments Learning Objectives 7.1 7.2 7.3 7.4 7.5 7.6 7.7 7.8 7.9 7.10 7.11 7.12 7.13 7.14

describe the background to the development of accounting standards on financial instruments define a financial instrument outline and apply the definitions of financial assets and financial liabilities distinguish between equity instruments and financial liabilities explain the concept of a compound financial instrument determine the classification of revenues and expenses arising from financial instruments describe the scope of IFRS 9 explain the concept of an embedded derivative distinguish between the categories of financial instruments specified in IFRS 9 apply the recognition criteria for financial instruments understand and apply the measurement criteria for each category of financial instrument determine when financial assets and financial liabilities may be offset outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges describe the main disclosure requirements of IFRS 7.

10

Multiple Choice Questions

1.

When first issued, IAS 39 was: Learning Objective 7.1 Describe the background to the development of accounting standards on financial instruments *a.

More rule-based than other AASB standards b.

Less rule-based than other AASB standards c.

Wider in scope that other AASB standards d.

Narrower in scope that other AASB standards

2.

Which of the following is NOT an example of a derivative financial instrument?

Learning Objective 7.4 Explain the concept of a derivative a.

A forward exchange contract *b.

A commercial bill contract c.

A futures contract d.

An option contract

3.

Company A issues preference shares to Company B, the terms of which entitle party B to redeem the preference shares for cash if Company A‘s revenues fall below a specified level. From Company A‘s perspective the preference shares are: Learning Objective 7.4 Distinguish between equity instruments and financial liabilities a. an equity instrument *b. a financial liability c. a compound financial instrument d. a financial asset

4.

Which of the following items is classified as a financial asset?

Learning Objective 7.3 Outline and apply the definitions of financial assets and financial liabilities a. ordinary shares of the issuer; b. loans payable (owed by the borrower); *c. accounts receivable; d. inventory.

5.

All of the following would be regarded as financial instruments except: Learning Objective 7.2 Define a financial instrument a. bank overdraft; b. notes payable; c. cash; *d. equipment.

5.11

6.

Which of the following items are regarded as a financial liability?

Learning Objective 7.3 Outline and apply the definitions of financial assets and financial liabilities a. ordinary shares held in another entity; *b. a contract that is a non-derivative for which the entity is obliged to deliver a variable number of its own equity instruments; c. a contractual right to exchange under potentially favourable conditions, an option to purchase shares below the market price; d. the right of a depositor to obtain cash from a financial institution with which it has deposited cash.

7.

Which of the following are regarded as financial instruments: I Deposits held by a financial institution; II Ordinary shares; III Raw materials inventories; IV Property, plant and equipment.

VAccounts receivable and accounts payable.

Learning Objective 7.2 Define a financial instrument a.

I, II, IV and V only; b.

II, III and IV only; *c.

I, II and V only; d.

I, IV and V only.

8.

Company A issued convertible notes 3 years ago and accounted for them as a compound financial instrument. Complete the following: At the end of the three year period the portion of the (1) component that relates to the notes which have been converted (2) .

Learning Objective 7.5 Explain the concept of a compound financial instrument (1) (2) a. equity is transferred to profit & loss b. liability remains as a liability *c. liability is transferred to equity d. liability is transferred to profit & loss

12

9.

Company A has convertible notes on issue. These notes are convertible to ordinary shares of the Company after 3 years. The distributions made to the note holders by Company A are classified by Company A as follows: Learning Objective 7.5 Explain the concept of a compound financial instrument a. interest expense. b. dividends distributed. *c. a portion representing interest expense and a portion representing dividends distributed d. indeterminable based on the information provided.

10.

Which of the following events provide objective evidence that a financial asset has been impaired: I A default in interest payments.

II The borrower enters into bankruptcy.

III Significant financial difficulty of the issuer.

IV The downgrade of an entity‘s credit rating.

Learning Objective 7.11 understand and apply the measurement criteria for each category of financial instrument *a.

I, II and III only; b.

II, III and IV only; c.

I, III and IV only; d.

II and IV only.

11.

IFRS 9 requires that on initial recognition financial liabilities must be measured at: Learning Objective 7.11 understand and apply the measurement criteria for each category of financial instrument a. fair value; *b. fair value minus transaction costs; c. fair value plus transaction costs; d. discounted future net cash flows.

12.

The formal documentation of a hedging relationship must include identification of: I

The hedging instrument The hedged item No The nature of the risk being hedged How the entity will assess hedge effectiveness

No

II No

III No No

IV Yes Yes

Yes Yes

Yes Yes

Yes No

Yes Yes

No

Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges a.

I; b.

II; *c.

III; d.

IV.

5.13

13.

To be regarded as ‗highly effective‘ in achieving offsetting changes in fair value or cash flows, actual hedge results must be in the range: Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges a.

70% - 100%; *b.

80% - 125%; c.

90% - 100%; d.

20% - 50%.

14.

Whitnall Limited lost $150 on a hedging instrument and had a corresponding gain on the hedged item of $100. The effectiveness range for the associated transactions is: Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges a.

100% - 150%; b.

20% - 30%; c.

0% - 15%; *d.

66% - 150%.

15.

The degree to which changes in the fair value or cash flows of a hedge item that are attributable to a hedge risk are offset by the changes in the fair value or cash flows of a hedging instrument, describes: Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges a. transaction exposure; b. hedge ineffectiveness; *c. hedge effectiveness; d. transaction variability.

16.

When accounting for a cash flow hedge, IFRS 9 requires that hedge ineffectiveness is: Learning Objective 7.13 Outline the rules of hedge accounting set out in IFRS 9 and be able to apply the rules to simple common cash flow and fair value hedges *a. recorded in profit or loss; b. separately recorded in equity; c. recorded separately as a financial liability; d. capitalised as a deferred asset.

14

17.

The definition of a derivative requires which of the following characteristics to be met?

I

its value must change in response to a change in an underlying variable such as a specified interest rate, price or foreign exchange rate.

II it must be settled on a net basis III it must require no initial net investment or an additional net investment that is smaller than would be required for other types of contracts with similar responses to changes in market factors.

IV it is to be settled at a future date Learning Objective 7.8 explain the concept of an embedded derivative a.

I, II and III *b.

I, III and IV c.

I, II and IV d.

II, III and IV

18.

Callas Corporation Limited buys an option that entitles it to purchase 2000 shares in Maria Limited at $5 per share at any time in the next 3 months. The derivative financial instrument in this transaction is the: Learning Objective 7.8 explain the concept of an embedded derivative a. shares in Callas Corporation Limited; b. shares in Maria Limited; c. price of the shares in Maria Limited after 3 months have elapsed; *d. option priced at $5.

19.

The classification of a financial instrument on the Statement of Financial Position of an entity is governed by the principle of: Learning Objective 7.4 Distinguish between equity instruments and financial liabilities a. legal form; b. net present value; *c. substance over form; d. forfeiture.

20.

The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to: Learning Objective 7.6 determine the classification of revenues and expenses arising from financial instruments *a. deduct from equity, net of tax; b. add to equity, net of tax; c. expense in the period incurred; d. defer as a contingent asset.

5.15

21.

When an entity has a legally enforceable right to set off the recognised amounts of a financial asset and financial liability and it intends to settle on a net basis, it: Learning Objective 7.12 determine when financial assets and financial liabilities may be offset a. can write off both the asset and the liability; *b. may offset the financial asset and liability; c. is not entitled to offset the asset and liability; d. need not present the asset, the liability or the net amount in its financial statements.

22.

The risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss is referred to as: Learning Objective 7.14 describe the main disclosure requirements of IFRS 7 a. interest rate risk; b. liquidity risk; c. market risk; *d. credit risk.

23.

Which of the following is within the scope of IFRS 9?

Learning Objective 7.7 describe the scope of IFRS 9 a. a lease obligation *b. a lease renewal option within a lease agreement c. a financial guarantee contract d. an investment in a joint venture.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

16

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

5.17

CHAPTER 8 Share-based payment

Learning Objectives 8.1 Explain the objective and scope of IFRS 2 8.2 Distinguish between cash-settled and equity-settled share-based payment transactions 8.3 Demonstrate how equity-settled and cash settled share-based payment transactions are recognised 8.4 Explain how equity-settled share-based payment transactions are measured 8.5 Explain the concept of vesting through differentiating between vesting and non-vesting conditions 8.6 Explain the concept of a share option reload feature 8.7 Explain how modifications to granted equity instruments are treated 8.8 Demonstrate how cash-settled share-based payment transactions are measured 8.9 Describe and apply the disclosure requirements of IFRS 2.

18

Multiple Choice Questions 1.

Which of the following is NOT within the scope of IFRS 2?

Learning Objective 8.1 Explain the objective and scope of IFRS 2 *a.

Transactions in which the entity receives or acquires goods or services as part of the net assets acquired in a business combination to which IFRS 3 Business Combinations applies. b.

Equity instruments granted to employees of the acquiree in a business combination in their capacity as an employee. c.

Cancellation, replacement or other modification of share-based payment arrangements because of a business combination. d.

Cancellation, replacement or other modification of share-based payment arrangements because of other equity restructuring.

2.

A share–based payment transaction in which the entity acquires goods or services by incurring liabilities to the supplier for amounts that are based on the value of the entity‘s shares or other equity instruments of the entity is classified in IFRS 2 as: Learning Objective 8.2 Distinguish between cash-settled and equity-settled share-based payment transactions a. an equity-settled share-based payment transaction *b. a cash-settled share-based payment transaction c. a liability-settled share-based payment transaction d. an ―other‖ share-based payment transaction

3.

A share–based payment transaction in which the entity receives goods or services as consideration for equity instruments of the entity is classified in IFRS 2 Share-based Payment as Learning Objective 8.2 Distinguish between cash-settled and equity-settled share-based payment transactions *a. an equity-settled share-based payment transaction b. a cash-settled share-based payment transaction c. a liability-settled share-based payment transaction d. an ―other‖ share-based payment transaction

4.

Reload features are accounted for as follows: Learning Objective 8.6 Explain the concept of a share option reload feature a. included in the fair value of the initial options granted at measurement date *b. separately from the initial options granted c. as a market condition d. as a modification to the initial terms and conditions of the initial options granted

5.19

5.

On 1 July 2015 Pepper Limited granted 500 share options to each of its 100 employees.

Each grant is conditional on the employee working for the company for the next two years. The fair value of each option is estimated to be €3.00. Pepper estimates that 8% of its employees will leave during the two year period and therefore forfeit their rights to the share options.

During the year ended 30 June 2024 five employees left. At this time the company revised its estimate of total employee departures over the full two-year period to 10%.

During the year ended 30 June 2017 a further 4 employees left.

The amount to be recognised as an expense by Pepper for the year ended 30 June 2024 is: Learning Objective 8.5 Explain the concept of vesting through differentiating between vesting and non-vesting conditions *a. €67 500 b. €69 000 c. €71 250 d. €135 000

6.

On 1 July 2013, Leo Limited granted 250 options to each of its 50 employees. The options are conditional on the employees remaining with the company for the 2 year vesting period. The options have a fair value of €10 at vesting date. In addition, the shares will vest as follows:  On 30 June 2014 if the company‘s earnings have increased by more than 15%  On 30 June 2015 if the company‘s earnings have increased by more than 12% averaged across the 2 year period At 30 June 2014 Leo‘s earnings have increased by 12% and 3 employees have left.

The company expects that earnings will continue to increase at a similar rate during the year to 30 June 2015 and that the shares will vest at that time. It also expects that a further 4 employees will leave during the year.

The remuneration expense for the year ended 30 June 2014 for Leo is: Learning Objective 8.5 Explain the concept of vesting through differentiating between vesting and non-vesting conditions a. €35 833 *b. €53 750 c. €58 750 d. €117 500

20

7.

Which of the following statements in relation to modifications to the terms and conditions on which equity instruments were granted as part of an employee share scheme is correct?

Learning Objective 8.7 Explain how modifications to granted equity instruments are treated a. a reduction in the exercise price of options will reduce the fair value of the share options b. a reduction in a performance hurdle relating to profitability targets will reduce the fair value of the options *c. a shortening of the vesting period will increase the fair value of the share options. d. an increase in the number of equity instruments granted is not an example of a modification

8.

On 1 July 2013 Diamond Ltd granted 800 share options with an exercise price of €35 to the CFO, conditional on the CFO remaining in employment with the company until 30 June 2024. The exercise price will drop to €30 if Diamond‘s earnings increase by an average of 8% per year over the three year period. On 1 July 2013 the estimated fair value of the share options with an exercise price of €35 is €10 per option, and if the exercise price is €30, the estimated fair value of the options is €12 per option.

During the year ended 30 June 2014 Diamond‘s earnings increased by 10% and they are expected to continue to increase at this rate over the next two years.

During the year ended 30 June 2015 Diamond‘s earnings increased by 5% and Diamond management expected that the earnings target would be achieved.

During the year ended 30 June 2024 Diamond‘s earnings increased by 11%.

When calculating the remuneration expense to be recognised for the year ended 30 June 2015 which of the following dollar values should be included in the calculation?

Learning Objective 8.5 Explain the concept of vesting through differentiating between vesting and non-vesting conditions *a. €10 b. €12 c. €30 d. €35

5.21

The following information relates to questions 9 and 10 On 1 July 2013 Fantasy Ltd granted 200 options to each of its 100 employees. The share options will vest on 30 June 2015 if the employees remain employed with the company on that date. The share options have a life of four years. The exercise price is $5, which is also Fantasy‘s share price at the grant date. Fantasy is unable to reliably estimate the fair value of the share options at the grant date.

Fantasy‘s share price and the number of options exercised are set out below. Share options may only be exercised at year end.

Year ended 30 June 2014 30 June 2015 30 June 2024 30 June 2017 9. is:

Share price at year end $6 $7 $8 $9

Number of options exercised at year end 7 800 10 000

The cumulative remuneration expense to be recognised by Fantasy as at 30 June 2015 Learning Objective 8.6 Explain the concept of a share option reload feature a. $7800 b. $17 800 *c. $35 600 d. $124 600

10.

The formula to calculate the remuneration expense for the year ended 30 June 2024 is: Learning Objective 8.6 Explain the concept of a share option reload feature a.

7800 x ($8-$7) b.

7800 x $8 c.

(7800 + 10 000) x ($8-$5) *d.

(7800 + 10 000) x ($8-$7)

22

The following information relates to questions 11 to 13 On 1 July 2013 Watson Pty Ltd granted 100 share appreciation rights (SARS) to each of its 50 employees, conditional on the employee not leaving the company in the next three years. The company estimates the fair value of the SARS at the end of each year in which a liability exists as shown in the table below. The intrinsic values of the SARS at the date of exercise at 30 June 2024, 2017 and 2018 are also shown. All SARS held by employees at 30 June 2024 vest.

Year ended 30 June 2014 30 June 2015 30 June 2024 30 June 2017 30 June 2018

Fair value $14.40 $15.50 $18.20 $21.40

Intrinsic value

$15.00 $20.00 $25.00

By 30 June 2024 nine employees have left and 15 employees have exercised their SARS.

11.

The amount recognised as an expense for the year ended 30 June 2024 is: Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. $5987 b. $22 500 *c. $28 487 d. $47 320

12.

The liability recorded at 30 June 2015 is: Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. $19 680 b. $21 653 *c. $41 333 d. $47 320

13.

This is an example of: Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. an equity-settled share-based payment transaction *b. a cash-settled share-based payment transaction c. a share-based payment transaction where the counterparty has the settlement choice d. a share-based payment transaction where the entity has the settlement choice

5.23

The following information relates to questions 14 to 16 Viola Ltd has granted each of its 10 senior executives a choice between receiving a cash payment equivalent to 1000 shares or receiving 1200 share. The grant is conditional on the completion of three years‘ service with the company. If the share alternative is chosen, the shares must be held for two years after vesting date. At grant date the company‘s share price is £25 per share. At the end of years 1, 2 and 3 the share price is £27, £28 and £30 respectively.

The company does not expect to pay dividends in the next three years. After taking into account the effect of post-vesting transfer restrictions the company estimates the grant-date fair value of the share alternative is £24 per share.

14.

What is the fair value of the cash alternative?

Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. £240 000 *b. £250 000 c. £288 000 d. £300 000

15.

What is the fair value of the equity alternative?

Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. £240 000 b. £250 000 *c. £288 000 d. £300 000

16.

What is the liability component at the end of year 1?

Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. £83 333 *b. £90 000 c. £100 000 d. £108 000

24

17.

On 1 July 2014 Luca Ltd grants 200 options to each of its 75 employees conditional on the employee remaining in service over the next two years. The fair value of each option is estimated to be $7. Luca estimates that 8 employees will leave over the two year vesting period.

By 30 June 2015 four employees have left and the entity estimates that a further five employees will leave over the next year.

On 30 June 2015 Luca decided to reprice its share options, due to a fall in its share price over the last 12 months. The repriced share options will vest on 30 June 2024. At the date of repricing Luca estimates that the fair value of each original option is $1.50 and the fair value of each repriced option is $3.

During the year ended 30 June 2024 four employees left.

The remuneration expense for the year ended 30 June 2015 is: Learning Objective 8.7 Explain how modifications to granted equity instruments are treated *a. $34 650 b. $35 175 c. $46 200 d. $46 900

18.

In a share based payment transaction where the entity has settlement choice: Learning Objective 8.8 Demonstrate how cash-settled share-based payment transactions are measured a. where a present obligation does not exist the entity has a choice of classification as an equity or cash settled share based payment transaction. *b. the entity has a present obligation to settle in cash where it has a past practice or stated policy of settling in cash c. the entity must settle in equity unless there is no commercial substance to the transaction. d. if an entity elects to settle in cash the settlement is accounted for as an expense.

19.

Which of the following statements in relation to disclosures required under IFRS 2 Share-based Payment is NOT correct?

Learning Objective 8.9 Describe and apply the disclosure requirements of IFRS 2 a.

For arrangements that were modified during the year, the incremental fair value granted as a result. b.

The weighted average price at the date of exercise for options exercised during the period. c.

A description of the plan, including the general terms and conditions, vesting requirements, maximum term of options granted and method of settlement must be disclosed. *d.

For liabilities arising from share-based payment transactions, the total intrinsic value at the end of the period for liabilities where the counter party‘s right had not yet vested.

5.25

20.

A share–based payment transaction in which the entity receives goods or services as consideration for equity instruments of the entity is classified in IFRS 2 Share-based Payment as Learning Objective 8.2 Distinguish between cash-settled and equity-settled share-based payment transactions *a. an equity-settled share-based payment transaction b. a cash-settled share-based payment transaction c. a liability-settled share-based payment transaction d. an ―other‖ share-based payment transaction

21.

Salt Limited grants 1000 share options to each of its 100 employees. Each grant is conditional on the employee working for the company for the next two years. The fair value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date.

The amount to be recognised as an expense by Salt in year 2 is: Learning Objective 8.4 Explain how equity-settled share-based payment transactions are measured: *a. €250 000 b. €375 000 c. €500 000 d. €750 000

22.

Pepper Limited grants 500 share options to each of its 30 employees. Each grant is conditional on the employee working for the company for the next three years. The fair value of each option is estimated to be €5.00 at grant date and €7.50 at vesting date.

The amount to be recognised as an expense by Pepper in year 2 is: Learning Objective 8.4 Explain how equity-settled share-based payment transactions are measured: *a. €25 000 b. €37 500 c. €50 000 d. €75 000

23.

In situations where an option-pricing model is required to be used to determine the fair value of equity instruments granted IFRS 2 Share-based Payment: Learning Objective 8.4 Explain how equity-settled share-based payment transactions are measured: a. requires expected dividends to be taken into account when measuring the shares or options granted. *b. allows the entity to choose the option-pricing model it wishes to use, but contains a number of factors that the option-pricing model selected must take into account as a minimum. c. requires the use of a binominal option-pricing model. d. requires the use of the Black-Scholes-Merton formula.

26

24.

On 1 July 2013, Nelson Pty Ltd granted 250 options to each of its 50 employees. The options are conditional on the employees remaining with the company for the 3 year vesting period. The options have a fair value of €7.50 at vesting date. In addition, the shares will vest as follows: o On 30 June 2014 if the company‘s earnings have increased by more than 12% o On 30 June 2015 if the company‘s earnings have increased by more than 10% averaged across the 2 year period o On 30 June 2024 if the company‘s earnings have increased by more than 8% averaged across the 3 year period At 30 June 2014 Nelson‘s earnings have increased by 11% and 3 employees have left.

The company expects that earnings will continue to increase at a similar rate during the year to 30 June 2015 and that the shares will vest at that time. It also expects that a further 4 employees will leave during the year.

The remuneration expense for the year ended 30 June 2014 for Nelson is: Learning Objective 8.5 Explain the concept of vesting through differentiating between vesting and non-vesting conditions a. €26 875.00 b. €29 375.00 *c. €40 312.50 d. €88 125.00

25.

On 1 July 2013 Pearl Pty Ltd granted 800 share options with an exercise price of €35 to the CFO, conditional on the CFO remaining in employment with the company until 30 June 2024. The fair value of Pearl‘s shares at that time was assessed to be €40. The exercise price will drop to €30 if Pearl‘s earnings increase by an average of 8% per year over the three year period. On 1 July 2013 the estimated fair value of the share options with an exercise price of €35 is €10 per option, and if the exercise price is €30, the estimated fair value of the options is €12 per option. During the year ended 30 June 2014 Pearl‘s earnings increased by 10% and they are expected to continue to increase at this rate over the next two years. During the year ended 30 June 2015 Pearl‘s earnings increased by 9% and Pearl management continued to expect that the earnings target would be achieved. During the year ended 30 June 2024 Pearl‘s earnings increased by only 2%. At 30 June 2024 the share price is €23.

The remuneration expense to be recognised for the year ended 30 June 2014 is: Learning Objective 8.5 Explain the concept of vesting through differentiating between vesting and non-vesting conditions: a. €2667 *b. €3200 c. €8000 d. €9600

5.27

26.

27.

On 1 July 2013 Pearl Pty Ltd granted 800 share options with an exercise price of $35 to the CFO, conditional on the CFO remaining in employment with the company until 30 June 2024. The fair value of Pearl‘s shares at that time was assessed to be $40. The exercise price will drop to $30 if Pearl‘s earnings increase by an average of 8% per year over the three year period. On 1 July 2013 the estimated fair value of the share options with an exercise price of $35 is $10 per option, and if the exercise price is $30, the estimated fair value of the options is $12 per option. During the year ended 30 June 2014 Pearl‘s earnings increased by 10% and they are expected to continue to increase at this rate over the next two years. During the year ended 30 June 2015 Pearl‘s earnings increased by 9% and Pearl management continued to expect that the earnings target would be achieved. During the year ended 30 June 2024 Pearl‘s earnings increased by only 2%. At 30 June 2024 the share price is $23.

Assuming that the CFO decides NOT to exercise his options at 30 June 2024, the following entry would be recorded: Learning Objective 8.6 Explain the concept of a share option reload feature: a.

DR Wages expense CR Options issued (equity) b.

DR

Options issued (equity) CR Lapsed options reserve

c.

DR

Options issued (equity) CR Retained earnings

*d.

DR

Options issued (equity) CR Wages expense

In relation to equity instruments granted by an entity where the entity makes modifications to the terms and conditions attaching to the grant, Learning Objective 8.7 Explain how modifications to granted equity instruments are treated: a. the incremental fair value is measured as the difference between the fair value of the modified instrument, estimated at the date of modification and that of the original equity instrument, estimated at the date of original granting. b. if the modification occurs during the vesting period the incremental fair value is recognised immediately. c. terms or conditions may not be modified in a manner that is not beneficial to the employee. *d. where the exercise price of options is modified, the fair value of the options changes.

28

28.

29.

On 1 July 2013 Poggio Ltd grants 300 options to each of its 100 employees conditional on the employee remaining in service over the next three years. The fair value of each option is estimated to be $12. Poggio estimates that 15 employees will leave over the three year vesting period. By 30 June 2014 four employees have left and the entity estimates that a further ten employees will leave over the next two years. On 30 June 2014 Poggio decided to reprice its share options, due to a fall in its share price over the last 12 months. The repriced share options will vest on 30 June 2024. At the date of repricing Poggio estimates that the fair value of each original option is $3 and the fair value of each repriced option is $5. During the year ended 30 June 2015 a further 6 employees leave and Poggio estimates that another 3 employees will leave during the year ended 30 June 2024. During the year ended 30 June 2024 four employees left.

The entry at 30 June 2015 to account for the share based payment transaction is: Learning Objective 8.7 Explain how modifications to granted equity instruments are treated: a.

DR Wages expense CR Liability to employee *b.

DR

Wages expense CR Options issued (equity)

c.

DR

Wages expense CR Share capital

d.

DR

Wages expense CR Cash

Which of the following statements in relation to disclosures required under IFRS 2 is not correct?

Learning Objective 8.9 Describe and apply the disclosure requirements of IFRS 2: a.

Option pricing models used in valuing share options must be identified. b.

The number and weighted average exercise price of share options outstanding at the beginning and end of each period must be disclosed. c.

Information about share-based payment arrangements that are substantially the same may be aggregated. *d.

The total expense arising from share-based payment transactions in which the services qualified for recognition as an asset must be disclosed.

Testbank to accompany

5.29

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

30

Chapter 9 Inventories Learning Objectives: 9.1 9.2 9.3 9.4 9.5 9.6 9.7 9.8 9.9

Discuss the nature of inventories Explain how to measure inventories Explain what is included in the cost of inventory Account for inventory transactions using both the periodic and the perpetual methods Explain and apply end-of-period procedures for inventory under both periodic and perpetual methods Explain why cost flow assumptions are required and apply both FIFO and weighted average cost formulas Explain the net realisable value basis of measurement and account for adjustments to net realisable value Identify the amounts to be recognised as inventory expenses Implement the disclosure requirements of IAS 2.

5.31

Multiple Choice

1.

All of the following are common classifications for the disclosure of inventories in a set of financial statements: I

Raw materials Finished goods Work in progress Assets held for resale

II Yes

No

III Yes Yes No Yes

IV No Yes Yes No

No Yes Yes Yes

Yes No

Learning Objective 9.1 Discuss the nature of inventories a.

I; *b.

II; c.

III; d.

IV.

2.

Commodity broker traders are able to measure their inventories at: Learning Objective 9.2 Explain how to measure inventories a. replacement cost; b. nominal cost; *c. fair value less costs of disposal; d. current cost.

3.

IAS 2 prohibits which of the following from being included in the cost of inventory?

Learning Objective 9.3 Explain what is included in the cost of inventory a. trade discounts received; *b. freight (where the terms of sale are FOB destination); c. production overheads; d. import duties.

4.

IAS 2 allows which of the following to be capitalised into the cost of inventory?

Learning Objective 9.3 Explain what is included in the cost of inventory a. storage costs for finished goods; b. selling costs; *c. normal wastage costs; d. administrative overheads.

32

5.

Which of the following statements is correct?

Learning Objective 9.4 Account for inventory transactions using both the periodic and the perpetual methods a. the periodic method of accounting for inventory will always result in a higher closing inventory balance than the perpetual method; b. the periodic method of accounting for inventory will always result in a lower closing inventory balance than the perpetual method; *c. closing inventory will always be the same under the periodic and perpetual methods; d. the relationship between the closing inventory balance under the periodic and perpetual methods will depend on whether the FIFO or weighted average method is used to value inventory.

6.

Stock take discrepancies between a count sheet and recorded quantities in the ledger may arise due to: I II

Theft of stock during the year Stock purchased under FOB destination terms being in transit at period

III IV

A consignee including consignment stock in their physical count Sales returns not being processed into the ledger

end

Learning Objective 9.5 Explain and apply end-of-period procedures for inventory under both periodic and perpetual methods a.

I, II and III; b.

II, III and IV; *c.

I, III and IV; d.

I, II and IV.

7.

Duo Ltd uses a periodic inventory system and rounds the average unit cost to the nearest dollar. The following data relates to Duo Ltd for the year ended 30 June 2024: Opening inventory January purchases July purchases October purchases Ending inventory

15 units @ average cost of €25 each 10 units @ €24 each 25 units @ €26 each 20 units @ €24 each 20 units

The cost of ending inventory at 30 June 2024 using the weighted average cost method (rounded to the nearest euro) is: Learning Objective 9.6 Explain why cost flow assumptions are required and apply both FIFO and weighted average cost formulas a. €459; b. €465; *c. €499; d. €483.

8.

The weighted average inventory costing method is particularly suitable to inventory where:

5.33

Learning Objective 9.6 Explain why cost flow assumptions are required and apply both FIFO and weighted average cost formulas a. dissimilar products are stored in separate locations; b. the entity carries stocks of raw materials, work-in-progress and finished goods; c. goods have distinct use-by dates and the goods produced first must be sold earliest; *d. homogeneous products are mixed together.

9.

When an inventory costing formula is changed, the change is required to be applied: Learning Objective 9.6 Explain why cost flow assumptions are required and apply both FIFO and weighted average cost formulas a. prospectively and the adjustment taken through the current profit or loss; *b. retrospectively and the adjustment taken through the opening balance of retained earnings; c. prospectively and the current period adjustment recognised directly in equity; d. retrospectively and the adjustment recognised as an extraordinary gain or loss.

10.

The measurement rule for inventories, mandated by IAS 2 Inventories, is: Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value a. lower of fair value and selling price; *b. lower of cost and net realisable value; c. higher of initial cost and realisable value; d. higher of completion costs and replacement costs.

11.

‗Net realisable value‘ of inventory is defined as the net amount that an entity expects to realise from the sale of the inventory: Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value *a. in the ordinary course of operations less estimated costs of completion and costs necessary to make the sale; b. plus the estimated costs of completion plus the estimated costs necessary to make the sale; c. in a forced sale; d. plus the estimated costs of completion.

34

12.

Net realisable value of inventories may fall below cost for a number of reasons including: I Product obsolescence II Physical deterioration of inventories III An increase in the expected replacement costs of the inventory IV An increase in the estimated costs of completion Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value *a.

I, II and IV only; b.

I, III and IV only; c.

II, III and IV only; d.

I and II only.

13.

When determining the net realisable value of inventory, estimates must be made of the following: I Estimated costs of completion (if any) II Expected replacement cost III Expected selling price IV Estimated selling costs Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value a.

I, II, III and IV; b.

I, II and III only; c.

II and IV only; *d.

I, III and IV only.

14.

IAS 2 Inventories requires that when inventories are written down to net realisable value, they are written-down: Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value a. on a class-by-class basis; b. on the basis of industry segment; *c. on an item-by-item basis; d. according to geographical segment within the entity.

5.35

15.

Ming Limited had the following items of inventory at reporting date: Item Refrigerators Stoves

Quantity 10 20

Cost/unit £ 100 80

NRV/unit £ 95 85

The adjustment necessary at reporting date is: Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value a.

DR Inventory £50; b.

DR Inventory £100; *c.

CR Inventory £50; d.

CR Inventory £0.

16.

If the selling price of inventory that has been written down to net realisable value in a prior period, subsequently recovers, the: Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value *a. previous amount of the write-down can be reversed; b. carrying amount of the inventory cannot be adjusted; c. value adjustment can be recognised immediately in equity; d. adjustment must be recognised in a ‗provision for future inventory write-downs‘ account.

17.

Where the net realisable value of inventory falls below cost, IAS 2 Inventories, requires that: Learning Objective 9.7 Explain the net realisable value basis of measurement and account for adjustments to net realisable value a. the inventory continue to be carried in the Statement of Financial Position at cost; *b. the inventory be written down to net realisable value; c. no adjustment be made, but the difference between net realisable value and cost be disclosed in the notes to the financial statements; d. the difference be added to the carrying amount of the inventory.

18.

Under IAS 2 Inventories, items of inventory that are used by business entity as components in a self-constructed property asset are required to be: Learning Objective 9.8 Identify the amounts to be recognised as inventory expenses a. aggregated into the ‗cost of sales‘ expense in the period in which the items are used; b. expensed directly into equity in the period in which the items are used; *c. capitalised and depreciated; d. added to a ‗property construction‘ provision account.

36

19.

IAS 2 requires separate disclosure of: Learning Objective 9.9 Implement the disclosure requirements of IAS 2. a. where there has been abnormal wastage which has been expensed; *b. details of inventory pledged as security for loans; c. interest costs which have been capitalised into the cost of inventory; d. details of key terms of purchase.

20.

IAS 2 applies to the accounting for: Learning Objective 9.1 Discuss the nature of inventories a. work in progress under construction contracts; b. financial instruments; c. biological assets; *d. materials consumed in the manufacture of knitting machines for sale.

21.

When an entity‘s operating cycle is not clearly identifiable it is assumed to be: Learning Objective 9.1 Discuss the nature of inventories a. three months; b. six months; c. nine months; *d.

12 months.

22.

Where inventories in an industry are measured by reference to historical cost which of the following measurement rules applies subsequent to initial measurement?

Learning Objective 9.2 Explain how to measure inventories a. historical cost; b. discounted cash flow; *c. lower of cost and net realisable value; d. replacement cost.

23.

Taxes may be included in the costs of inventory unless they are: Learning Objective 9.3 Explain what is included in the cost of inventory a. levied on the entity by a foreign government; b. in respect to the raw materials component of manufactured inventory; *c. recoverable by the entity from the taxing authority; d. in the nature of import duties.

5.37

24.

The terms ‗2/7‘ appearing on an invoice for the sale/purchase of inventory means that the buyer: Learning Objective 9.3 Explain what is included in the cost of inventory *a. will receive a 2% discount if paid within 7 days of the invoice date; b. will receive a 7% discount if paid within 2 days of the invoice date; c. has 7 days from the invoice date to pay or will be charged a 2% surcharge; d. has 2 days from the invoice date to pay or will be charged a 7% surcharge.

25.

Under the periodic inventory approach the cost of sales during a period is determined as follows: Learning Objective 9.4 Account for inventory transactions using both the periodic and the perpetual methods *a. beginning inventory + net purchases – ending inventory; b. beginning inventory – net purchases – ending inventory; c. opening inventory + net purchases + closing inventory; d. opening inventory – net purchases + closing inventory.

26.

Which of the following is an appropriate journal entry to recognise inventory items that have been lost?

Learning Objective 9.5 Explain and apply end-of-period procedures for inventory under both periodic and perpetual methods a.

DR Inventory(asset) CR Provision for inventory losses (liability); *b.

DR Inventory losses (expense) CR Inventory (asset); c.

DR Cost of sales (expense) CR Inventory (asset); d.

DR Provision for Inventory losses (liability) CR Inventory (asset).

27.

Under the periodic inventory approach an appropriate journal entry to measure closing inventory is: Learning Objective 9.5 Explain and apply end-of-period procedures for inventory under both periodic and perpetual methods: a.

DR Opening inventory (cost of sales expense) CR Inventory (asset); b.

DR Purchases (expense) CR Inventory (asset); *c.

DR Inventory (asset) CR Closing inventory (cost of sales expense); d.

DR Purchases returns (cost of sales expense) CR Inventory (asset).

38

28.

Which of the following is not recognised as an expense in accordance with IAS 2?

Learning Objective 9.8 Identify the amounts to be recognised as inventory expenses a.

Cost of sales; b.

Write-downs of inventories to net realisable value; c.

Reversal of write downs to net realisable value; *d. Inventory items used by an entity as components in self-constructed property, plant or equipment.

29.

IAS 2 requires disclosure of the following:

I II

Details of reversals of prior year write-downs Separate disclosure of the carrying amount of inventories carried at cost and those carried at net realisable value The accounting policy adopted by the entity in relation to inventory valuation The carrying amount of inventory by class

III IV

Learning Objective 9.9 Implement the disclosure requirements of IAS 2 a.

II and III only; b.

I, II and III only; c.

II, III and IV only; *d.

I, II, III and IV.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

5.39

prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

40

CHAPTER 10 Employee benefits

Learning Objectives 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9

Outline the principles applied in accounting for employee benefits Discuss the scope and purpose of IAS 19 Discuss the definition of employee benefits Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave Compare defined benefit and defined contribution post-employment benefit plans Prepare entries to account for expenses, assets and liabilities arising from defined contribution post-employment plans Prepare entries to record expenses, assets and liabilities arising from defined benefit post-employment benefit plans Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave Explain when a liability should be recognised for termination benefits and how it should be measured.

5.41

Multiple Choice Questions 1.

Which of the following types of employee benefits are required to be measured at their nominal value?

Learning Objective 10.1 Outline the principles applied in accounting for employee benefits a. long service leave b. defined benefit post-employment benefits *c. accumulating non-vesting sick leave d. defined contribution employment benefits

2.

Which of the following types of employee benefits are required to be measured at the present value of expected future cash flows?

Learning Objective 10.1 Outline the principles applied in accounting for employee benefits a. annual leave b. accumulating non-vesting sick leave c. maternity leave *d. long service leave

3.

Employee benefits can arise from which of the following?

I workplace agreements between an entity and its employees II enterprise bargaining agreements between an entity and the relevant employee union III government legislation IV specific industry arrangements Learning Objective 10.2 Discuss the scope and purpose of IAS 19 a.

I and II only b.

II, III and IV only c.

I, II and III only *d.

I, II, III and IV

4.

An enterprise bargaining agreement results from an entity entering into an agreement with: Learning Objective 10.2 Discuss the scope and purpose of IAS 19 a. its employees b. the government c. the relevant industry body *d. the relevant employee union

42

5.

Employee benefits can be allocated to assets: Learning Objective 10.3 Discuss the definition of employee benefits a. only if it relates to the cost of an internally generated intangible b. where the entity is certain the future economic benefits will flow to it *c. in accordance with the requirements of other accounting standards d. where they meet the definition of an asset under the Conceptual Framework

6.

IAS 19 defines employee benefits as: Learning Objective 10.3 Discuss the definition of employee benefits a. any cash consideration given by an entity to employees or their authorised representatives in exchange for services rendered by the employee b. all forms of consideration given by an entity to employees or their authorised representatives in exchange for services rendered by the employee *c. all forms of consideration given by an entity in exchange for service rendered by employees d. all forms of consideration given by an entity to employees or their authorised representatives

7.

Which if the following is NOT an example of a short-term employee benefit?

Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. wages and salaries *b. termination payments c. bonuses and profit-sharing arrangements d. short-term compensated benefits

8.

Salary sacrificing refers to: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. an employer withholding a portion of an employee‘s salary or wages for sub-standard performance b. an employee not receiving a portion of their salary and wages due to the fact that pre-determined performance targets have not been met c. an employee foregoing some of their salary because leave entitlements such as sick leave have been exceeded *d. an employee electing to forego some of their salary or wages in return for other non-cash benefits

5.43

9.

IAS 19 requires short-term employee benefits to be measured at: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. future value *b. nominal value c. present value d. fair value

10.

ABC Ltd employs 5 staff. Each staff member is entitled to 20 days annual leave per annum. Leave loading of 17.5% is paid when the leave is taken.

On 31 December 2024 Joan Rivers left the company and was paid out her untaken leave entitlements. Joan had 12 days leave owing at 1 July 2024 and took 4 days leave between 1 July and 31 December 2024. Her salary at the time of her departure was $140 000.

There are 260 work days in a year. On 1 July each year all employees receive a 3% wage rise. There are no other wage rises given during the year.

The gross entitlement owing to Joan Rivers on 31 December 2024 was: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. $17 715 b. $9692 c. $5061 *d. $11 388

11.

Carpenter Ltd has 6 employees, who are each paid $750 per week for a 5 day working week. Each employee is entitled to 8 days accumulating non-vesting sick leave per year.

At 1 July 2024 the accumulated untaken leave was 14 days in total. During the year ended 30 June 2017 a total of 50 days sick leave was taken, of which 12 days were unpaid leave.

Of the accumulated untaken leave at 30 June 2017 it is estimated that 75% of it will be taken during the following year.

The balance of the provision for sick leave at 30 June 2017 is: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. $1350 b. $3600 *c. $2700 d.

NIL, as the leave is non-vesting

44

12.

Pirate Ltd employs 5 staff. Each staff member is entitled to 20 days annual leave per annum. Leave loading of 17.5% is paid when the leave is taken. At 1 July 2024 the balance in the provision for annual leave account was $20 303.

Details of each employees leave entitlement at 30 June 2017 are as follows: Employee

Salary

Jo Bird Bill Brown Ben Fit Greg Horn Lou Hamilton

$65 000 $70 000 $85 000 $62 500 $90 000

Days owing @ 1/7/13 17 5 24 3 9

Days taken during year 22 12 18 15 26

There are 260 work days in a year. On 1 July each year all employees receive a 5% wage rise. There are no other wage rises given during the year.

The closing balance in the provision for annual leave account at 30 June 2017 is: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. $18 712 b. $19 647 *c. $23 086 d. $27 221

13.

An entity is required to recognise a liability for short-term compensated absences that are: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave *a. accumulating and vesting b. non-accumulating and vesting c. non-accumulating and non-vesting d. all of the above

5.45

14.

Pirate Ltd employs 5 staff. Each staff member is entitled to 20 days annual leave per annum. Leave loading of 17.5% is paid when the leave is taken. At 1 July 2015 the balance in the provision for annual leave account was €20 303.

Details of each employees leave entitlement at 30 June 2024 are as follows: Employee

Salary

Jo Bird Bill Brown Ben Fit Greg Horn Lou Hamilton

€65 000 €70 000 €85 000 €62 500 €90 000

Days owing @ 1/7/13 17 5 24 3 9

Days taken during year 22 12 18 15 26

There are 260 work days in a year. On 1 July each year all employees receive a 5% wage rise. There are no other wage rises given during the year.

Annual leave payments made during the year were debited against the provision account. The total debit against the annual leave account during the year in relation to leave taken was: Learning Objective 10.4 Prepare journal entries to account for short-term liabilities for employee benefits, such as wages and salaries, sick leave and annual leave a. €27 221 b. €28 654 *c. €33 585 d. €33 668

15.

The key difference between defined benefit and defined contributions postemployment plans is that: Learning Objective 10.5 Compare defined benefit and defined contribution postemployment benefit plans a. the employee bears the risk in a defined benefit plan, whereas the employer bears the risk in a defined contribution plan b. the fund bears the risk in a defined benefit plan, whereas the employee bears the risk in a defined contribution plan *c. the employer bears the risk in a defined benefit plan, whereas the employee bears the risk in a defined contribution plan d. the employer bears the risk in a defined benefit plan, whereas the fund bears the risk in a defined contribution plan

46

16.

Benefits paid to members of a defined contribution post-employment fund are based on: I the level of contributions made to the fund II remuneration levels while employed III number of years in service IV investment returns generated by the fund Learning Objective 10.5 Compare defined benefit and defined contribution postemployment benefit plans a.

I and II only b.

II and III only c.

III and IV only *d.

I and IV only

17.

IAS 19 does NOT prescribe the accounting treatment for: Learning Objective 10.6 Prepare entries to account for expenses, assets and liabilities arising from defined contribution post-employment plans a. contributions to defined contribution post-employment benefit funds *b. contributions received by a defined contribution post-employment benefit

fund c. d.

assets arising from defined benefit post-employment benefit plans from the perspective of the employer liabilities arising from defined benefit post-employment benefit plans from the perspective of the employer

18.

If the amount paid to the defined contribution fund by an entity during the year is less than the amount payable in relation to service provided by employees, the entity must recognise; Learning Objective 10.6 Prepare entries to account for expenses, assets and liabilities arising from defined contribution post-employment plans a. an asset for the unpaid contributions *b a liability for the unpaid contributions c. an expense for the unpaid contributions d. a gain for the unpaid contributions

19.

An increase in the present value of a defined benefit obligation resulting from employee service in the current period is referred to as: Learning Objective 10.7 Prepare entries to record expenses, assets and liabilities arising from defined benefit post-employment benefit plans *a. the current service cost b. the past service cost c. the interest cost d. an actuarial gain or loss

5.47

20.

Benefits paid to members of a defined benefit post-employment fund are based on: I the level of employer contributions made to the fund II remuneration levels while employed III number of years in service IV investment returns generated by the fund Learning Objective 10.7 Prepare entries to record expenses, assets and liabilities arising from defined benefit post-employment benefit plans a.

I and II only *b.

II and III only c.

III and IV only d.

I and IV only

21.

Actuarial gains or losses can arise from: I employee service provided in the current period II the unwinding of the discount applied to the obligation III changes to actuarial assumptions IV experience adjustments Learning Objective 10.7 Prepare entries to record expenses, assets and liabilities arising from defined benefit post-employment benefit plans a.

I and II b.

II and III *c.

III and IV d.

I and IV

22.

The key steps involved in accounting by the employer for a defined benefit postemployment fund in accordance with IAS 19 include: Learning Objective 10.7 Prepare entries to record expenses, assets and liabilities arising from defined benefit post-employment benefit plans a. determining the deficit or surplus of the fund b. determining the amount of the net defined benefit liability (asset) c determining the amounts to be recognised in profit or loss for current service cost, any past service cost and net interest expense (income) on the net defined benefit liability (asset) *d. all of the options are correct

23.

The nominal value of an accumulated benefit for long service leave is calculated as (Years of employment/Years required for LSL) x (weeks of paid leave/52) x ______?

Learning Objective 10.8 Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave a. current salaries b. projected salaries x (1+inflation rate)n

48

c. *d.

current salaries / (1+inflation rate)n projected salaries

5.49

24.

Determining an entity‘s liability for long service leave requires estimation of: Learning Objective 10.8 Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave a. when the leave will be taken b. projected salary levels c. proportion of employees who will become entitled to the leave *d. all of the above.

25.

IAS 19 requires an entity to record a liability for long service leave: Learning Objective 10.8 Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave a. once the employee becomes presently entitled to the leave *b. as the employee provides service to the entity c. when the leave is taken by the employee d. in a consistent manner from year to year

26.

IAS 19 adopts which method to determining long service leave obligations?

Learning Objective 10.8 Explain how to measure and record other long-term liabilities for employment benefits, such as long service leave a. units of production method b. the actuarial method c. the bi-nominal method *d. projected unit credit method

27.

Which of the following do NOT fall within the definition of a termination benefit?

Learning Objective 10.9 Explain when a liability should be recognised for termination benefits and how it should be measured *a. employee resignation b. voluntary redundancy accepted by an employee c. termination of employment before the normal retirement date due to company insolvency d. termination of employment before the normal retirement date due to poor performance

28.

Which of the following obligations do NOT arise from past services provided by an employee?

Learning Objective 10.9 Explain when a liability should be recognised for termination benefits and how it should be measured a. short-term compensated absences *b. termination benefits c. other long-term employee benefits d. post-employment benefits

50

29.

An entity is able to record a provision for termination benefits when it: Learning Objective 10.9 Explain when a liability should be recognised for termination benefits and how it should be measured a. has a detailed formal plan b. has a definite intention of terminating employment c. has received Board approval for the termination benefits *d. can no longer withdraw the offer of the benefits

30.

The offer to pay termination benefits can no longer be withdrawn when the entity has communicated to affected employees a plan of termination that meets which of the following criteria?

Learning Objective 10.9 Explain when a liability should be recognised for termination benefits and how it should be measured a. actions required to complete the plan indicate that significant changes to the plan are unlikely b. the plan identifies the location, function or job classification, the number of employees whose services are to be terminated, and the expected completion date c. the plan establishes the termination benefits payable in sufficient detail to enable employees to determine the type and amount of benefits they will receive *d. all of the above

Testbank to accompany

®

Applying IFRS Standards 5e Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas 5.51

Prepared by John Sweeting and Emma Holmes

John Wiley & Sons, Ltd 2024

52

CHAPTER 11 Property, plant and equipment

Learning Objectives: 11.1 Describe the nature of property, plant and equipment 11.2 Recall the recognition criteria for initial recognition of property, plant and equipment 11.3 Demonstrate how to measure property, plant and equipment on initial recognition 11.4 Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation 11.6 Explain the revaluation model of measurement 11.7 Discuss the factors to consider when choosing which measurement model to apply 11.8 Account for derecognition 11.9 Implement the disclosure requirements of IAS 16.

Multiple Choice Questions

1.

Property, plant and equipment are assets that: Learning Objective 11.1 Understand the nature of property, plant and equipment a. are expected to be used up within the current financial period; b. are held for resale within the current period; *c. are physical in nature; d. have a remaining productive life of less than one financial year.

2.

Property, plant and equipment includes items that are: Learning Objective 11.1 Understand the nature of property, plant and equipment a. intangible; b. held for resale; c. expected to be used up during the current period; *d. held for rental to others.

3.

The cost of property, plant and equipment is only recognised as an asset if it is probable that the future economic benefits will flow to the entity and if: Learning Objective 11.2 Recall the recognition criteria for initial recognition of property, plant and equipment *a. the cost can be reliably measured; b. the asset has been fully paid for in cash; c. the asset has been received by the purchaser; d. it is a tangible asset.

4.

Jackson Limited acquired a bundle of assets for a cash consideration of €200 000. The fair values of the assets on date of acquisition were as follows:  Building €132 000  Furniture €88 000.

The appropriate journal entry to record this acquisition is: Learning Objective 11.3 Demonstrate how to measure property, plant and equipment on initial recognition a.

DR Property, plant and equipment €200 000 CR Cash €200 000 b.

*c.

d.

DR CR

Property, plant and equipment Cash

€220 000

DR DR CR

Building Furniture Cash

€120 000 € 80 000

DR DR CR

Building Furniture Cash

€132 000 € 88 000

Company Accounting in Australia, Seventh edition – Chapter 6

€220 000

€200 000

€220 000

5.

Costs that may be included in the cost of acquisition of property, plant and equipment include: I

II

III

Yes Yes No No

Yes No No No

No

IV    

Site preparation Initial delivery and handling costs Installation and assembly costs Testing whether the asset is functioning

Yes Yes Yes

Yes No Yes Yes

Learning Objective 11.3 Demonstrate how to measure property, plant and equipment on initial recognition *a.

I; b.

II; c.

III; d.

IV.

6.

After an item of property, plant and equipment has been initially recognised at cost it may be measured using the following measurement method: Learning Objective 11.4 Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition a. liquidation value; b. accrual; *c. revaluation; d. realisable value.

7.

Under the cost model, after initial recognition of a property, plant and equipment asset, the item must be carried at its: Learning Objective 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation a. residual value; *b. cost less accumulated depreciation and less accumulated impairment losses; c. initial cost; d. net present value.

8.

Wilson Limited applied the straight-line method of depreciation to its non-current assets.

The cost of the buildings was €640 000, the depreciable amount is €560 000, the residual value is €80 000 and the useful life is 8 years. The annual depreciation charge is: Learning Objective 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation a. €80 000; b. €75 000; *c. €70 000; d. €60 000.

2

9.

Replicator Limited acquired an item of plant with an expected useful life of 5 years.

Expected total production output over this period was:  Year 1, 35 000 units  Year 2, 35 000 units  Year 3, 18 000 units  Year 4, 12 000 units.

The asset cost € 100 000 and associated installation costs amounted to €20 000 and residual value is €5000. The amount of depreciation charged in the first year is: Learning Objective 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation *a. €40 250; b. €42 000; c. €35 000; d. €33 250.

10.

When a company recognises a depreciation credit resulting from a review of the estimated residual value of a depreciable asset, the depreciation debit should be recognised in accumulated depreciation and the depreciation credit should be recognised: Learning Objective 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation a. in the opening balance of retained earnings; *b. in the depreciation expense; c. directly in the depreciable asset account; d. as a gain in the current period.

11.

A change in accounting policy from the revaluation model to the cost model requires a retrospective adjustment to the: Learning Objective 11.4 Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition a. revenue in the profit and loss statement; b. expenses in the profit and loss statement; *c. opening balance of retained earnings; d. other comprehensive income.

12.

A non-current property, plant and equipment asset is depreciated using the straight-line method. The asset was revalued upwards after four years of use. There is no change in the remaining useful life of six years or to the residual value. Which of the following relationships reflects the effect of the revaluation on the prospective depreciation of the asset?

Learning Objective 11.6 Explain the revaluation model of measurement

*a. b. c. d.

Depreciation rate Same Same Higher Higher

Annual depreciation expense Higher Same Higher Same

Company Accounting in Australia, Seventh edition – Chapter 6

13.

Revaluations under IAS 16 Property, Plant and Equipment apply to: Learning Objective 11.6 Explain the revaluation model of measurement a. all assets on an individual basis; b. individual current assets only; c. individual non-current assets only; *d. assets on a class-by-class basis.

Use the following information to answer questions 14 and 15 An extract of a company‘s draft statement of financial position at 30 June 2015 discloses the following: €500 000 300 000 €200 000

Plant (at cost) Less: Accumulated Depreciation

On 30 June 2024 the company assessed the fair value of the plant to be €350 000. At 30 June 2017, the carrying amount of the plant was €250 000.

The tax rate is 30%. Depreciation rates are 10% p.a. (accounting) and 12.5% p.a. (tax) using the straight-line method.

14.

The journal entries necessary to record the revaluation of plant (ignoring any tax effect) at 30 June 2024 in accordance with IAS 16 Property, Plant and Equipment is: Learning Objective 11.6 Explain the revaluation model of measurement *a.

b.

c.

d.

Accumulated depreciation – Plant Plant

Dr Cr

300 000

Plant Gain on revaluation - OCI

Dr Cr

150 000

Plant Gain on revaluation - OCI

Dr Cr

150 000

Gain on revaluation - OCI Asset revaluation surplus

Dr Cr

150 000

Plant Gain on revaluation - OCI Accumulated depreciation - Plant

Dr Dr Cr

150 000 150 000

300 000

150 000

150 000

150 000

300 000

4

15.

The journal entries to adjust for the tax effect of the revaluation at 30 June 2024 is: Learning Objective 11.6 Explain the revaluation model of measurement a.

b.

c.

*d.

16.

Dr Cr

45 000

Asset revaluation surplus Income tax expense – OCI

Dr Cr

45 000

Income tax expense – OCI Asset revaluation surplus

Dr Cr

45 000

Income tax expense – OCI Deferred tax liability

Dr Cr

45 000

Gain on revaluation - OCI Income tax expense – OCI Asset revaluation surplus

Dr Cr Cr

150 000

45 000

45 000

45 000

45 000

45 000 105 000

Speculator Limited acquired a parcel of land for €50 000. This amount is also the tax base of the land. Two years after the acquisition date, the building was revalued to €80 000.

The tax rate is 30%. The appropriate journal entry to recognise the net effect of the revaluation is: Learning Objective 11.6 Explain the revaluation model of measurement a.

b.

*c.

d.

17.

Income tax expense – OCI Deferred tax liability

DR CR

Gain on revaluation - OCI Asset revaluation surplus

€30 000

DR DR CR

Land Income tax expense - OCI Asset revaluation surplus

€21 000 € 9 000

DR CR CR

Land Deferred tax liability Asset revaluation surplus

€30 000

DR CR CR

Gain on revaluation - OCI Income tax expense - OCI Asset revaluation surplus

€30 000

€30 000

€30 000 € 9 000 €21 000 €9 000 €21 000

Troubadour Limited had an existing revaluation surplus in respect to an item of plant that had been derecognised. An appropriate journal entry to transfer the surplus to retained earnings would include: Learning Objective 11.6 Explain the revaluation model of measurement a.

DR Gain on revaluation – OCI; b.

CR Asset revaluation surplus; c.

DR Retained earnings; *d.

CR Retained earnings.

Company Accounting in Australia, Seventh edition – Chapter 6

18.

When using the revaluation model: Learning Objective 11.7 Discuss the factors to consider when choosing which measurement model to apply a. ongoing record keeping costs are generally lower than if the cost model were used; *b. the values reported will provide more relevant information to users of the financial statements; c. depreciation costs will generally be lower than under the cost model; d. the entities financial statements will be consistent with US GAAP requirements.

19.

When an asset is sold the resulting gain or loss is: Learning Objective 11.8 Account for derecognition a. reported in other comprehensive income, normally with separate disclosure of income and the carrying amount of the asset; b. reported in other comprehensive income, normally on a net basis; c. reported in current period profit or loss, normally with separate disclosure of income and the carrying amount of the asset; *d. reported in current period profit or loss, normally on a net basis.

20.

Which of the following statements is NOT correct in relation to disclosure of property, plant and equipment balances?

Learning Objective 11.9 Implement the disclosure requirements of IAS 16. a.

Paragraph 79 of IAS 16 contains disclosure that are encouraged, but not required in relation to property, plant & equipment; b.

An entity must disclose the useful life estimates for each class of assets; c.

A summary of movements in the revaluation surplus is required to be disclosed; *d. Information on assets carried at revalued amounts must be disclosed on an individual asset basis.

21.

IAS 16 requires disclosure, for each class of property, plant and equipment: Learning Objective 11.9 Implement the disclosure requirements of IAS 16 a. the measurement bases used for determining the gross carrying amount; b. the deprecation methods used; c. the useful lives or the depreciation rates used; *d. all of the options are correct.

22.

The cost of an item of property, plant and equipment is only recognised if the cost of the item can be reliably measured and if: Learning Objective 11.2 Recall the recognition criteria for initial recognition of property, plant and equipment a. it is not directly attributable to the asset; b. it has been paid for in cash; c. the item has been received by the acquirer; *d. it is probable that future economic benefits associated with the item will flow to the entity.

6

23.

An entity acquired an item of plant in exchange for an item of equipment. The equipment has a carrying value of €5000 and a fair value of €6000. The journal entry to record the acquisition of the plant will show: Learning Objective 11.3 Demonstrate how to measure property, plant and equipment on initial recognition a. a loss on acquisition of €1000; b. proceeds on disposal of equipment of €1000; *c. a gain on disposal of €1000; d. proceeds on disposal of plant of €1000.

24.

For the purposes of recognising a non-current property, plant and equipment asset, the acquisition date is determined as the date: Learning Objective 11.3 Demonstrate how to measure property, plant and equipment on initial recognition a. the contract to exchange assets is signed; b. on which the offer to acquire the asset becomes unconditional c. the consideration is paid; *d. on which the acquirer obtains control of the asset.

25.

Subsequent to the initial recognition of an asset, an entity has a choice on the measurement basis to be adopted. The choice is between: Learning Objective 11.4 Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition a. cash and accrual; *b. cost and revaluation; c. tax and accounting; d. current and non-current.

26.

When applying a revaluation measurement model to assets, the model: Learning Objective 11.4 Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition *a. applies to the entire class of non-current assets; b. may only be applied to current assets; c. is applied permanently and may not be changed; d. is applied to individual assets within a class of non-current assets.

27.

Depreciation is a process that is designed to: Learning Objective 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation a. reduce the carrying amount of an asset to reflect the diminishing fair value of the asset; b. spread the cost of an asset across a period no greater than 5 years; c. reflect the change in value of an asset as a result of obsolescence; *d. allocate the cost of an asset across its useful life to an entity.

Company Accounting in Australia, Seventh edition – Chapter 6

28.

Under IAS 16 Property, Plant and Equipment, the depreciation charge for a period reflects: Learning Objective 11.5 Explain the cost model of measurement and understand the nature and calculation of depreciation a. the fall in the fair value of the asset across the period; b. a change in the re-sale value of the asset that has occurred over the period; *c. the consumption of economic benefits over the period; d. a reduction in the estimated market value of the asset across the period.

29.

Which of the following is an argument to support the use of the revaluation model of accounting for property, plant and equipment?

Learning Objective 11.7 Discuss the factors to consider when choosing which measurement model to apply: a. the revaluation model is consistent with US GAAP; b. the revaluation model can be selectively applied to individual assets; c. the ongoing costs associated with applying the revaluation model provide a disincentive to applying the model; *d. the revaluation model provides more relevant and reliable information than the cost model.

30.

ABC Limited acquired an item of plant on 1 July 2015 for €80 000. The estimated useful life of the plant at acquisition date was 5 years and the residual value €5000. The company sold the plant on 1 January 2019 for €30 000. The journal entry to reflect the sale is: Learning Objective 11.8 Account for derecognition

a.

DR Cash DR

Accumulated

depreciation

€30 000 €56 000 €80 000 € 6 000

CR Plant CR Gain on sale b.

€30 000

DR Cash CR Proceeds on sale

€30 000

DR Carrying amount of plant

€27 500 €27 500

CR Plant c.

€30 000 € 2 500

DR Cash DR Loss on sale CR Plant

*d.

DR Cash DR Accumulated CR Plant

€32 500

depreciation

€30 000 €52 500 €80

8

000 € 2 500

CR Gain on sale

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024 Company Accounting in Australia, Seventh edition – Chapter 6

Chapter 12 Leases Learning Objectives 12.1 discuss the characteristics of a lease 12.2 explain the difference between a finance lease and an operating lease 12.3 understand and apply the guidance necessary to classify leases 12.4 account for finance leases from the perspective of a lessee 12.5 account for finance leases from the perspective of a lessor 12.6 account for finance leases by manufacturer or dealer lessors 12.7 account for operating leases from the perspective of both lessors and lessees 12.8 recognise and account for sale and leaseback transactions 12.9 discuss changes to lease accounting.

Company Accounting 7e Leo et al Chapter 7 Test Bank Multiple Choice Questions

1.

Which of the following is included within the scope of IFRS 16 Leases?

Learning Objective 12.1 discuss the characteristics of a lease a. lease agreements for motion picture films; b. lease agreements to explore for minerals; c. lease agreements for biological assets; *d. lease agreement for an oil refinery.

2.

The user of a leased asset is referred to as the: Learning Objective 12.1 discuss the characteristics of a lease a. vendor; b. purchaser; c. lessor; *d. lessee.

3.

Which of the following is NOT an example of a risk of ownership of an asset?

Learning Objective 12.2 explain the difference between a finance lease and an operating lease a. idle capacity; *b. gains on the eventual sale of the asset; c. uninsured damage; d. technical obsolescence.

4.

A finance lease is an agreement between an owner of an asset and a user of that asset wherein the: Learning Objective 12.2 explain the difference between a finance lease and an operating lease a. legal title to property is transferred to the lessee when the first lease payment is made; b. ownership passes to the lessor on inception date of the lease; c. substantially all of the risks and benefits of ownership remain with the lessor; *d. usual risks and benefits of ownership are transferred to the user.

5.

Which of the following is NOT one of the situations provided in IFRS 16 Leases in relation to the classification of leases as finance leases?

Learning Objective 12.3 understand and apply the guidance necessary to classify leases a.

Losses from the fluctuation of the fair value of the residual accrue to the lessee; b.

Leased assets are of a specialised nature; *c. The lessee has provided a guarantee that they will acquire the asset at the end of the lease term; d.

The lease is for a major part of the economic life of the asset.

Company Accounting in Australia, Seventh edition – Chapter 6

6.

IFRS 16 Leases deems cancellable leases with which of the following characteristics to be non-cancellable:

Leases that can be cancelled upon the occurrence of some remote contingency Leases that can be cancelled only with the permission of the lessor Leases where the lessee, upon cancellation, is committed to enter into a further lease with the same lessor Leases that require the lessee to pay a substantial penalty on cancellation

I No

II Yes

III Yes

IV Yes

Yes

No

Yes

Yes

Yes

Yes

Yes

No

Yes

Yes

Yes

No

Learning Objective 12.3 understand and apply the guidance necessary to classify leases a.

I; b.

II; *c. III; d.

IV.

7.

The minimum lease payment is defined as including all of the following components except: Learning Objective 12.3 understand and apply the guidance necessary to classify leases a. bargain purchase option; *b. contingent rentals; c. a guaranteed residual value; d. the lease payments occurring over the lease term.

8.

According to IFRS 16 Leases, because lease payments are made over the lease term, the payments made under a finance lease must be divided into the following components: I    

Reduction of the lease liability Interest expense incurred Reimbursement of lessor costs Receipt of lease incentives

Yes No

II Yes No Yes No

III Yes Yes Yes Yes

IV No No Yes Yes

Yes No

Learning Objective 12.4 account for finance leases from the perspective of a lessee *a.

I; b.

II; c.

III; d.

IV.

2

Company Accounting 7e Leo et al Chapter 7 Test Bank 9.

Which of the following is an appropriate journal entry for the initial recognition by a lessee of a finance lease arrangement?

Learning Objective 12.4 account for finance leases from the perspective of a lessee a.

DR Leased asset CR Bank loan; b.

DR Cash CR Leased asset; c.

DR Lease liability CR Leased asset; *d. DR Leased asset CR Lease liability.

The following information relates to questions 10-12 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 × 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%.

10.

On inception date, the present value of the minimum lease payments is: Learning Objective 12.4 account for finance leases from the perspective of a lessee *a. £60 359; b. £64 170; c. £64 584; d. £69 000.

11.

The period over which the asset should be depreciated by the lessee is: Learning Objective 12.4 account for finance leases from the perspective of a lessee a.

3 years; b.

6 years; c. the rate as determined by the tax authorities; *d. cannot be determined from the information provided.

12.

The journal entry recorded by the lessee when the payment is made at the end of the first year is: Learning Objective 12.4 account for finance leases from the perspective of a lessee *a.

b.

c.

Dr Dr Cr

Interest expense Lease liability Cash

4 225 18 775

Dr Dr Cr

Lease liability Interest expense Cash

4 225 18 775

Dr

Interest expense

1 610

Company Accounting in Australia, Seventh edition – Chapter 6

23 000

23 000

d.

Dr Cr

Lease liability Cash

21 390

Dr Dr Cr

Lease liability Interest expense Cash

1 610 21 390

23 000

23 000

13.

In relation to finance leases, the following information must be disclosed separately in the financial statements of lessors: I Unearned finance income.

II Contingent rents recognised as income in the period.

III The unguaranteed residual values accruing to the benefit of the lessee.

IV The accumulated allowance for uncollectible minimum lease payments receivable.

Learning Objective 12.5 account for finance leases from the perspective of a lessor *a.

I, II and IV only; b.

I, III and IV only; c.

II, III and IV only; d.

II and IV only.

14.

On 30 June 2024, Mala Ltd leased a vehicle to Tango Ltd. Mala Ltd had purchased the vehicle on that day for its fair value of €89 721. The lease agreement cost Mala Ltd €1457 to have drawn up and requires Tango to reimburse Mala for annual insurance costs of €1050. The amount recorded as a lease receivable by Mala Ltd at the inception of the lease is: Learning Objective 12.5 account for finance leases from the perspective of a lessor a. €88 264; b. €89 721; c. €90 771; *d. €91 178.

15.

Which of the following is an appropriate journal entry for the initial recognition by a lessor of a finance lease arrangement?

Learning Objective 12.5 account for finance leases from the perspective of a lessor *a. DR Lease receivable CR Asset; b.

DR Lease receivable CR Lease liability; c.

DR Leased asset: CR Cash/Trade payables; d.

DR Leased asset CR Cash.

4

Company Accounting 7e Leo et al Chapter 7 Test Bank 16.

Nelson Ltd manufactures specialised machinery for both sale and lease. On 1 July 2024, Nelson leased a machine to Poggi Ltd. The machine cost Nelson Ltd €195 000 to manufacture, and its fair value at the inception of the lease was €212 515. The interest rate implicit in the lease is 10%, which is in line with current market rates. Under the terms of the lease, Poggi Ltd has guaranteed €25 000 of the asset‘s expected residual value of €37 000 at the end of the 5-year lease term. The debit to the sales revenue account in Nelson‘s books is: Learning Objective 12.6 account for finance leases by manufacturer or dealer lessors a. €187 548; b. €195 000; *c. €205 063; d. €212 515.

17.

IFRS 16 Leases requires manufacturer and dealer lessors to recognise selling profit or loss at the: Learning Objective 12.6 Account for finance leases by manufacturer or dealer lessor a. end of the lease; b. systematically recognised over the lease term; *c. commencement of the lease; d.

50% at commencement of the lease and 50% at the end of the lease.

18.

Under IFRS 16 Leases, lessors are required to account for lease receipts from operating leases as: Learning Objective 12.7 account for operating leases from the perspective of both lessors and lessees a. revenue, on a reducing balance basis over the lease term; b. income, on inception date of the lease; *c. income, on a straight-line basis over the lease term; d. revenue, at the end of the lease term.

19.

With respect to operating leases, lessors are required under IFRS 16 Leases to make the following disclosures: I Total contingent rents recognised as income in the period II Future minimum lease payments under individual, cancellable operating leases, separately III A general description of the lessee‘s leasing arrangements IV Future minimum lease payments under non-cancellable operating leases in aggregate.

Learning Objective 12.7 account for operating leases from the perspective of both lessors and lessees a.

I, II and III only; *b.

I, III and IV only; c.

II and III only; d.

I, II and IV only.

Company Accounting in Australia, Seventh edition – Chapter 6

20.

A lessee when accounting for a lease incentive received under an operating lease treats is as a: Learning Objective 12.7 account for operating leases from the perspective of both lessors and lessees a. increase in rental income over the lease term; b. increase in rental expense over the lease term; *c. reduction in rental expense over the lease term; d. reduction in rental income over the lease term.

21.

Burgess Limited accepts a lease incentive to enter into a 3-year operating lease for a building. The incentive is a cash amount of £5000 received on signing of the lease agreement. The lessee initially records this transaction as follows: Learning Objective 12.7 account for operating leases from the perspective of both lessors and lessees a.

DR Lease expense £5000 CR Cash £5000 b.

c.

*d.

22.

DR CR

Incentive from lessor Cash

£5000

DR CR

Incentive to lessee Rent income

£5000

DR CR

Cash

£5000

£5000

£5000

Lease incentive from lessor

£5000.

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: Learning Objective 12.7 account for operating leases from the perspective of both lessors and lessees a.

DR Cash £10 000 CR Incentive to lessee £10 000 *b.

c.

d.

DR CR

Incentive to lessee Cash

£10 000

DR CR

Rent income Rent expense

£10 000

DR CR

Cash

£10 000 Rent income

£10 000

£10 000

£10 000

6

Company Accounting 7e Leo et al Chapter 7 Test Bank 23.

Which of the following is an appropriate journal entry for the initial recognition by a lessee of an operating lease arrangement?

Learning Objective 12.7 account for operating leases from the perspective of both lessors and lessees a.

DR Leased asset CR Lease liability; *b. DR Lease rental expense CR Cash/Trade payables; c.

DR Leased asset CR Cash/Trade payables; d.

DR Lease asset CR Lease interest expense.

24.

If a sale and leaseback transaction results in a finance lease, IFRS 16 Leases provides the following accounting treatment for any excess of sales proceeds over the carrying amount: Learning Objective 12.8 recognise and account for sale and leaseback transactions a. recognise directly in retained earnings of the seller-lessee; b. immediately recognise as income by the seller-lessee; *c. defer and amortise over the lease term; d. include in the capitalised amount of the leased asset.

25.

A sale and leaseback transaction involves the sale of an asset that is then leased back to the: Learning Objective 12.8 recognise and account for sale and leaseback transactions *a. original owner; b. acquiring entity; c. lessor; d. purchaser.

26.

Which of the following was NOT a reason given by the IASB to remove the requirement to classify leases from any future accounting standard?

Learning Objective 12.9 discuss changes to lease accounting a.

All leases give rise to a right to use the leased item that meets the definition of an asset; a single conceptual model to account for all leases is preferable; b.

The removal of classification will result in a simpler accounting standard; *c. Removing the classification will result in inconsistencies in how the minimum lease payments are determined for classification purposes; d.

Removal of classification will result in similar transactions being accounted for in the same way.

Testbank to accompany Company Accounting in Australia, Seventh edition – Chapter 6

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

8

CHAPTER 13 Intangible assets

Learning objectives 13.1 Understand the key characteristics of an intangible asset 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles 13.3 Explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles 13.4 Explain the accounting for retirement and disposal of intangible assets 13.5 Apply the disclosure requirements of IAS 38

Company Accounting 7e Leo et al Chapter 8 Test Bank Multiple Choice Questions

1.

Which of the following assets is regarded as meeting the identifiability criteria for recognition as an identifiable intangible asset that can be recorded as acquired in a business combination?

Learning Objective 13.1 Understand the key characteristics of an intangible asset a. customer base; *b. royalty agreements; c. ongoing recruitment programs; d. strong and favourable employee relations.

2.

For an asset to be classified as an identifiable intangible, IAS 38 Intangibles requires that it meet which of the following criteria?

I. It arises from a contractual or legal right.

II. Its fair value must be able to be reliably measured.

III. It is separable from the entity.

IV. Its cost must reliably measurable.

Learning Objective 13.1 Understand the key characteristics of an intangible asset a.

I or IV only; b.

I or II only; c.

II or III only; *d. I or III only.

3.

A key characteristic that separates assets such as property, plant and equipment from intangible assets is: Learning Objective 13.1 Understand the key characteristics of an intangible asset a. separability; b. length of useful life; *c. lack of physical substance; d. reliability.

4.

The two key characteristics of intangible assets are that they are identifiable and that they: Learning Objective 13.1 Understand the key characteristics of an intangible asset: a. have physical substance; b. are monetary assets; c. represent current obligations of the entity; *d. lack physical substance.

5.

The characteristic that distinguishes the goodwill from other intangible assets is: Learning Objective 13.1 Understand the key characteristics of an intangible asset *a. identifiability; b. its nature as a monetary asset; c. that is has a physical embodiment; d. it can be separated from the entity and sold individually.

Under IAS 38 Intangibles, goodwill may only be recognised as an asset if it:

6.

8.1

Learning Objective 13.1 Understand the key characteristics of an intangible asset a. arises as a result of creating new assets within the normal business operations; b. does not exceed its internally recorded cost; c. is internally generated; *d. is acquired as part of a business combination.

7.

The measurement of fair value is determined in accordance with IFRS 13 Fair Value Measurement. IFRS 13 defines fair value as one that has all of the following conditions:

I II The price that would be received to sell an asset or paid to transfer a liability Yes Is an orderly transaction between market participants Yes Based on the measurement date.

Yes

No

III

IV

Yes

Yes

No

Yes Yes

No No

Yes

Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles a.

I; b.

II; c.

III; *d.

IV.

8.

When an intangible asset is acquired by an exchange of assets, which of the following measures will need to be considered in the determination of that cost?

Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles *a.

The fair value of the asset given up; b.

The initial cost of the asset given up; c.

The carrying amount of the asset received; d.

The replacement cost of the asset received.

9.

Which of the following assets is regarded as meeting the identifiability criteria for recognition as an identifiable intangible asset that may be acquired in a business combination?

Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles a. customer service capability; *b. newspaper mastheads; c. favourable government relations; d. presence in geographic locations.

2

Company Accounting 7e Leo et al Chapter 8 Test Bank 10.

Paragraph 63 of IAS 38 Intangibles, prohibits the recognition of the following internally generated identifiable intangibles:

I II Brands Mastheads Publishing titles Customer lists

No No No No

III

IV

No Yes No Yes

No Yes Yes No

Yes Yes Yes Yes

Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles a.

I; b.

II; c.

III; *d.

IV.

11.

Unless acquired under a business combination, intangible assets must be initially measured using which of the following measurement approaches?

Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles a. discounted cash flows; b. fair value; c. net present value; *d. cost.

12.

According to the definition provided in IAS 38 Intangibles, activities undertaken in the ‗research‘ phase of the generation of an asset may include: Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles a. the application of knowledge to a design for the production of new materials; *b. original and planned investigation with the prospect of gaining new scientific knowledge; c. the use of research findings to create a substantially improved product; d. using knowledge to materially improve a manufacturing device.

8.3

13.

Wojtowicz Limited was involved in a mining exploration business. It commenced a project to design more efficient gold detecting equipment. The following expenditures occurred during the financial year ended 2013:  Researcher‘s salary £5000  Research consumables £3000  Re-development of the detecting equipment £4000  Final adjustments to the detecting equipment £2500.

The amount to be capitalised by this company as an intangible asset, for the 2013 financial year, is: Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles *a. £6500; b. £8000; c. £11 500; d. £14 500.

14.

Parsons Limited was involved in a highly successful plastics manufacturing business. It commenced a project to design a more efficient extrusion system for its plastic pipes. The following outlays occurred:  January: Research salaries £50 000  February: Research materials £30 000  March: Re-development of the extrusion plant £400 000  April: Final adjustments to the extrusion plant £25 000.

The amount to be expensed by this company at the end of the financial year, 30 June, is: Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles a. £30 000; b. £50 000; *c. £80 000; d. £480 000.

15.

IAS 38 Intangibles, requires that an intangible asset with a finite life: Learning Objective 13.3 Explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles *a. be amortised across its useful life; b. be amortised across a period of no greater than 20 years; c. not be amortised in periods when it is been properly maintained; d. not be subject to amortisation charges.

4

Company Accounting 7e Leo et al Chapter 8 Test Bank 16.

Under IAS 38 Intangibles, an intangible asset with an indefinite useful life is: Learning Objective 13.3 Explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles a. not able to be recognised by an entity as an asset; *b. not subject to annual amortisation charges; c. amortised using the straight-line method over a period of no more than 20 years; d. amortised using the reducing balance method over a period not exceeding 5 years.

17.

Which of the following statements is NOT correct?

Learning Objective 13.4 Explain the accounting for retirement and disposal of intangible assets a. intangible assets are to be derecognised when there are no expected future benefits from the asset; b. amortisation of an intangible with a finite useful life does not cease when the asset becomes temporarily idle; *c. amortisation of an intangible with an indefinite life does not cease when the asset is retired from active use; d. gains or losses on disposal are calculated as the difference between the proceeds on disposal and the carrying amount at point of sale, with amortisation calculated up to the point of sale.

18.

IAS 38 Intangibles, requires that the following items in relation to intangibles, each be disclosed separately: Learning Objective 13.5 Apply the disclosure requirements of IAS 38 a. the opening balance of each intangible; b. the closing balance of each intangible; *c. any impairment losses reversed in profit or loss during the period; d. all amounts of intangibles acquired during the period.

19.

Items such as market knowledge, effective advertising programs, fundraising capabilities and trained staff are NOT regarded as assets because they: Learning Objective 13.1 Understand the key characteristics of an intangible asset: a. are monetary items; b. cannot be measured; *c. are not controlled by the entity; d. are too difficult to manage.

20.

The recognition criteria that an asset must meet before it may be recognised and presented in the financial statements include: Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles: a. that the recognition of the asset is relevant to user decision making; *b. probability that future economic benefits will flow to the entity; c. that the information about the asset is neutral;

8.5

d.

a likelihood that the cost of the asset is verifiable.

6

Company Accounting 7e Leo et al Chapter 8 Test Bank 21.

The cost of an intangible asset is comprised of the fair value of the consideration: Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles: a. less legal costs incurred in the purchase; *b. plus directly attributable costs; c. plus indirect costs; d. less directly attributable costs.

22.

The original and planned investigation undertaken with the prospect of gaining new knowledge is described as: Learning Objective 13.2 Explain the criteria relating to the initial recognition of intangible assets and their measurement at point of initial recognition, distinguishing between acquired and internally generated intangibles: a. exploration; b. development; c. investigation; *d. research.

23.

Under the revaluation method of measuring an intangible, the asset is carried at fair value and subject to charges for: Learning Objective 13.3 Explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles: *a. amortisation and impairment; b. inflation in value; c. interest expense; d. increment in value.

24.

When subsequent expenditure on intangible assets occurs the costs are: Learning Objective 13.3 Explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles: a. recognised directly in retained earnings account; *b. immediately expensed; c. transferred to a revaluation reserve account; d. capitalised.

25.

Which of the following statements is NOT correct?

Learning Objective 13.4 Explain the accounting for retirement and disposal of intangible assets: a. intangible assets are to be derecognised on disposal; *b. amortisation of an intangible with a finite useful life ceases when the asset becomes temporarily idle; c. intangible assets are to be derecognised when there are no expected future benefits from the asset; d. gains or losses on disposal are calculated as the difference between the proceeds on disposal and the carrying amount at point of sale, with amortisation calculated up to the point of sale.

8.7

26.

Which of the following statements is correct?

Learning Objective 13.5 Apply the disclosure requirements of IAS 38: a.

IAS 38 requires disclosures about an entity‘s intangible assets, with disclosures being made on an asset by asset basis; b.

Disclosures about the useful lives of intangibles are required with explanations being required where assets are assessed to have finite useful lives; c.

Where the cost model is used, specific disclosures are required including assumptions made on estimating fair values; *d. Separate disclosures are required for internally generated intangibles.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone 8

Company Accounting 7e Leo et al Chapter 8 Test Bank

John Wiley & Sons, Ltd 2024

8.9

CHAPTER 14 Business combinations

Learning Objectives 14.1 14.2 14.3 14.4 14.5 14.6 14.7 14.8 14.9

Understand the nature of a business combination and its various forms Explain the basic steps in the acquisition method of accounting for business combinations Account for a business combination in the records of the acquirer Recognise and measure the assets acquired and liabilities assumed in the business combination Understand the nature of and the accounting for goodwill and gain from bargain purchase Account for shares acquired in the acquiree Prepare the accounting records of the acquiree Account for subsequent adjustments to the initial accounting for a business combination Provide the disclosures required under IFRS 3.

-1Multiple Choice Questions 1.

A business combination is defined as: Learning Objective 14.1 Understand the nature of a business combination and its various forms a.

A transaction in which an acquirer obtains control of an acquiree b.

A transaction in which one entity obtains control of one or more other entities *c. A transaction or other event in which an acquirer obtains control of one or more businesses d.

A transaction or other event in which an entity obtains control of one or more businesses

2.

In a business combination, the acquirer is the party that: Learning Objective 14.2 Explain the basic steps in the acquisition method of accounting for business combinations *a. obtains control of the other entities b. concedes control over the acquired entities c. sells the acquired entity d. receives the acquisition consideration.

3.

In a business combination, the acquiree is the party that: Learning Objective 14.2 Explain the basic steps in the acquisition method of accounting for business combinations a. finances the business combination *b. gives up control over the net assets acquired c. obtains control of the net assets the other entity d. pays the acquisition consideration.

4.

The acquisition date for a business combination is the date on which: Learning Objective 14.2 Explain the basic steps in the acquisition method of accounting for business combinations a. a substantive agreement between the combining parties is reached *b. the acquirer effectively obtains control of the acquiree c. the business combination is announced to the public d. the acquirer announces the acquisition to the acquiree.

5.

Where the acquirer purchases assets and assumes liabilities of another entity it does NOT need to consider measurement of: Learning Objective 14.3 Account for a business combination in the records of the acquirer a. consideration transferred b. fair values of identifiable net assets *c. carrying amounts of identifiable net assets d. goodwill

8.1

6.

In order for a tangible asset to be recognised by an acquirer under a business combination it must be probable that future economic benefits will flow to the acquirer and:

Learning Objective 14.4 Recognise and measure the assets acquired and liabilities assumed in the business combination *a. b. c. d,

its fair value can be measured reliably it must be a non-current item it must be measured using the present value method it may not be a non-monetary asset.

7.

The following items are NOT deemed to be items that would meet the definition of an intangible asset given by IFRS 3: Learning Objective 14.4 Recognise and measure the assets acquired and liabilities assumed in the business combination a. *b. c. d.

trademarks experienced marketing team newspaper mastheads order backlogs.

8.

Net employee benefit liabilities acquired in a business combination are measured by using the: Learning Objective 14.4 Recognise and measure the assets acquired and liabilities assumed in the business combination *a. b. c. d.

9.

present value method estimated total of future cash outflows, undiscounted face value of the liabilities cash method.

Oliveira Limited estimated that the net present value of future cash flows from Equipment acquired in a business combination is $15 000. The cost of replacing the Equipment is estimated to be $18 000. The Equipment has been independently appraised at a value of $14 000. A similar item of Equipment cost the acquirer $19 000 the previous year.

The fair value at which the Equipment will be recognised when recording the business combination is:

Learning Objective 14.4 Recognise and measure the assets acquired and liabilities assumed in the business combination *a. b. c. d.

$14 000 $15 000 $18 000 $19 000.

2

-310.

Johnson Limited estimated the net present value of future cash flows from specialised Plant acquired under a business combination to be $30 000. A replacement cost for the Plant is estimated to be $33 000. The Plant has been independently appraised at a value of $31 000. A similar item of Plant cost the acquirer $29 000 the previous year.

What is the fair value for recognition of the Plant under a business combination?

Learning Objective 14.4 Recognise and measure the assets acquired and liabilities assumed in the business combination a. b. c. *d.

$29 000 $30 000 $33 000 $31 000.

11.

If shares are issued as part of the consideration paid, transactions costs such as brokerage fees may be incurred. According to IFRS 3, the appropriate accounting treatment for such costs in the records of the acquirer is a debit to: Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain *a. b. c. d.

share capital investments cash acquisition expenses.

12.

The consideration transferred in a business combination is measured as the fair value of the: Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain a. b. *c. d.

net assets acquired costs directly attributable to the combination consideration given only consideration given plus directly attributable costs.

13.

Bolton Limited acquires the net assets of Pamelia Limited for a cash consideration of $100 000. One half is to be paid on acquisition date and one half is payable in one year‘s time. The appropriate discount rate is 10% p.a. The present value of the cash outflow in one year‘s time is: Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain *a. b. c. d.

14.

$45 454 $50 000 $54 545 $55 000

According to IFRS 3, a gain on bargain purchase arises when the acquirer‘s interest in the fair value of the acquiree‘s identifiable assets and liabilities is:

Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain a. b.

less than the carrying amount of the net assets acquired less than the consideration transferred

8.3

*c. d.

greater than the consideration transferred more than the book values of the identifiable assets acquired.

4

-515.

Fredericks Limited acquired the identifiable assets and liabilities of Nicole Limited for €134 000. The items acquired, stated at fair value, are:  Plant €72 000  Inventory €40 000  Trade receivables €18 000  Patents €10 000  Trade payables €16 000.

The difference on acquisition is: Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain a. b. *c. d.

16.

Gain on bargain purchase €10 000 Gain on bargain purchase €16 000 Goodwill of €10 000 Goodwill of €124 000.

Valdez Limited acquired a 25% interest in Alaska Pty Ltd on 1 January 2024. On 15 September 2024 it acquired an additional 10% interest, and on 15 March 2017 a further 40%.

According to IFRS 3, a business combination occurs on:

Learning Objective 14.6 Account for shares acquired in the acquiree a.

1 January 2024 b.

15 September 2024

*c.

15 March 2017

d.

All of the above

17.

Damon Limited acquired the net assets of Gina Limited. Damon Limited provided an item of equipment as part of the consideration. The fair value of the equipment was €13 000. It cost €20 000 and had a carrying amount of €12 000.

Which of the following entries appropriately reflects the gain or loss on the equipment?

Learning Objective 14.7 Prepare the accounting records of the acquiree a.

DR Loss on sale €1 000 b.

CR Loss on sale €1 000 *c.

CR Gain on sale €1 000 d.

Dr Gain on sale €1 000.

18.

Adjustments cannot be made subsequent to the initial accounting for:

Learning Objective 14.8 Account for subsequent adjustments to the initial accounting for a business combination a.

Goodwill *b.

Restructuring costs

c.

Contingent consideration

d.

Contingent liabilities

8.5

19.

IFRS 3 is relevant when accounting for a business combination that: Learning Objective 14.1 Understand the nature of a business combination and its various forms: a. involves mutual entities b. results in the formation of a joint venture *c. results in an entity acquiring the net assets of another entity d. involves entities or businesses that are not investor owned

20.

Appendix B of IFRS 3 requires disclosure of which of the following?

I

details of contingent consideration

II

the date of exchange

III

carrying amounts of assets and liabilities in business combinations where shares are acquired

IV

a qualitative description of the factors that make up goodwill

Learning Objective 14.9 Provide the disclosures required under IFRS 3 a. I, II and IV only *b. I, III and IV only c. I, II and III only d. I, II, III and IV

21.

According to IFRS 3, the method of accounting for a business combination is the: Learning Objective 14.2 Explain the basic steps in the acquisition method of accounting for business combinations: a. joint venture method b. purchase method c. market value method *d. acquisition method

22.

When an acquirer accounts for a business combination they have to consider: I. II. III. IV.

recognition of the identifiable assets acquired measurement of the identifiable assets acquired recognition of the liabilities assumed measurement of the liabilities assumed

Learning Objective 14.3 Account for a business combination in the records of the acquirer: a.

I and II only *b. I, II, III and IV c.

I and III only d.

II and IV only

6

-723.

When accounting for a business combination a contingent liability is recognised if: Learning Objective 14.4 Recognise and measure the assets acquired and liabilities assumed in the business combination: a. it is a present obligation that has failed to meet the recognition criteria *b. its fair value can be measured reliably c. it is a possible obligation and it is probable that it will occur d. it is probable that an outflow of resources may occur in order to settle the obligation

24.

Goodwill arising in a business combination is classified as: Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain from bargain purchase: a. an item in equity b. a liability c. an expense associated with the acquisition *d. an asset

25.

Goodwill is measured as the difference between the: Learning Objective 14.5 Understand the nature of and the accounting for goodwill and gain from bargain purchase: a. cost of the assets given up, and the cost of the net assets acquired b. cost of the net assets acquired, and the net present value of the consideration given up c. present value of the consideration transferred, and the present value of the net assets acquired *d. consideration transferred, and the fair value of the assets and liabilities acquired

26.

Where an entity acquires shares rather than the net assets of another entity the acquirer records the shares at: Learning Objective 14.6 Account for shares acquired in the acquiree: a. fair value b. fair value less transaction costs c. consideration paid *d. fair value plus transaction costs

27.

Neil Limited sold a business to Howell Limited for $60 000. All assets were recorded by the acquiree at their fair values as follows:  Land $30 000  Inventory $20 000  Trade receivables $4000.

When recording the sale, the acquiree recognises: Learning Objective 14.7 Prepare the accounting records of the acquiree *a. a gain on sale of $6000 b. goodwill of $6000 c. a gain on bargain purchase of $6000 d. a loss on sale of $6000

8.7

28.

When an acquiree disposes of a business, the gain or loss is recognised in: Learning Objective 14.7 Prepare the accounting records of the acquiree: a. retained earnings b. revaluation surplus *c. the statement of profit or loss and other comprehensive income d. capital profits

29.

Subsequent to acquisition date contingent liabilities are measured at: Learning Objective 14.8 Account for subsequent adjustments to the initial accounting for a business combination: a. the amount that would be recorded in accordance with IAS 37 b. the amount initially recorded less cumulative amortisation recognised in accordance with IAS 18 c. the lower of a. and b. above *d. the higher of a. and b. above

30.

The information contained within Appendix B of IFRS 3 in relation to disclosure: Learning Objective 14.9 provide the disclosures required under IFRS 3: a. is not mandatory, but contains optional additional disclosures b. contains prescribed presentation formats for disclosure of business combinations *c. is an integral part of IFRS 3 d. is complementary to the main disclosure requirements within the body of IFRS 3

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

8

-9-

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

8.9

CHAPTER 15 Impairment of assets

Learning Objectives 15.1 15.2 15.3 15.4 15.5 15.6 15.7

Understand the purpose of the impairment test for assets Understand when to undertake an impairment test Explain how to undertake an impairment test for an individual asset Identify a cash-generating unit, and account for an impairment loss for a cashgenerating unit — not including goodwill Account for the impairment of goodwill Account for reversals of impairment losses Apply the disclosure requirements of IAS 36.

-1Multiple Choice Questions 1.

Under IAS 36 Impairment of Assets, the following assets are subject to impairment testing: I Inventory Assets arising from construction contracts Assets arising from employee benefits Property, plant and equipment

Yes No No

II Yes Yes Yes Yes

III Yes No No Yes

IV No No Yes No

No

Learning Objective 15.1 Understand the purpose of the impairment test for assets a.

I; b.

II; *c. III; d.

IV.

2.

If an entity does not expect to recover the carrying amount of an asset, the entity has incurred: Learning Objective 15.1 Understand the purpose of the impairment test for assets: *a. an impairment loss; b. a depreciation expense; c. an amortisation cost; d. a loss on disposal.

3.

Which of the following assets need to be tested for impairment every year?

I intangible assets with indefinite useful lives II intangible assets not yet available for use III intangible assets accounted for under the revaluation method IV goodwill acquired in a business combination Learning Objective 15.2 Understand when to undertake an impairment test a.

I, II and III only; b.

II, III and IV only; *c. I, II and IV only; d.

I, III and IV only.

4.

When goodwill is acquired under a business combination it is subject to an impairment test every: Learning Objective 15.2 Understand when to undertake an impairment test *a. year; b. two years; c. three years; d. five years.

8.1

5.

The impairment test must be applied to tangible assets: Learning Objective 15.2 Understand when to undertake an impairment test: a. at each balance date; b. every three years; c. at each reporting date including interim reporting dates such as half-year; *d. only if there is an indication that the asset may be impaired.

6.

An impairment loss occurs when: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset a. the recoverable amount of an asset exceeds the carrying amount; *b. the carrying amount of an asset exceeds the recoverable amount; c. the asset has a zero residual value; d. the recoverable amount of an asset exceeds its initial cost.

7.

According to IAS 36 Impairment of Assets, the recoverable amount test requires an entity to compare the fair value an asset less costs to sell, with: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset a. the amount obtainable from the sale of the asset; b. the costs directly attributable to the liquidation of the asset; c. its disposal value; *d. its value in use.

8.

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: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset a. £80 000; b. £73 600; *c. £68 000; d. £63 500.

2

-39.

Candy Limited expected future cash flows from the use of Equipment as follows:  End of Year 1 £4000;  End of Year 2 £5000;  End of Year 3 £2000.

The discount rate was determined as 5%. The value in use of the equipment is: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset *a. £10 073; b. £10 576; c. £11 000; d. £11 550.

10.

Where an asset is measured using the cost model, any impairment loss is: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset a. accumulated in a separate ‗accumulated impairment losses‘ account; b. set off against the balance of revenue; c. taken directly to equity; *d. added to the balance of the accumulated depreciation account.

11.

An appropriate journal entry to recognise an impairment loss under the cost model is: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset a.

DR Accumulated impairment losses CR Impairment loss b.

DR CR

Accumulated impairment losses Asset revaluation (Equity)

*c.

DR CR

Impairment loss Accumulated depreciation and impairment losses

d.

DR CR

Revenue Impairment loss

8.3

12.

Under IAS 36 Impairment of Assets, impairment of an asset, and the accounting treatment using the cost model, are as follows: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset Impairment Carrying amount of an asset is less than its recoverable amount

Accounting treatment Asset is written up to its recoverable amount

b.

Carrying amount of an asset is less than its recoverable amount

No change to the asset value

*c.

Carrying amount of an asset is greater than its recoverable amount

Asset is written down to its recoverable amount

d.

Carrying amount of an asset is greater than its recoverable amount

No change to the asset value

a.

13.

When an asset is measured using the revaluation model, any impairment loss is treated as: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset *a. a revaluation decrement; b. a revaluation increment; c. a set-off against depreciation expense; d. an addition to depreciation expense.

14.

When evaluating whether an asset has been impaired, the carrying amount of the asset must be compared to recoverable amount. Recoverable amount is the higher of: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset: a. initial cost: and, fair value; *b. fair value less costs to sell: and, value in use; c. original cost: and, net present value; d. value in use: and, original cost.

15.

Value in use is: Learning Objective 15.3 Explain how to undertake an impairment test for an individual asset a. amount obtainable from disposal of an asset excluding any selling costs; b. initial cost of an asset less any expected disposal costs; c. incremental costs directly attributable to disposal of an asset; *d. the present value of future cash flows expected to be derived from an asset.

4

-516.

Constructor Limited estimated an impairment loss of €500 against its single cashgenerating unit. The company had the following assets:  Headquarters Building €1000;  Construction Plant €600;  Equipment €400.

The net carrying amount of the Equipment after allocation of the impairment loss is: Learning Objective 15.4 Identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill a. €200; b. €400; *c. €300; d. €0.

17.

In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of: Learning Objective 15.5 Account for the impairment of goodwill *a. value in use and zero; b. present value and value in use; c. cost and market value; d. initial cost and fair value.

18.

Hayfield Limited recognised an impairment loss of $200 against a cash-generating unit containing the following assets:  Buildings $500;  Roads $300;  Equipment $600.

The net carrying amount of the Roads after allocation of the impairment loss is: Learning Objective 15.4 Identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill a. $100; b. $235; *c. $257; d. $300.

19.

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 Plant after allocation of the impairment loss is: Learning Objective 15.4 Identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill a. €60 000; *b. €45 000; c. €35 000; d. €10 000.

8.5

20.

Jam Pty Ltd has two cash generating units. CGU A had a carrying amount of €700 and value in use of €750. CGU B has a carrying amount of €900 and a value in use of €800.

The carrying amount of the head office assets is €400. CGUs A and B utilise the head office services equally. The impairment loss for CGU A is: Learning Objective 15.4 Identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill a. €0; b. €50; *c. €150; d. €350.

21.

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 $4000;  Plant $3000;  Goodwill $1000.

The carrying amount of Goodwill after the impairment loss is allocated is: Learning Objective 15.5 Account for the impairment of goodwill a. $0; *b. $200; c. $900; d. $1000.

22.

At reporting date, the carrying amount of a cash-generating unit was considered to be have been impaired by $900. The unit included the following assets:  Land $4000;  Plant $3000;  Goodwill $500.

The amount of impairment allocated to land is: Learning Objective 15.5 Account for the impairment of goodwill a. $200; *b. $229; c. $300; d. $514.

23.

Under IAS 36 Impairment of Assets, the impairment testing of goodwill occurs at the: Learning Objective 15.5 Account for the impairment of goodwill a. level of the entity itself; b. combined segments level; c. operating division level; *d. lowest level at which goodwill is allocated to cash-generating units.

6

-724.

The carrying amount of a cash-generating unit was considered to be impaired. impairment loss was €600. The cash-generating unit included the following assets:  Goodwill €1000;  Buildings €2000;  Plant and Equipment €1500.

The carrying amount of Goodwill after allocation of the impairment loss is: Learning Objective 15.5 Account for the impairment of goodwill a. €0; b. €867; c. €600; *d. €400.

The

25.

The impairment test for goodwill must be conducted: Learning Objective 15.5 Account for the impairment of goodwill a. annually, at balance date; b. once every three years at balance date; c. only if it is reasonable to expect that goodwill has been impaired; *d. annually, at the same time every year.

26.

When assessing the recoverable of assets that have previously been subject to an impairment loss, which of the following indicators assist in providing external evidence that an impairment loss has reversed: Learning Objective 15.6 Account for reversals of impairment losses a. the asset‘s market value has decreased significantly during the period; b. significant changes with an adverse effect on the entity have taken place; *c. market interest rates have decreased during the period; d. internal reporting sources indicate that the economic performance of the asset will not be as good as expected.

27.

During 2024 Sacco Limited, estimated that the carrying amount of goodwill was impaired and wrote it down by €50 000. In 2017, the company reassessed goodwill was decided that the old acquired goodwill still existed. The appropriate accounting treatment in 2017 is: Learning Objective 15.6 Account for reversals of impairment losses a. reverse the previous goodwill impairment loss; b. recognise the revalued amount of goodwill by an adjustment against the asset revaluation surplus account; *c. ignore the reversal as it is prohibited by IAS 36 Impairment of Assets; d. increase goodwill by an adjustment to retained earnings.

8.7

28.

Which of the following is NOT correct in relation to the reversal of an impairment loss of an individual asset?

Learning Objective 15.6 Account for reversals of impairment losses a.

When reversing an impairment loss the carrying amount cannot be increased to an amount in excess of the carrying amount that would have been determined had no impairment loss been recognised; b.

For a depreciable asset there needs to be a calculation of carrying amount using the depreciation variables applied before the impairment loss to determine what the carrying amount would have been if there had been no impairment loss; c.

If the individual asset is recorded under the cost model, then the increase in the carrying amount is recognised immediately in profit or loss; *d. Where the recoverable amount is less than the carrying amount of an individual asset, the reversal of a previous impairment loss requires adjusting the carrying amount of the asset to recoverable amount.

29.

In relation to the impairment of assets, IAS 36 Impairment of Assets, requires the following disclosures for each class of assets: I The line of the statement of profit or loss and other comprehensive income in which impairment losses are included.

II The amount of reversals of impairment losses during the period.

III The amount of impairment losses recognised directly in other comprehensive income.

IV The beginning and ending balances of any ‗provision for impairment‘ account.

Learning Objective 15.7 Apply the disclosure requirements of IAS 36 *a. I, II, III and IV; b.

I, II and III only; c.

II and IV only; d.

IV only.

30.

Which of the following is required to be disclosed for each class of assets?

I the amount of impairment losses recognised in profit or loss during the period II the amount of reversals of impairment losses recognised in profit or loss during the period III the amount of impairment losses on revalued assets recognised directly in equity during the period; and IV the amount of reversals of impairment losses on revalued assets recognised directly in other comprehensive income during the period.

Learning Objective 15.7 Apply the disclosure requirements of IAS 36 a.

III and IV only; *b. I, II, III and IV; c.

I, II and III only; d.

I and II only.

Testbank 8

-9-

to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

8.9

Chapter 16

Financial Statement Presentation

Learning Objectives 16.1 16.2 16.3

16.4 16.5 16.6 16.7

16.8

Describe the main components of financial statements Explain the general principles underlying the preparation and presentation of financial statements Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/and/or in the notes Apply the requirements for the presentation of information in the statement of profit or loss and other comprehensive income and/and/or in the notes Apply the requirements for the presentation of information in the statement of changes in equity and/and/or in the notes Discuss the disclosures required by IAS 1 in the notes to the financial statements Apply the requirements of IAS 8 regarding the selection and application of accounting policies, and in respect of accounting for changes in accounting policies, changes in accounting estimates and errors Distinguish between adjusting and non-adjusting events after the reporting period in accordance with IAS 10.

10

- 11 Multiple Choice Questions

1.

The requirements of IAS 1 Presentation of Financial Statements apply to the following sets of financial statements: Learning Objective 16.1 Describe the main components of financial statements a. condensed financial statements; b. interim financial statements; *c. general-purpose financial statements; d. special purpose financial statements.

2.

Items that are dissimilar in nature must be presented separately in financial statements unless: Learning Objective 16.2 Explain the general principles underlying the preparation and presentation of financial statements *a. they are immaterial; b. they are financial items in which case they can be off-set; c. the directors approve of an aggregation of the items; d. the auditors approval to aggregate the items is obtained.

3.

Assets and liabilities, and income and expenses may be off-set if: Learning Objective 16.2 Explain the general principles underlying the preparation and presentation of financial statements a. they are financial assets and liabilities; b. they are in respect of borrowing and lending activities such as interest revenue and interest expense; *c. required or permitted by a standard; d. there is no tax effect.

4.

The primary source of information about an entity‘s financial position is to be found in its: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. statement of profit or loss and other comprehensive income; *b. statement of financial position; c. statement of changes in equity; d. statement of cash flows.

8.11

5.

According to IAS 1 Presentation of Financial Statements, a required format for the presentation of a statement of financial position is: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. not prescribed and no guidance is provided in the standard; *b. not prescribed but guidance is provided in the standard for a suitable format; c. prescribed by the standard; d. not prescribed by the standard but details are found in the Company Act or in the civil code.

6.

Which of the following items, if it exists, must be presented as a line item in the statement of financial position?

Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes *a. Trade and other receivables; b. Revenue; c. Cost of sales; d. Share of profit of associates.

7.

An entity is required to classify its assets and liabilities as current or non-current unless it is considered more relevant and provide more reliable information to present them according to their: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. value; *b. liquidity; c. age; d. physical nature.

8.

Under IAS 1 Presentation of Financial Statements, which of the following items is disclosed separately on the face of a statement of financial position?

Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. Income tax expense; b. Revenue; *c. Investment property; d. Profit attributable to members of the parent.

12

- 13 9.

Typically industries where operating cycles may exceed twelve months include: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. food preparation; b. manufacturing; c. retail; *d. real estate development.

10.

The following are normally presented in a statement of financial position as current items: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. deferred tax liabilities; *b. trade payables; c. deferred tax assets; d. goodwill.

11.

If a liability satisfies the following criterion it will be classified as non-current: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. due to be settled within twelve months of the balance date; b. expected to be settled in the entity‘s normal operating cycle; *c. due to be settled more than twelve months after the statement of financial position date; d. it is held primarily for the purpose of being traded.

12.

At reporting date for Year 1, Elpha Limited had a loan from its bankers that it expected to settle within three months. The loan term was renegotiated after reporting date and before the authorisation date of the financial statements, and the repayment date was extended by two years. For Year 1 financial statement presentation purposes this loan is classified by Elpha Limited as: Learning Objective 16.3 Apply the requirements for the classification of items reported in the statement of financial position, and apply the requirements for the presentation of information in the statement of financial position and/or in the notes a. a non-current liability; *b. a current liability; c. a contingent liability; d. an off-statement of financial position liability.

8.13

13.

According to IAS 1 Presentation of Financial Statements, a required format for the presentation of the statement of profit or loss and other comprehensive income is: Learning Objective 16.4 Apply the requirements for the presentation of information in the statement of profit or loss and other comprehensive income and/or in the notes a. prescribed by the standard; b. not prescribed and no guidance is provided in the standard for a suitable format; *c. not prescribed but guidance is provided in the standard for a suitable format; d. prescribed by the standard and further details are found in the Company Act or in the civil code.

14.

IAS 1 Presentation of Financial Statements requires the following items to be disclosed separately in the statement of profit or loss and other comprehensive income: I Cost of sales.

II Revenue.

III Finance costs.

IV Share of the profit or loss from associates.

V Tax expense relating to extraordinary events.

VI Tax expense relating to ordinary activities.

VII Profit or loss.

Learning Objective 16.4 Apply the requirements for the presentation of information in the statement of profit or loss and other comprehensive income and/or in the notes a. I, II, VI and VII only; b. I, II, III and V only; *c. II, III, IV, VI and VII only; d. I, III, V and VII only.

15.

Which of the following items, if it exists, does NOT have to be presented as a line item on the face of a statement of profit or loss and other comprehensive income?

Learning Objective 16.4 Apply the requirements for the presentation of information in the statement of profit or loss and other comprehensive income and/or in the notes a. revenue; *b. closing inventory; c. profit or loss attributable to non-controlling interests; d. post-tax profit or loss of discontinued operations.

16.

In respect to the statement of profit or loss and other comprehensive income of an entity, IAS 1 Presentation of Financial Statements prescribes: Learning Objective 16.4 Apply the requirements for the presentation of information in the statement of profit or loss and other comprehensive income and/or in the notes a. a fixed format for the presentation of items in the statement of profit or loss and other comprehensive income; *b. line items that are considered to be of sufficient importance to warrant presentation; c. the presentation of line items of revenue, but not of income; d. the presentation of line items comprising total expenses, but not line items comprising total revenue.

14

- 15 17.

Under IAS 1 Presentation of Financial Statements profit or loss attributable to noncontrolling interests is prescribed for presentation in: Learning Objective 16.4 Apply the requirements for the presentation of information in the statement of profit or loss and other comprehensive income and/or in the notes a. an equity statement; b. a statement of financial position; *c. a statement of profit or loss and other comprehensive income; d. a statement of cash flows.

18.

Included in a statement of changes in equity are the following items: I Opening and closing balances.

II Profit or loss for the period.

III Gains or losses not recognised in the statement of profit or loss and other comprehensive income.

IV New share issues.

V Dividends paid.

Learning Objective 16.5 Apply the requirements for the presentation of information in the statement of changes in equity and/or in the notes a. I, II & III only; b. II, III and IV only; c. I, IV and V only; *d. I, II, IV and V only.

19.

Which of the following note disclosures are NOT required by IAS 1 Presentation of Financial Statements?

Learning Objective 16.6 Discuss the disclosures required by IAS 1 in the notes to the financial statements a. Sources of estimation uncertainty in relation to impairment of assets; b. Dividends declared after end of reporting period but before the financial statements are authorised for issue; c. the country of incorporation of the entity; *d. the names and qualifications of all directors of the entity.

20.

Where an accounting estimate has been revised materially the item is: Learning Objective 16.7 Apply the requirements of IAS 8 regarding the selection and application of accounting policies, and in respect of accounting for changes in accounting policies, changes in accounting estimates and errors a. to be accounted for retrospectively; b. not required to be recognised in the current period; *c. to be accounted prospectively; d. to be adjusted in the comparative numbers of previous periods.

8.15

21.

Which of the following statements in relation to errors is correct?

Learning Objective 16.7 Apply the requirements of IAS 8 regarding the selection and application of accounting policies, and in respect of accounting for changes in accounting policies, changes in accounting estimates and errors *a. Errors must be accounted for on a retrospective basis; b. Under the ―all inclusive‖ concept of profit, accounting errors must be recognised in profit and loss for the period; c. All errors, regardless of their size must be corrected as soon as they are discovered; d. Where the error is considered to be fundamental, the prior year financial statements must be recalled and reissued.

22.

If an entity receives information after end of reporting period that one of its assets was impaired at end of reporting period by a material amount it must: Learning Objective 16.8 Distinguish between adjusting and non-adjusting events after the reporting period in accordance with IAS 10 *a. adjust the amounts recognised in the financial statements to reflect the impairment; b. notify all shareholders in writing; c. disclose the impairment in the notes but not recognise the amount in the financial statements; d. include the impairment loss as a contingent liability.

23.

Which of the following events occurring after the reporting date but before the financial report is authorised for issue is NOT an example of an adjusting event?

Learning Objective 16.8 Distinguish between adjusting and non-adjusting events after the reporting period in accordance with IAS 10 *a. a decline in the market value of a listed security; b. the notification of the insolvency of a debtor; c. an event that indicates that the going concern basis of accounting may not be appropriate; d. the sale of inventories after the reporting date for an amount below cost.

24.

A set of financial statement prepared in accordance with IAS 1 Presentation of Financial Statements comprises: I. A statement of financial position.

II. A statement of profit or loss and other comprehensive income.

III. A statement of cash flows.

IV. A statement of changes in equity.

V. Notes.

Learning Objective 16.1 Describe the main components of financial statements a. I, II, and IV; *b. I, II, III IV and V: c. I, III and IV; d. I, II, III and IV.

16

- 17 25.

Under IAS 1 Presentation of Financial Statements, financial statements must be prepared and presented at least: Learning Objective 16.2 Explain the general principles underlying the preparation and presentation of financial statements *a. annually; b. half-yearly; c. each three months; d. at the end of each month of operations.

26.

The application of International Financial Reporting Standards with additional disclosure where necessary is presumed to result in financial statements that: Learning Objective 16.2 Explain the general principles underlying the preparation and presentation of financial statements *a. will result in a fair presentation; b. contain only material items; c. are free from error and misstatement; d. are unbiased.

27.

Included in a statement of changes in equity are the following items: I Opening and closing balances.

II Profit or loss for the period.

III New share issues.

IV Dividends paid.

Learning Objective 16.5 Apply the requirements for the presentation of information in the statement of changes in equity and/or in the notes a. I, II & III only; b. II, III and IV only; c. I, II and IV only; d.* I, II, III and IV.

28.

In relation to ‗retained earnings‘, IAS 1 Presentation of Financial Statements mandates the following disclosures: I. Any changes during the reporting period.

II. The related tax adjustments in respect to any changes during the period.

III. The beginning balance.

IV. The balance at reporting date.

Learning Objective 16.5 Apply the requirements for the presentation of information in the statement of changes in equity and/or in the notes a. I, II, III and IV; b. II, III and IV only; *c. I, III and IV only; d. III and IV only.

8.17

29.

The issuing of bonus shares in lieu of a cash dividend would be separately disclosed in an entity‘s Learning Objective 16.5 Apply the requirements for the presentation of information in the statement of changes in equity and/or in the notes a. Statement of Financial Position; b. Statement of Comprehensive Income; *c. Statement of Changes in Equity; d. Statement of Cash Flows.

30.

Which of the following is NOT an example of an adjusting event under IAS 10 Events after the Reporting Period?

Learning Objective 16.8 Distinguish between adjusting and non-adjusting events after the reporting period in accordance with IAS 10 a. the settlement after reporting date but prior to the date that the financial statements are authorised for issue of a court case which had commenced prior to reporting date; b. the sale of inventories after reporting date but prior to the date that the financial statements are authorised for issue for an amount below cost; *c. uninsured damage to a material item of machinery after reporting date but prior to the date that the financial statements are authorised for issue for an amount below cost; d. receipt of advice after reporting date but prior to the date that the financial statements are authorised for issue that a material debtor has been placed in liquidation.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas 18

- 19 -

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

8.19

Chapter 17 Statement of cash flows Learning Objectives 17.1 17.2 17.3 17.4 17.5 17.6

Explain the purpose of a statement of cash flows and its usefulness Explain the definition of cash and cash equivalents Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities Contrast the direct and indirect methods of presenting net cash flows from operating activities Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions Prepare other disclosures required or encouraged by IAS 7

-1Multiple choice 1.

Which of the following items must be separately disclosed in the Statement of Cash Flows?

I. Dividends paid II. Interest received III. Dividends received IV. Interest paid V. Auditor‘s remuneration paid Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions *a. I, II, III and IV only; b.

II, III and IV only; c.

I, II and V only; d.

II, III, IV and V only.

2.

According to IAS 7 Statement of Cash Flows, which of the following items does NOT fall within the definition of cash?

Learning Objective 17.2 Explain the definition of cash and cash equivalents a.

Bank notes and coins; b.

Non-bank bills readily convertible to cash; c.

An investment with a short maturity of, say, three months or less from the date of acquisition; *d.

Trade receivables.

3.

Which of the following items is classified as part of ‗operating activities‘ in the Statement of Cash Flows?

Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a.

Depreciation of non-current assets; *b.

Receipts from customers from the sale of goods; c.

Bad debts expense; d.

Proceeds from the sale of non-current assets.

4.

The following item is classified as part of ‗investing activities‘ in the Statement of Cash Flows: Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a. depreciation of non-current assets; b. interest received from investments; *c. acquisition of non-current assets; d. proceeds from an issue of shares.

8.1

5.

The following item is classified as a ‗financing activity‘ in the Statement of Cash Flows: Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a. interest paid on debentures; b. cash received from trade receivables; *c. d.

cash payment on redemption of the company‘s debentures; cash payment to purchase debentures of another entity.

6.

Operating activities on a Statement of Cash Flows are generally associated with: Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a. movements in non-current liabilities of an entity; *b. revenues and expenses of an entity; c. acquisitions of non-current assets of an entity; d. changes in equity of an entity.

7.

Items classified as ‗financing activities‘ on an entity‘s Statement of Cash Flows are usually associated with: Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities *a. movements in non-current liabilities and equity; b. sales of goods and services by the entity; c. disposal of non-current assets; d. purchase of shares by the entity.

8.

Which of the following cash flow activities are regarded as investing cash flows?

Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a. income taxes paid; b. interest paid; *c. acquisition of subsidiary net of cash acquired; d. proceeds from issue of debentures.

9.

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 disposal of investments of $28 000 Also, Trade Receivables increased by $39 000 and Inventories decreased by $12 000.

The cash flow from operating activities during the year was: Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions a. $731 000; b. $785 000; *c. $915 000; d. $969 000.

2

-310.

The following information was extracted from the records of Ustinof Limited:  Opening balance of Equipment: $360 000  Closing balance of Equipment: $400 000  Cost of new Equipment: $80 000  Proceeds from disposal of Equipment: $6000 (Cost $40 000; Carrying amount $10000) The total cash flows from investing activities is equal to: Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions a. $40 000 cash outflow; *b. $74 000 cash outflow; c. $76 000 cash outflow; d. $80 000 cash outflow.

Use the following information to answer questions 11 to 13 A company reported the following information for a financial year: £ Profit from ordinary activities before income tax expense Income tax expense Depreciation expense Issue of shares Loan made to another company Increase in trade receivables Decrease in inventories Cash received from loans receivable Dividends paid

72 000 20 000 8 000 40 000 6 000 1 000 2 000 4 000 2 000

11.

What is the net cash inflow (outflow) from operating activities?

Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions a. £45 000; b. £59 000; c. £60 000; *d. £61 000.

12.

What is the net cash inflow (outflow) from investing activities?

Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions a. £2000 net cash inflow; b. £6000 net cash inflow; *c. £(2000) net cash outflow; d. £(4000) net cash outflow.

8.3

13.

What is the net cash inflow (outflow) from financing activities?

Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions *a. £38 000 net cash inflow; b. £40,000 net cash inflow; c. £42,000 net cash inflow; d. £(2000) net cash outflow.

14.

Which of the following items should be disclosed in a Statement of Cash Flows?

Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions a.

Payment of dividends through a share investment scheme; b.

Acquisition of an investment in a subsidiary for consideration consisting of an exchange of non-current assets and liabilities; *c. Proceeds from the issue of debentures; d.

Refinancing of long-term debt.

15.

IAS 7 Statement of Cash Flows requires that investing and financing transactions that do NOT require the use of cash or cash equivalents should be: Learning Objective 17.2 Explain the definition of cash and cash equivalents *a. excluded from a Statement of Cash Flows; b. included in a Statement of Cash Flows before operating, investing and financing activities; c. presented in the Statement of Cash Flows after operating activities and before investing and financing activities; d. presented in a Statement of Cash Flows after the operating, investing and financing activities have been presented.

16.

During the financial year Sugianto Limited had sales of £42 000. The opening balance of trade receivables was £9000, and the closing balance was £12 700. Bad debts amounting to £700 were written off during the period. The cash receipts from sales during the year amounted to: Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions *a. £37 600; b. £39 000; c. £38 300; d. £45 700.

4

-517.

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 disposal of plant: €215 000 What is the amount of the cash flows from financing activities of Warner Limited for the reporting period?

Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions a.

Net cash inflow €155 000; *b. Net cash outflow €155 000; c.

Net cash inflow €212 000; d.

Net cash outflow €212 000.

18.

During the financial year Marina Limited had sales of €720 000. The opening balance of trade receivables was €103 000, and the ending balance was €139 000. Bad debts of €34 000 were written off during the period. The cash receipts from customers during the year were equal to: Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions *a. €650 000; b. €718 000; c. €722 000; d. €790 000.

19.

During the financial year, Cresswell Limited had cost of sales of €260 000. Opening and closing balances of inventory and trade payables are shown below:

 Inventory  Trade Payables

Opening balance

Closing balance

€46 000 €18 000

€55 000 €26 000

A discount of €2000 for prompt payment was received. The amount of cash paid for goods purchased during the year was: Learning Objective 17.5 Prepare a statement of cash flows and use a worksheet to prepare a statement of cash flows with more complex transactions *a. €259 000; b. €263 000; c. €275 000; d. €279 000.

8.5

20.

Katsis Limited had the following cash flows during the reporting period:  Acquisition of intangibles: €30 000  Proceeds from disposal 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 flows from operating activities was: Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities *a. €211 100; b. €239 100; c. €256 600; d. €269 100.

21.

The basis of measurement used in the Statement of Cash Flows is: Learning Objective 17.1 Explain the purpose of a statement of cash flows and its usefulness: a. accrual; *b. cash and cash equivalents; c. net present value; d market value.

22.

An item or transaction will qualify for classification as a cash equivalent: Learning Objective 17.2 Explain the definition of cash and cash equivalents: a. if it has a remaining term of more than three months but no more than six months b. its term to maturity is no greater than twelve months c. it has a fixed maturity date of greater than twelve months *d. only if it had a maturity of less than three months at the date of acquisition.

23.

Bank borrowings are ordinarily classified as: Learning Objective 17.2 Explain the definition of cash and cash equivalents: a. operating activities, except for bank overdrafts that are repayable on demand and which form an integral part of an entity‘s cash management; b. investing activities, except for bank overdrafts that are repayable on demand and which form an integral part of an entity‘s cash management; c. financing activities, except for bank overdrafts that are repayable on demand; *d financing activities, except for bank overdrafts that are repayable on demand and which form an integral part of an entity‘s cash management.

24.

For cash flow reporting purposes, operating activities include: Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a. buying and selling of non-current assets; b. incurring and extinguishing equity and debt; c. acquisition and disposal of investments; *d. activities not otherwise classified as financing and investing.

6

-725.

Which of the following descriptions is the best for ‗cash flows from investing activities‘?

Those activities that relate to __________________.

Learning Objective 17.3 Explain the classification of cash flow activities and classify cash inflows and outflows into operating, investing and financing activities a. changing the size or financial structure of an entity; b. altering the composition of the debt of an organisation; *c. the acquisition or disposal of non-current assets; d. restructuring the working capital components of a business.

26.

The Statement of Cash Flows presentation method that separates gross cash inflows from cash outflows is known as the: Learning Objective 17.4 Contrast the direct and indirect methods of presenting net cash flows from operating activities: a. equity method; *b. direct method; c. set-off method; d. net method.

27.

Cash flows arising from the following operating, investing or financing activities may be reported on a net basis when: Learning Objective 17.4 Contrast the direct and indirect methods of presenting net cash flows from operating activities: a. cash receipts and payments for items in which the turnover is slow, the amounts are large, and the maturities are short; b. cash receipts and payments for items in which the turnover is quick, the amounts small, and the maturities are short; c.* cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are short; d. cash receipts and payments for items in which the turnover is quick, the amounts are large, and the maturities are long-term.

28.

Cash flows arising from each of the following activities of a financial institution may be reported on a net basis: I cash receipts and payments for the acceptance and repayment of deposits with a fixed maturity date II the placement of deposits with and withdrawal of deposits from other financial institutions III cash advances and loans made to customers and the repayment of those advances and loans IV cash receipts and payments for the acceptance and repayment of deposits with no fixed maturity date Learning Objective 17.4 Contrast the direct and indirect methods of presenting net cash flows from operating activities: a.

I , II and IV; b.

II, III and IV; c.

I, III and IV; *d. I, II and III.

8.7

29.

30.

The components of cash and cash equivalents: Learning Objective 17.6 Prepare other disclosures required or encouraged by IAS 7 a. may be disclosed at the option of the entity and reconciled to amounts reported in the statement of financial position; b. must be disclosed and reconciled to amounts reported in the statement of comprehensive income; *c. must be disclosed and reconciled to amounts reported in the statement of financial position; d. must be disclosed and reconciled to amounts reported in the statement of changes in equity.

IAS 7 encourages, but does NOT require, the disclosure of: the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities II the aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity III the amount of the cash flows arising from the operating, investing and financing activities of each reportable segment IV the name(s) of the entity‘s banks Learning Objective 17.6 Prepare other disclosures required or encouraged by IAS 7: a.

I, II and IV; b.

II, III and IV; c.

I, III and IV; *d. I, II and III. I

Testbank to accompany

®

Applying IFRS Standards 5e

8

-9-

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by Yeny Lukito, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

8.9

CHAPTER 18 Operating Segments Learning Objectives 18.1 18.2 18.3 18.4 18.5 18.6 18.7 18.8 18.9

Discuss the objectives of financial reporting by segments Identify the types of entities that are within the scope of IFRS 8 Explain and evaluate the controversy surrounding the issuance of IFRS 8 Identify operating segments in accordance with IFRS 8 Distinguish between operating segments and reportable segments Apply the definition of reportable segments Explain the disclosure requirements of IFRS 8 Analyse the disclosures made by companies applying IFRS 8 in practice Discuss the outcome of the post-implementation review of IFRS 8.

10

- 11 Multiple Choice Questions

1.

IFRS 8 Operating Segments is primarily a: Learning Objective 18.1 Discuss the objectives of financial reporting by segments: *a. disclosure standard; b. measurement standard; c. definition standard; d. conceptual standard.

2.

A key objective of providing financial reporting information by segment is: Learning Objective 18.1 Discuss the objectives of financial reporting by segments. a. to allow detailed analysis to be undertaken by users such as segment profit margin analysis; b. to allow the user to better understand the entity‘s future performance; c. to highlight poorly performing areas of an entity‘s business to users; *d. to allow users to better assess the entity‘s risks and returns.

3.

Complete the following sentence: IFRS 8 Operating Segments is applicable for financial reporting periods _____ on or after 1 January 2009. Early adoption is _______.

Learning Objective 18.1 Discuss the objectives of financial reporting by segments. a.

ending, not permitted;

b.

ending, permitted;

c.

beginning, not permitted;

*d.

beginning, permitted.

4.

Segment disclosures are designed to: Learning Objective 18.1 Discuss the objectives of financial reporting by segments. a. combine components of consolidated financial data to provide a higher level of summarisation; b. condense particular items of consolidated financial data into one financial statement; *c. disaggregate selected consolidated financial data; d. aggregate revenues and expenses so that only net profit is shown for each important segment.

8.11

5.

IFRS 8 Operating Segments applies to: I. public companies II. listed entities III. entities in the process of listing IV. any entity who voluntarily chooses to apply it Learning Objective 18.2 Identify the types of entities that are within the scope of IFRS 8. a.

I, II and III only; *b.

II, III and IV only; c.

I, II and IV only; d.

I, III and IV only.

6.

If an entity presents both consolidated financial statements and parent entity financial statements in the same financial report, it must present: Learning Objective 18.2 Identify the types of entities that are within the scope of IFRS 8. a. segment data only on the basis of the parent entity financial statements; *b. segment data only on the basis of the consolidated financial statements; c. condensed segment data that includes revenue information only; d. segment information on the basis of both the consolidated and the parent financial information.

7.

For financial reporting periods commencing prior to 1 January 2009, the accounting standard relating to segment reporting was: Learning Objective 18.3 Explain and evaluate the controversy surrounding the issuance of IFRS 8. a.

IFRS 8 Operating Segments; *b.

IAS 14 Segment Reporting; c.

IAS 14 Operating Segments; d.

IFRS 8 Segment Reporting.

8.

Compared to IAS 14 Segment Reporting, IFRS 8 Operating Segments can be described as being: Learning Objective 18.3 Explain and evaluate the controversy surrounding the issuance of IFRS 8. a. more closely aligned to other accounting standards; b.

preferred in the European Union to its predecessor;

*c.

less prescriptive;

d.

less onerous in terms of disclosure.

12

- 13 9.

Which of the following statements is correct about the controversial issues surrounding IFRS 8?

Learning Objective 18.3 Explain and evaluate the controversy surrounding the issuance of IFRS 8. *a.

The management approach adopted in IFRS 8 was argued to put preparers‘ needs ahead of users‘ needs. b.

Despite the objections from different parties, all IASB board members at the time unanimously agreed that IFRS 8 should replace IAS 14. c.

The European Parliament was not able to endorse IFRS 8 due to strong oppositions from European countries. d.

The proponents of IAS 14 argued that IFRS 8 contains too many mandatory disclosure requirements compared to IAS 14.

The following criteria are the key decision points in identifying an entity‘s component as an operating segment, except for: Learning Objective 18.4 Identify operating segments in accordance with IFRS 8. *a. the component‘s manager is part of the CODM; b. discrete financial information are available for the component; c. the component is able to generate revenue and incur expenses from its business activities; d. the component‘s operating results are regularly reviewed by the CODM. 10.

11. IFRS 8 prescribes that an operating segment must be identified on the basis of: Leaning Objective 18.4 Briefly compare IFRS 8 with its predecessor standard IAS 14. a. b. *c. d.

12.

geographic location; predominant sources of risks and returns; the way information is reported internally to the CODM; the usefulness of financial information available to users.

Based on the information provided below, which business unit(s) should be identified as TeeVee Ltd‘s operating segment(s)?

Can the component generate revenue and incur expenses from its business activities?

Are the component‘s operating results regularly reviewed by the CODM? Is discrete financial information available for the component?

Glee Yes

Homeland CSI Yes Yes

Yes

Yes

No

No

Yes

Yes

Learning Objective 18.4 Identify operating segments in accordance with IFRS 8. a.

Glee only; *b.

Homeland only; c.

CSI only; d.

Glee and CSI.

8.13

13.

Which of the followings are the requirements under IFRS 8?

I.

Identifying primary and secondary segments.

Disclosure of reliance on major external customers.

14.

Cherry Group has operating segments in three different locations. Total assets for each segment are as follows:

Identifying operating segments based on predominant sources of risks and returns.

II. V. Preparing segment information in conformity with accounting policies for preparing financial statements.

III. Disclosure of a measure of VI. Does not distinguish between revenues and profit or loss and total assets. expenses from internal and external customers.

Leaning Objective 18.4 Briefly compare IFRS 8 with its predecessor standard IAS 14. a.

I, II, III. b.

II, IV, VI. c.

I, III, V. *d.

II, III, VI.

  

IV.

Melbourne $400 000 Sydney $80 000 Adelaide $20 000

Which operating segment(s) should be disclosed as reportable segment(s) of Cherry Group?

Learning Objective 18.5 Distinguish between operating segments and reportable segments. a.

All segments are reportable segments; b.

Melbourne and Sydney are the only reportable segments; c.

Sydney and Adelaide are the only reportable segments; *d.

Melbourne is the only reportable segment.

15. Additional segments must be identified as reportable segments until at least: Learning Objective 18.5 Distinguish between operating segments and reportable segments. *a. 75% of total entity revenue is included in reportable segments; b.

75% of total entity assets are included in reportable segments; c.

75% of total entity liabilities are included in reportable segments; d.

75% of total entity equity is included in reportable segments.

14

- 15 16.

Under IFRS 8, two or more operating segments may be aggregated into a single operating segment if aggregation is consistent with the core principle of the standard, the segments have similar economic characteristics, and the segments are similar in each of the following respects: I. II. III. IV.

the nature of the production processes the markets in which the products are sold are closely related the type or class of customer for their products and services the nature of the regulatory environment

Learning Objective 18.5 Distinguish between operating segments and reportable segments. a.

I, II and III only; *b.

I, III and IV only; c.

I, II and IV only; d.

II, III and IV only.

What is the reasonable maximum number of an entity‘s reportable segments according to the additional guidance provided in IFRS 8?

Learning Objective 18.5 Distinguish between operating segments and reportable segments. a.

8; *b.

10; c.

12; d.

There is no maximum number provided in the guidance.

17.

18.

One of the conditions used to determine if two or more operating segments may be aggregated into a single operating segment is: Learning Objective 18.5 Distinguish between operating segments and reportable segments. a. the segments have the same manager in charge; b. the aggregation is deemed to provide useful information for users; c. the segments have similar operating results; *d. the segments have similar methods used to distribute their product or provide their services.

19. Segments that do not satisfy the requirements of a reportable segment must: Learning Objective 18.5 Distinguish between operating segments and reportable segments. a. not be disclosed at all in the financial report; b. be reported in the notes to the financial statements; *c. be combined and disclosed as ‗all other segments‘; d. be combined with the smallest reportable segment.

8.15

20. If an operating segment does not meet all of the thresholds of significance, it: Learning Objective 18.5 Distinguish between operating segments and reportable segments. a. may not be designated as a reportable segment; *b. may still be designated as a reportable segment; c. must be combined with the largest of the other segments and reported in aggregate; d. is insignificant and cannot be reported separately.

21.

Huey, Dewey, and Louie are the three operating segments of Donald Company. Which of the following statements is correct based on the information provided below?

In $000

Huey

Revenue Profit/loss Assets

Dewey

275 100 355

130 30 215

Louie 410 185 750

Total operating segments 815 315 1320

Other business units 295 60 310

Total Donald Company 1110 375 1630

Learning Objective 18.6 Apply the definition of reportable segments. a.

Huey, Dewey, and Louie are reportable segments of Donald Company. b.

Only Dewey and Louie should be disclosed as reportable segments. c.

Dewey is not a reportable segment as it does not satisfy the profit/loss quantitative threshold. *d. Donald Company needs to identify another reportable segment from ‗other business units‘ component.

22.

Assuming the three business units below are operating segments and all revenue earned are from external customers, in which of the following scenarios does Colourband Ltd need to identify another reportable segment to be disclosed?

Revenue in $000

Red

Blue

Green

Total operating segments

I. II. III.

75 110 230

160 140 250

320 275 375

555 525 855

Other business units 250 175 315

Total Colourband Ltd 805 700 1170

Learning Objective 18.6 Apply the definition of reportable segments. a.

I only. b.

I and II. *c.

I and III. d.

II and III.

16

- 17 23. Under IFRS 8 all entities to which the standard applies are required to disclose: Learning Objective 18.7 Explain the disclosure requirements of IFRS 8. a. a reconciliation of total segment expenses to total consolidated expenses; b. factors used to identify all segments; *c. the basis of accounting for any transactions between reportable segments; d. a measure of segment liabilities.

24.

Which of the following statements is incorrect?

IFRS 8 requires external revenue by product to be disclosed on an entity wide basis by all entities to which IFRS 8 applies: Learning Objective 18.7 Explain the disclosure requirements of IFRS 8. a. unless the information has already been provided as part of the reportable segment information; b. unless the information is not available and the cost to develop it would be excessive; c. and must be calculated based on the financial information used to produce the entity‘s financial statements; *d. unless providing such information would be considered to damage the entity‘s competitive advantage.

25. Under IFRS 8, entities are required to provide reconciliations on the followings, except for: Learning Objective 18.7 Explain the disclosure requirements of IFRS 8. a. the total of the reportable segment‘s measures of profit and loss to the entity‘s profit or loss; *b. the total of the reportable segment‘s equity to the entity‘s equity; c. the total of the reportable segment‘s revenue to the entity‘s revenue; d. the total of the reportable segment‘s liabilities to the entity‘s liabilities;

26.

Which of the following information is not required to be disclosed by entities complying with IFRS 8?

Learning Objective 18.7 Explain the disclosure requirements of IFRS 8. *a. the identity of external customers from which the entity earns at least 10% of its revenue; b. the total of the reportable segments‘ liabilities to the entity‘s liabilities; c. the nature and effect of the changes in measurement of segment profit or loss; d. revenues from external customers located in foreign countries.

8.17

27. IFRS 8 requires disclosure in relation to which of the following?

Learning Objective 18.8 Explain the disclosure requirements of IFRS 8. a. the basis of accounting for all segments; b. the nature of any difference between the measurement of the reportable segments‘ revenue and the entity‘s revenue; *c. the nature of any difference between the measurement of the reportable segments‘ assets and liabilities and the entity‘s assets and liabilities; d. the nature and effect of all symmetrical allocations to reportable segments.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by Elisabetta Barone and Yeny Lukito

18

- 19 -

John Wiley & Sons, Ltd 2024

Chapter 19 Other key notes disclosures

Learning Objectives

19.1

Explain the potential effect of related party relationships

19.2

Explain the objective and scope of IAS 24

19.3

Identify an entity‘s related parties

19.4

Identify relationships that do not give rise to a related party relationship as envisaged under IAS 24

19.5

Describe and apply the disclosures required by IAS 24

19.6

Explain why a government-related entity has a partial exemption from related party disclosures

19.7

Explain the objective of IAS 33

19.8

Discuss the application and scope of IAS 33

19.9

Discuss the components of basic earnings per share and examine how it is measured

19.10

Explain the concept of diluted earnings per share and how it is measured

19.11

Explain the need for retrospective adjustment of earnings per share

19.12

Describe and apply the disclosure requirements of IAS 33.

8.19

Multiple Choice Questions 1.

Disclosure of related parties is essential in financial reporting because: Learning Objective 19.1 Explain the potential effect of related party relationships a. related parties cannot be trusted; b. there are certain limits imposed on entities in regards to how many related party transactions they could have; *c. related parties have the potential to affect an entity‘s profit or loss and financial position that might not otherwise occur; d. a high number of corporate collapses are caused by related party transactions.

2.

The scope of IAS 24 states that IAS 24 shall be applied in identifying the followings, except for: Learning Objective 19.2 Explain the objective and scope of IAS 24 a. outstanding balances, including commitments, between an entity and its related parties; *b. insider trading with related parties; c. circumstances in which disclosures of transactions with related parties are required; d. related party relationships and transactions.

3.

An entity is related to a reporting entity if any of the following conditions apply, except: Learning Objective 19.3 Identify an entity‘s related parties *a. the reporting entity has significant economic dependence on the entity; b. both entities are joint venture of the same third party; c. the entity is the subsidiary of the reporting entity; d. the entity is a post-employment benefit plan for the reporting entity‘s employees.

4.

The power to participate in the financial and operating policy decisions of an entity is known as: Learning Objective 19.3 Identify an entity‘s related parties a. control; *b. significant influence; c. share ownership; d. joint control.

Aladdin is the owner and founder of Genie Limited. Aladdin‘s wife, Jasmine, has a controlling investment in Jafar Limited. Which of the followings describes the relationship between Genie Limited and Jafar Limited?

Learning Objective 19.3 Identify an entity‘s related parties 5.

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- 21 a. b. *c. d.

Genie Limited and Jafar Limited are not related parties.

No disclosure about transactions with Jafar Limited is required in the financial statements of Genie Limited.

Genie Limited is a related party of Jafar Limited.

Genie Limited has control over Jafar Limited.

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6.

Galaxy Limited is a listed company operating in retail industry with three business units: Milky Way, Andromeda, and Whirlpool. Which of the followings is likely to be the key management personnel of Galaxy Limited?

Learning Objective 19.3 Identify an entity‘s related parties *a. The general manager of Milky Way; b.

The managing director‘s personal assistant; c.

The company‘s auditor; d.

The company‘s IT manager.

7.

An entity in which an investor has significant influence is known as: Learning Objective 19.3 Identify an entity‘s related parties a. a joint venture; b. a related party; c. a subsidiary; *d. an associate.

8.

Two entities are not regarded as related parties simply because: Learning Objective 19.4 Identify relationships that do not give rise to a related party relationship as envisaged under IAS 24 a. one entity is a post- employment benefit plan for the other entity; b. one entity is a subsidiary of the other entity; c. a member of the key management personnel of one entity controls the other entity; *d. a member of the key management personnel of one entity has significant influence over the other entity.

9.

John Berry is one of the non-executive directors of Monash Company. In this current financial year, Monash Company had transactions with the following entities: I. Borrowed money from ABC Bank.

II. Purchased raw materials from Deakin Company.

III. Loaned money to one of its subsidiaries, Swinburne Company, with 10% per annum.

IV. Sold products to Melbourne Company, of which John Berry is also a director.

Which transactions are not related party transactions between Monash Company and another entity?

Learning Objective 19.4 Identify relationships that do not give rise to a related party relationship as envisaged under IAS 24 a.

I and II only; b.

II and III only; *c. I, II and IV; d.

II, III, and IV.

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- 23 10. According to IAS 24, related party disclosures are required irrespective of whether there have been related party transactions when: Learning Objective 19.5 Describe and apply the disclosures required by IAS 24 a. significant influence exists; *b. control exists; c. economic dependence exists; d. all of the above.

11. The following remuneration categories must be disclosed for key management personnel, except for: Learning Objective 19.5 Describe and apply the disclosures required by IAS 24 a. termination benefits; b. post-employment benefits; *c. bonus payments; d. share-based payments.

12. IAS 24: Learning Objective 19.1 Explain the potential effect of related party relationships a. prescribes how transactions with related parties are to be measured; b. defines the recognition criteria of related party transactions; c. explains the format of financial statements of entities with related parties; *d. deals purely with related party disclosures.

13. In the case where financial statements of parent entity or the ultimate controlling entity are not made publicly available, the reporting entity must disclose: Learning Objective 19.5 Describe and apply the disclosures required by IAS 24 a. the name of the entity‘s largest shareholder; *b. the name of the next most senior parent entity whose financial statements are publicly available; c. the reason of why the parent entity does not make its financial statements publicly available; d. the level of share ownership of the next most senior parent entity.

14. A government entity controls both Edward Limited and Jacob Limited. Bella Limited and Jasper Limited are the subsidiaries of Edward Limited. Carlisle Cullen is the managing director of Edward Limited. Edward Limited can apply the partial exemption of disclosures in paragraph 25 of IAS 24 to transactions with the following parties, except for: Learning Objective 19.6 Explain why a government-related entity has a partial exemption from related party disclosures *a. Carlisle Cullen; b.

Jacob Limited;

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c. d.

Bella Limited; the government entity.

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- 25 15. Willow Limited and Rupert Limited are the two subsidiaries of Buffy Company. Dan Sanders, one of the directors of Buffy Company, is also a director of Rupert Limited. Dan‘s wife, Sandra, has 10% of shareholding in Rupert Limited. Which of the followings are related parties to Willow Limited?

Learning Objective 19.3 Identify an entity‘s related parties a.

Buffy Company and Dan Sanders; *b. Buffy Company and Rupert Limited; c.

Rupert Limited and Dan Sanders; d.

Dan Sanders and Sandra Sanders.

16. Which of the following is the related party of a reporting entity within the scope of IAS 24?

Learning Objective 19.3 Identify an entity‘s related parties a.

The domestic partner of a director of the reporting entity. b.

A supplier of the reporting entity. c.

The non-dependent children of the reporting entity‘s CEO. *d. Another subsidiary of the reporting entity‘s parent.

17. Examples of related party transactions that must be disclosed include: Learning Objective 19.5 Describe and apply the disclosures required by IAS 24 a. settlement of liabilities; b. disposal of assets; c. purchase or sales of goods; *d. all of the above.

18. Jon holds an investment in Voight Limited that gives him a significant influence over the company. Jon‘s daughter, Angelina, also has a significant influence over another entity, Jolie Limited. What is the relationship between Voight Limited and Jolie Limited?

Learning Objective 19.3 Identify an entity‘s related parties a.

Voight Limited is a related party of Jolie Limited. b.

Voight Limited has a significant influence over Jolie Limited. *c. Voight Limited and Jolie Limited are not related parties. d.

Voight Limited has control over Jolie Limited.

19. Maria is one of the directors in Leo Limited, which is one the subsidiaries of Aries Limited. She also has a joint control with Mimi in Virgo Limited. In this circumstance, the followings are related parties to Leo Limited, except for: Learning Objective 19.3 Identify an entity‘s related parties *a. Mimi; b.

Maria; c.

Aries Limited;

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d.

Virgo Limited.

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- 27 20. Which of the followings are most likely to be considered as key management personnel of an entity?

I. Chief Financial Officer II. Admin Officer III. Non-executive directors IV. General Manager Learning Objective 19.3 Identify an entity‘s related parties a.

I, II, and III; b.

II, III, and IV; *c. I, III, and IV; d.

I, II, III, and IV.

21. VicEd is a government agency that controls Science Limited. Science Limited has two subsidiaries: Bio Limited and Chem Limited. To which entities can Bio Limited apply the disclosure exemption in paragraph 25 of IAS 24?

Learning Objective 19.6 Explain why a government-related entity has a partial exemption from related party disclosures a.

VicEd Limited only; b.

Science Limited only; c.

Science Limited and Chem Limited only; *d. VicEd Limited, Science Limited, and Chem Limited.

22. If an entity chooses to apply the disclosure exemption in paragraph 25 of IAS 24, it is still required to do the followings, except: Learning Objective 19.6 Explain why a government-related entity has a partial exemption from related party disclosures a. disclose the nature of the relationship with the government-related entities; b. identify the government to which it is related; *c. the nature and amount of every transaction with government-related entities; d. a qualitative or a quantitative indication of the extent of other transactions that are collectively significant.

23. Which of the following transactions are not related party transactions for an entity?

I. An employee purchased the entity‘s products on normal trading terms.

II. The entity made an agreement with a trade union about increase in employee‘s wages.

III. A subsidiary of the entity supplied raw materials to the entity.

IV. The entity lent money to one of its directors.

Learning Objective 19.4 Identify relationships that do not give rise to a related party relationship as envisaged under IAS 24 *a. I and II only; b.

I and III only; c.

II and IV only;

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d.

III and IV only.

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- 29 24. The minimum disclosures for related party transactions include the followings, except: Learning Objective 19.5 Describe and apply the disclosures required by IAS 24 a. provision of doubtful debts related to outstanding balances; b. the amount of transactions; c. the amount of the outstanding balances and commitments; *d. the key management personnel of the related party.

25. Harry is a non-executive director of Potter Limited and Hogwarts Limited. Harry‘s wife, Ginny, is a non-executive director of Weasley Limited. Which of the following statements is correct?

Learning Objective 19.4 Identify relationships that do not give rise to a related party relationship as envisaged under IAS 24 a.

Harry is not a related party to Potter Limited. *b. Potter Limited and Hogwarts Limited are not related parties. c.

Ginny is a related party to Hogwarts Limited. d.

Potter Limited and Weasley Limited are related parties.

26. Metro Limited is a subsidiary of Matrix Limited. Which of the followings is not a related party to Metro Limited?

Learning Objective 19.4 Identify relationships that do not give rise to a related party relationship as envisaged under IAS 24 a.

A pension scheme that offers benefits to employees of Metro Limited. b.

The Managing Director of Matrix Limited. c.

An associate of Metro Limited. *d. A distributor of Metro Limited‘s products.

27. The contractually agreed sharing of control over an economic entity is known as: Learning Objective 19.3 Identify an entity‘s related parties a. significant influence; b. significant control; *c. joint control; d. joint venture.

28. Drew is one of the directors of Mellor Limited. In the current financial year, Mellor Limited paid £50 000 to Advice Agency, where Drew‘s brother works, for the consultancy services it provided. In addition, Mellor Limited also paid £2000 to Drew for a once-off consultancy he provided on a specific project. Which of the following statements describes the relationship between Drew, Mellor Limited, and Advice Agency?

Learning Objective 19.3 Identify an entity‘s related parties a.

Advice Agency is a related party to Mellor Limited.

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b. *c. d.

Drew is not a related party to Mellor Limited.

The £50 000 consultancy fee is not a related party transaction.

The £2000 consultancy fee is not a related party transaction.

30

- 31 29. David is the general manager of Awesome Limited and is considered to be the member of key management personnel. The following transactions occurred between David and Awesome Limited:  David purchased a product of Awesome Limited on normal trading terms;  David received remuneration from Awesome Limited amounting to £100 000;  Awesome Limited issued 20 000 options to David, which can be converted into Awesome Limited‘s shares if target profit margin of 25% is achieved in the next three years.

Which of the above transactions must be disclosed as related party transactions?

Learning Objective 19.5 Describe and apply the disclosures required by IAS 24 a.

The purchase of product and David‘s remuneration. *b. David‘s remuneration and the grant of options. c.

The purchase of product and the grant of options. d.

All of the above transactions are related party transactions.

30. Earnings per share is calculated by comparing an entity‘s: Learning Objective 19.7 Explain the objective of IAS 33 a. revenue with the number of ordinary shares it has on issue b. profit with the number of shareholders *c. profit with the number of ordinary shares it has on issue d. revenue with the number of shareholders

31. Earnings per share disclosed by reporting entities have limitations because of the: I different accounting methods that can be used in the determination of profit II different amounts of profit depending on the size of the entity III ability of an entity to change the number of shares used in the denominator IV different numbers of shareholders depending on the size of the entity Learning Objective 19.7 Explain the objective of IAS 33 a.

I and IV b.

II and III c.

II and IV *d.

I and III

32. EPS refers to: Learning Objective 19.7 Explain the objective of IAS 33 a. equity per share b. earnings per shareholder *c. earnings per share d. earnings per subsidiary

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33. Earnings per share is calculated by: Learning Objective 19.7 Explain the objective of IAS 33 a. dividing profit or loss attributable to ordinary shareholders of a parent entity, by the number of ordinary shares the entity has on issue at the beginning of the reporting period *b. dividing profit or loss attributable to ordinary shareholders of a parent entity, by the weighted average number of ordinary shares the entity has on issue during the reporting period c. dividing profit or loss attributable to preference shareholders of a parent entity, by the weighted average number of ordinary shares the entity has on issue during the reporting period d. dividing profit or loss attributable to ordinary shareholders of a parent entity, by the number of ordinary shares the entity has on issue at the end of the reporting period

34. Under paragraph 4, if an entity presents both consolidated and separate financial statements, the IAS 33 disclosures need only be determined on the basis of: Learning Objective 19.8 Discuss the application and scope of IAS 33 a. parent entity only b. subsidiary entities only *c. consolidated information d. the entity has choice of either parent entity or consolidation

35. IAS 33 applies to the computation and presentation of earnings per share by: Learning Objective 19.8 Discuss the application and scope of IAS 33 a. only reporting entities whose shares are publicly traded *b. reporting entities whose shares are publicly traded, or of entities that are in the process of issuing ordinary shares that will be traded in public markets c. only those entities that are in the process of issuing ordinary shares that will be traded in public markets d. both reporting and non-reporting entities

36. The number of shares used in the calculation of earnings per share is: Learning Objective 19.9 Discuss the components of basic earnings per share and examine how it is measured a. the number of ordinary and preference shares adjusted by a timeweighting factor which is the number of days in the reporting period that the shares are outstanding as a proportion of the total number of days in the period b. the number of preference shares adjusted by a time-weighting factor which is the number of days in the reporting period that the shares are outstanding as a proportion of the total number of days in the period

32

- 33 c. *d.

the average of the number of ordinary shares outstanding at the beginning and end of the reporting period the number of ordinary shares adjusted by a time-weighting factor which is the number of days in the reporting period that the shares are outstanding as a proportion of the total number of days in the period

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37. XYZ Ltd has 10 000 ordinary shares on issue at 1 July 2015 which is the beginning of its reporting period. On 1 May 2024, it issued a further 2000 ordinary shares for cash.

The weighted average number of shares for use in the earnings per share calculation is: Learning Objective 19.9 Discuss the components of basic earnings per share and examine how it is measured a.

10 000 shares *b.

10 333 shares c.

11 000 shares d.

12 000 shares

38. The profit or loss that is used in the calculation of basic earnings per share is calculated as: Learning Objective 19.9 Discuss the components of basic earnings per share and examine how it is measured a.

Profit before tax expense b.

Profit before tax expense – tax expense c.

Profit before tax expense – tax expense – ordinary dividends *d.

Profit before tax expense – tax expense – preference dividends

39. ABC Ltd has 21 000 ordinary shares on issue at 1 January 2024 which is the beginning of its reporting period. On 30 June 2024, it issued a further 2000 ordinary shares for cash. On 1 November 2024, ABC Ltd repurchased 600 shares at fair value in a market transaction.

The weighted average number of shares for use in the earnings per share calculation is: Learning Objective 19.9 Discuss the components of basic earnings per share and examine how it is measured a.

21 000 shares b.

21 700 shares *c.

21 900 shares d.

22 400 shares

40. Mary Ltd determined its profit attributable to ordinary shareholders for the reporting period ended 30 June 2024 as £720 000. The number of ordinary shares on issue up to 31 October 2015 was 50 000. Mary Ltd announced a two-for-one bonus issue of shares effective for each ordinary share outstanding at 31 October 2015.

Basic earnings per share at 30 June 2024 is: Learning Objective 19.9 Discuss the components of basic earnings per share and examine how it is measured *a. £4.80 b. £6.17

34

- 35 c. d.

£7.20 £9.60

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Use the following information to answer questions 41 and 42 Harry Ltd determined its profit attributable to ordinary shareholders for the reporting period ended 30 June 2024 as €960 000. The average market price of the entity‘s shares during the period is €4.00 per share. The weighted average number of ordinary shares on issue during the period is 1 000 000. The weighted average number of shares under share options arrangements during the year is 200 000 and the exercise price of shares under option is €3.50.

41. The basic earnings per share at 30 June 2024 is: Learning Objective 19.10 Explain the concept of diluted earnings per share and how it is measured a. €0.80 *b. €0.96 c. €3.50 d. €4.00

42. The diluted earnings per share at 30 June 2024 is: Learning Objective 19.10 Explain the concept of diluted earnings per share and how it is measured a. €0.80 *b. €0.94 c. €1.24 d. €4.00

43. For the purposes of calculating diluted earnings per share, an entity shall adjust the profit attributable to ordinary shareholders by the after-tax effect of the following item(s) related to dilutive potential ordinary shares: Learning Objective 19.10 Explain the concept of diluted earnings per share and how it is measured a. dividends only *b. dividends, interest, other income or expenses c. interest only d. other income or expenses only

44. If all of the dilutive securities were converted into ordinary shares, the diluted earnings per share ratio: Learning Objective 19.10 Explain the concept of diluted earnings per share and how it is measured a. may include an adjustment to increase the weighted average number of ordinary shares that would be outstanding b. must include an adjustment to decrease the weighted average number of ordinary shares that would be outstanding

36

- 37 c. *d.

must include an adjustment to increase the number of ordinary shares that would be outstanding must include an adjustment to increase the weighted average number of ordinary shares that would be outstanding

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45. A company issues bonus shares for no consideration on 1 August 2014. For the reporting period ended 30 June 2015, the calculation of: Learning Objective 19.11 Explain the need for retrospective adjustment of earnings per share a. only basic earnings per share must be adjusted retrospectively for all periods that are presented in the financial statements b. only the diluted earnings per share must be adjusted retrospectively for all periods that are presented in the financial statements *c. both basic earnings per share and diluted earnings per share must be adjusted retrospectively for all periods that are presented in the financial statements d. both basic earnings per share and diluted earnings per share may be adjusted retrospectively at the option of the entity for all periods that are presented in the financial statements

46. Any errors or adjustments resulting from changes in accounting policies that are accounted for retrospectively require: Learning Objective 19.11 Explain the need for retrospective adjustment of earnings per share a. a retrospective adjustment to basic earnings per share only b. a retrospective adjustment to diluted earnings per share only c. no retrospective adjustment to either basic or diluted earnings per share *d. a retrospective adjustment to both basic and diluted earnings per share

47. The basic earnings per share and diluted earnings per share ratios must be presented in an entity‘s: Learning Objective 19.12 Describe and apply the disclosure requirements of IAS 33 a. statement of financial position even if the amounts are negative *b. statement of profit or loss and other comprehensive income even if the amounts are negative c. statement of profit or loss and other comprehensive income only if the amounts are positive d. statement of changes in equity even if the amounts are negative

48. Paragraphs 70–73 of IAS 33 prescribe various disclosures relating to earnings per share. The disclosures include: I the amounts used as the numerators (earnings) in the ratios II a reconciliation of the earnings amounts to the profit or loss attributable to the parent entity for the period including the individual effect of each class of instruments that affects earnings per share III the number of ordinary shares outstanding at the end of the financial year IV the weighted average number of ordinary shares used as the denominator in the ratios

38

- 39 Learning Objective 19.12 Describe and apply the disclosure requirements of IAS 33 a.

I, II and III b.

I, III and IV c.

II, III and IV *d.

I, II and IV

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49. If the entity has a discontinued operation, then it must also calculate and disclose the: Learning Objective 19.12 Describe and apply the disclosure requirements of IAS 33 *a. the basic and diluted earnings per share ratios for the discontinued operation in the statement of profit or loss and other comprehensive income. b. the basic earnings per share ratio only for the discontinued operation in the statement of profit or loss and other comprehensive income. c. the diluted earnings per share ratio only for the discontinued operation in the statement of profit or loss and other comprehensive income. d. the basic and diluted earnings per share ratios for the discontinued operation in the statement of profit or loss and other comprehensive income only if the discontinued operation contributed a profit in the current reporting period

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

40

- 41 -

Prepared by Yeny Lukito and Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

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Chapter 20 Consolidation: controlled entities Learning Objectives 20.1 20.2 20.3 20.4 20.5

Explain the meaning of consolidated financial statements Discuss the meaning and application of the criterion of control Discuss which entities should prepare consolidated financial statements Understand the relationship between a parent and an acquirer in a business combination Explain the differences in disclosure requirements between single entities and consolidated entities.

Company Accounting 7e Leo et al Chapter 7 Test Bank Multiple Choice Questions 1.

The entity that is represented by a single set of consolidated financial statements known as a consolidated financial report is: Learning Objective 20.1 Explain the meaning of consolidated financial statements. *a. an economic entity; b. a parent entity; c. a subsidiary entity; d. a partnership.

2.

When one entity controls the business operations of another entity, the business combination results in the following type of relationship: Learning Objective 20.1 Explain the meaning of consolidated financial statements. *a. parent-subsidiary; b. partnership; c. a merger; d. dual-listed.

3.

For the purposes of consolidated financial reporting, a group is: Learning Objective 20.1 Explain the meaning of consolidated financial statements. a. an entity that has no subsidiaries; *b. a parent entity and all its subsidiaries; c. an entity that has one or more subsidiaries; d. a subsidiary entity of another entity.

4.

IFRS 10 defines a ‗parent‘ and a ‗subsidiary‘ as: Learning Objective 20.1 Explain the meaning of consolidated financial statements.

a. b. c. *d.

Parent An entity which owns more than 50% of the voting shares of another entity.

An entity which owns more than 20% of the voting shares of another entity.

An entity that has one or more subsidiaries.

An entity that controls another entity.

Subsidiary An entity in which another entity owns more than 50% of the voting shares.

An entity which is owned partly by another entity.

An entity which is controlled by a parent entity.

An entity which is controlled by another entity.

5.

A single set of financial statements, that combines the separate sets of financial statements for a number of entities, which are managed as a single economic entity, is known as: Learning Objective 20.1 Explain the meaning of consolidated financial statements. a. a concise financial report; b. a condensed financial report; c. new entity financial statements; *d. consolidated financial statements.

8.1

6.

The process of preparing the combined financial statements of a group of entities is known as: Learning Objective 20.1 Explain the meaning of consolidated financial statements. a. accrual accounting; b. condensation; c. accumulation; *d. consolidation.

7.

A group of entities formed by A Limited (parent entity), B Limited (subsidiary entity) and C Limited (subsidiary entity) has the following Trade Receivables balances:   

A Limited $12 000 B Limited $15 000 C Limited $10 000

The consolidated financial statements show the following amount as the consolidated Trade Receivables balance: Learning Objective 20.1 Explain the meaning of consolidated financial statements. a. $12 000; b. $13 000; c. $25 000; *d. $37 000.

8.

The process of aggregating individual sets of financial statements to produce consolidated financial statements requires: Learning Objective 20.1 Explain the meaning of consolidated financial statements. *a. that no adjustments be entered into the individual ledger accounts of entities in the group; b. balance sheet date adjusting journal entries to be recorded in the ledger accounts of the subsidiaries; c. accruals of expenses and revenue, directly into the retained earnings ledger account of the parent entity; d. balance sheet date adjusting entries directly into the ledger accounts of the parent entity only.

9.

The key criterion for the consolidation of the separate financial statements of entities is: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a. substance over form; *b. control; c. the existence of contracts for the supply of goods between the entities; d. capacity of the accounting systems to facilitate the necessary combination process;

2

Company Accounting 7e Leo et al Chapter 7 Test Bank 10. In a consolidated group of entities, control over the subsidiaries in the group: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. *a. may not be shared control; b. can be shared with other parties; c. can be less than 100% control; d. can be less than 50% control.

11.

According to IFRS 10, which of the following factors indicate the existence of control?

I. II. III. IV.

Possessing existing rights that give the current ability to direct the relevant activities.

Shared power in the governance of financial and operating policies of another entity so as to obtain benefits.

The power to govern the operating policies of an entity so as to obtain benefits.

Ownership of more than 50% of the voting power in the subsidiary.

Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a.

I, II and III only; *b.

I and IV only; c.

II and IV only; d.

IV only.

12. When deciding whether or not control exists over one entity by another entity: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a. the controlling entity must have exercised its power to control; *b. it is sufficient that the controlling entity has the capacity to control; c. the controlling entity must be actively involved in governing the operations of the other entity; d. it is necessary that the controlling entity has exerted its control over the financing policies of the other entity.

13.

For one entity to control another entity, the percentage of share ownership held by the controlling entity: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. *a. can be nil; b. must be greater than 20%; c. must be greater than 50%; d. must be 100%.

14. Which is not one of the three elements of control?

Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a. the ability to use power over the investee to affect the amount of the investor‘s returns; *b. holding majority voting rights; c. power over the investee; d. exposure, or rights, to variable returns from involvement with the investee.

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15. Which of the following is correct in relation to rights in the context of control?

Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a.

The rights must be protective rights. b.

The rights must arise from a legal contract. c.

The rights may be administrative. *d.

The rights must be substantive rights.

16. If a controlling entity has delegated control to another entity, the parent is deemed to be: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a. the delegated party who is actively exercising control; b. both the delegating party and the party to whom control has been delegated; *c. the entity who delegated the control; d. neither entity as actual control has been lost.

17.

Control is automatically presumed to exist where the parent either directly or indirectly through subsidiaries owns: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a. more than 25% but less than 50% of the voting power of an entity; b. more than 10% but less than 25% of the voting power of an entity; c. not more than 49% of the voting power of an entity; *d. more than 50% of the voting power of an entity.

18.

Unicorn Trustees has a fiduciary relationship with Amble Limited enabling it to direct certain activities of Amble Limited. As a result of this relationship: Learning Objective 20.2 Discuss the meaning and application of the criterion of control. a.

Unicorn Trustees is regarded as a parent entity of Amble Limited; b.

Amble Limited is regarded as a subsidiary of Unicorn Trustees; *c. a parent-subsidiary relationship is not regarded as existing between these two parties; d. a parent-subsidiary relationship is regarded as existing between these two parties as Unicorn is able to direct the activities of Amble Limited.

19.

All parent entities are required to present consolidated statements unless the following conditions apply to them: I. The parent is a wholly owned subsidiary.

II. The parent is a partly owned subsidiary and its owners do not object to the nonpresentation of consolidated financial statements.

III. The parent‘s debt or equity securities are traded in a public market.

IV. The parent is not in the process of applying to issue any securities in a public market.

Learning Objective 20.3 Discuss which entities should prepare consolidated financial statements. a.

I and II only; b.

I, II and III only; *c. I, II and IV only; d.

I, II, III and IV.

4

Company Accounting 7e Leo et al Chapter 7 Test Bank 20.

A Ltd is a listed public company and has an 80% controlling interest in B Pty Ltd. B Pty Ltd is the parent of C Pty Ltd. In which of the following situations will B Pty Ltd not be required to prepare consolidated financial statements?

Learning Objective 20.3 Discuss which entities should prepare consolidated financial statements. a.

If B Pty Ltd prepares separate financial statements that comply with IFRS. *b. If the other owners of B Pty Ltd have consented to the non-preparation. c.

Where it is likely that there are external users dependant on the information. d.

B Pty Ltd would never be required to prepare consolidated financial statements.

21.

Two entities A Limited and B Limited together form a third entity, C Limited. C Limited acquires A Limited and B Limited. According to IFRS 3 Business Combinations: Learning Objective 20.4 Understand the relationship between a parent and an acquirer in a business combination. a.

A Limited and B Limited cease to exist and C Limited is the acquirer; b. the combined A Limited and B Limited is the acquirer of C Limited; c.

C Limited is considered to be the acquirer; *d.

C Limited is not to be considered to be the acquirer.

22. In a business combination: Learning Objective 20.4 Understand the relationship between a parent and an acquirer in a business combination. a. it is not necessary to identify the acquirer as long as parent entity has been identified; b. the parent entity will always be the acquirer; *c. the accounting acquirer is the entity that becomes the controlling entity; d. the legal acquirer is the entity that becomes the controlling entity.

23.

Which of the following statements applies to reverse acquisitions?

I.

The accounting acquirer would III. issue equity shares to the accounting acquire.

The legal acquirer is identified IV. as accounting acquiree.

24.

Truong Limited acquired 60% of the shares of Quang Limited through the Australian Securities Exchange. The share acquisition cost Truong Limited $500 000. As a result of the

The legal subsidiary has the power to govern the financial and operating policies of the combined entity.

II. Consolidated financial statements prepared following a reverse acquisition are issued under the name of the accounting acquirer.

Learning Objective 20.4 Understand the relationship between a parent and an acquirer in a business combination. a.

I and III; b.

I and IV; *c.

II and III; d.

II and IV.

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share acquisition, Truong Limited gained control over Quang Limited. In its accounting records, Truong will recognise: Learning Objective 20.5 Explain the differences in disclosure requirements between single entities and consolidated entities. *a. an investment at a cost of $500 000 b. an investment with a market value of $300 000 c. an increase in share capital of $500 000 d. an increase in share capital of $300 000.

25.

If an investor entity owns more than half of the voting or potential voting power of an investee and does not account for the investment as a subsidiary, IFRS 12 requires the following disclosure: Learning Objective 20.5 Explain the differences in disclosure requirements between single entities and consolidated entities. a. the reasons why the ownership of the investee does not constitute control; b. the nature of the relationship between the investor and investee; *c. the significant judgements and assumptions it has made in determining the nature of the interest in the other entity; d. the amount of any repayments of borrowings between the investor and investee during the period.

26.

If a parent entity chooses not to prepare consolidated financial statements, IAS 27 Separate Financial Statements requires the following disclosures in the separate financial statements of the parent: I. II. III. IV.

The name, country of residence and voting power of the directors of the parent.

That the exemption from consolidation has been used.

A list of significant investments including the proportion of ownership.

A description of the method used to account for the investments.

Learning Objective 20.5 Explain the differences in disclosure requirements between single entities and consolidated entities. a.

I, II and IV only; *b.

II, III and IV only; c.

II and III only; d.

IV only.

27.

According to IFRS 12, parent entities are required to disclose: I. Summarised financial information about each subsidiary.

II. A list of significant investments in subsidiaries.

III. If the subsidiary is not wholly owned, the names of all other members.

IV. The country of incorporation of subsidiaries.

Learning Objective 20.5 Explain the differences in disclosure requirements between single entities and consolidated entities. *a.

I, II and IV only;

6

Company Accounting 7e Leo et al Chapter 7 Test Bank b. c. d.

II, III and IV only; I and IV only; I, II, III and IV.

28. The main characteristic of a structured entity according to IFRS 12 is that: Learning Objective 20.5 Explain the differences in disclosure requirements between single entities and consolidated entities. a. the parent entity must have more than 80% of voting rights in the structured entity in order to gain control; *b. voting or similar rights are not the dominant factor in deciding who controls the entity; c. the legal acquirer of such entity will become the accounting acquiree; d. it is controlled by two or more parent entities.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by 8.7

John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

8

Company Accounting 7e Leo et al Chapter 7 Test Bank Chapter 21 Consolidation: wholly owned subsidiaries Learning Objectives 21.1 21.2 21.3 21.4 21.5

21.6 21.7

Understand the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet Explain how a consolidation worksheet is used Prepare an acquisition analysis for the parent‘s acquisition in a subsidiary Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries Prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from preacquisition equity Prepare the worksheet entries where the subsidiary revalues its assets at acquisition date Prepare the disclosures required by IFRS 3 and IFRS 12.

8.9

Multiple Choice Questions 1.

When preparing consolidated financial statements, adjustments for pre-acquisition equity and inter-entity transactions are recorded: Learning Objective 21.1 Understand the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet a. in the accounting records of the parent entity b. in the accounting records of the subsidiary *c. on a consolidation worksheet d. in the accounting records of the reporting entity.

If the end of a subsidiary‘s reporting period does not coincide with the end of the parent entity‘s reporting period, adjustments must be made for the effects of significant events that occur between these dates as long as the difference between the ends reporting periods differs by no more than: Learning Objective 21.1 Understand the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet a. one month *b. three months c. four months d. six months 2.

3.

Eeny Limited has two subsidiary entities, Meeny Limited and Miney Limited. Eeny Limited owns 100% of the shares in both entities. Details of issued share capital are:  Eeny Limited $100 000  Meeny Limited $30 000  Miney Limited $15 000 The consolidated share capital amount of the Eeny Meeny Miney group is:

Learning Objective 21.4 Explain how a consolidation worksheet is used a. $45 000 b. $55 000 *c. $100 000 d. $145 000.

4.

If the cost of a business combination is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree: Learning Objective 21.3 Prepare an acquisition analysis for the parent‘s acquisition in a subsidiary a. a gain on bargain purchase results *b. goodwill has been acquired and must be recognised c. the difference is treated as a special equity reserve in the acquirer‘s accounting records d. the difference is treated as a loss and immediately charged to profit or loss of the period in which the business combination occurred.

10

Company Accounting 7e Leo et al Chapter 7 Test Bank 5.

When a parent entity has previously held an investment in a subsidiary prior to gaining control the effect on the consolidation process is as follows: Learning Objective 21.3 Prepare an acquisition analysis for the parent‘s acquisition in a subsidiary a. there is no impact *b. the change in the fair value of the previously held interest is recognised in profit or loss c. the change in the fair value of the previously held interest is recognised in retained earnings d. the change in the fair value of the previously held interest is recognised in other comprehensive income

6.

Nelson Limited has two subsidiary entities, Poggi Limited and Holly Limited. Nelson Limited owns 100% of the shares in both entities. Details of issued share capital are:  Nelson Limited $100 000  Poggi Limited $30 000  Holly Limited $15 000 The worksheet adjustment entry made in order to determine the amount of consolidated share capital is: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries a.

DR Share capital $145 000 CR Shares in subsidiaries $145 000 b.

*c.

d.

DR CR

Share capital $100 000 Shares in subsidiaries

DR CR CR

Share capital $45 000 Shares in Poggi Limited Shares in Holly Limited

$30 000 $15 000

DR CR CR CR

Share capital $145 000 Shares in Nelson Limited Shares in Poggi Limited Shares in Holly Limited

$100 000 $30 000 $15 000

$100 000

7.

Company X acquired Company Y when the carrying value of Company Y‘s plant was $50 000. The fair value of the plant on acquisition date was $65 000. The company tax rate was 30%. How much is the amount of the business combination valuation reserve that must be recognised?

Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries a. $3500 *b. $10 500 c. $15 000 d. $65 000

8.11

8.

A Limited acquired B Limited for $110 000. At acquisition date the fair value of the B Limited‘s Land asset was $40 000 and the book value was $30 000. If the company tax rate is 30%, which of the following is the appropriate adjustment to recognise the tax effect of the business combination revaluation of land?

Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries a.

DR Deferred tax liability $3 000 *b.

CR Deferred tax liability $3 000 c.

DR Deferred tax asset $3 000 d.

CR Deferred tax liability $3 000.

9.

On 1 July 20X6, P Limited acquired all the issued shares of S Limited for $50 000 when the equity of S Limited consisted of:  Share Capital $35 000  Retained Earnings $15 000 The pre-acquisition entry at 1 July 20X6 is: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries a. Shares in S Limited Dr 50 000 Opening Retained earnings Cr 15 000 Share capital Cr 35 000 *b

c.

d.

Opening Retained earnings Share capital Shares in S Limited

Dr Dr Cr

15 000 35 000

Opening Retained earnings Share capital Shares in S Limited

Dr Dr Cr

35 000 15 000

Goodwill Share capital Shares in S Limited

Dr Dr Cr

15 000 35 000

50 000

50 000

50 000

10.

On 1 July 20X6 Possum acquired a 100% interest in Echidna. At that time Echidna had goodwill of $5000 recorded in its statement of financial position as a result of a previous business combination. The total goodwill arising on Possum‘s acquisition of Echidna was $12 000. The goodwill recognised on consolidation in the business combination valuation entry as a result of Possum‘s acquisition of Echidna is: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries a. nil b. $5 000 *c. $7 000 d. $12 000

12

Company Accounting 7e Leo et al Chapter 7 Test Bank 11.

At the date of acquisition a subsidiary had recorded a dividend payable of $10 000. The consolidation adjustment needed at the date of acquisition in relation to this event is: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries *a. DR Dividend payable $10 000 CR Dividend receivable $10 000 b.

c.

d.

DR

$10 000

CR

Dividend revenue Dividend declared Shares in subsidiary Dividend receivable

$10 000

CR

Cash

$10 000

DR

DR CR

Shares in subsidiary

$10 000

$10 000

$10 000

12.

One year after acquisition date, the goodwill acquired was regarded as having become impaired by $20 000. The appropriate consolidation adjustment in relation to the impairment will include the following line: Learning Objective 21.5 Prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from pre-acquisition equity a.

DR Goodwill $20 000 b.

DR Share capital $20 000 c.

CR Business combination valuation reserve $20 000 *d. CR Accumulated impairment losses $20 000.

13.

In relation to pre-acquisition of a subsidiary entity, which of the following events can cause a change in the pre-acquisition entry subsequent to acquisition date?

I Transfers from post-acquisition retained earnings II Bonus dividends paid from pre-acquisition equity III Transfers from pre-acquisition retained earnings IV Impairment of goodwill Learning Objective 21.5 Prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from pre-acquisition equity a.

I, II, III and IV b.

I, III and IV only *c. II and III only d.

III and IV only.

8.13

14.

Parent Limited acquired 100% of a subsidiary on 1 July 20X7. At acquisition date the subsidiary had the following equity items: Retained earnings $24 000 Share capital $33 000 Business combination revaluation reserve $10 000 In the year following the acquisition the subsidiary paid a bonus dividend of $14 000 out of pre-acquisition retained earnings. The following consolidation adjustment is needed in the consolidation worksheet for 30 June 20X8: Learning Objective 21.5 Prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from pre-acquisition equity *a. DR Share capital $14 000 CR Bonus dividend paid $14 000 b.

c.

d.

DR

Shares in subsidiary Share capital

14 000

CR

Bonus dividend paid Retained earnings

$14 000

CR

Retained earnings Share capital

$14 000

CR

DR

DR

$14 000

$14 000

$14 000

15.

At acquisition date a wholly owned subsidiary had the following equity items: Retained earnings $14 000 Share capital $30 000 General reserve $6000 In the year following the acquisition the subsidiary transferred $10 000 from preacquisition retained earnings to general reserve. At the reporting date following the reserve transfer, the following consolidation adjustment is needed: Learning Objective 21.5 Prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from pre-acquisition equity a.

DR Transfer to general reserve $10 000 CR General reserve $10 000 b.

c.

*d.

DR

General reserve Shares in subsidiary

$10 000

CR

Shares in subsidiary Retained earnings

$10 000

CR

General reserve Transfer to general reserve

$10 000

CR

DR

DR

$10 000

$10 000

$10 000

14

Company Accounting 7e Leo et al Chapter 7 Test Bank 16.

On 1 January 20X2 A Ltd acquired all the issued shares in B Ltd. At that date the inventory of B Ltd had a carrying amount $5000 lower than its fair value. The inventory was all sold by 30 June 20X4. At 30 June 20X5 the consolidation adjustment against inventory in relation to the transaction will be: Learning Objective 21.5 Prepare the worksheet entries in periods subsequent to the acquisition date, adjusting for movements in assets and liabilities since acquisition date and dividends from pre-acquisition equity a. a debit of $5000 b. a credit of $5000 c. a debit of $3500 *d. nothing For entities wanting to use the cost model of accounting, the revaluation of a subsidiary‘s assets would be undertaken in the: Learning Objective 21.6 Prepare the worksheet entries where the subsidiary revalues its assets at acquisition date a. subsidiary‘s records b. parent entity‘s records *c. consolidation worksheet d. notes to the consolidated financial statements.

17.

18.

In a business combination the revaluation of non-current assets in the records of the subsidiary means that the subsidiary has effectively adopted the: Learning Objective 21.6 Prepare the worksheet entries where the subsidiary revalues its assets at acquisition date a. parent-entity model of consolidation b. proprietary model of accounting c. cost model of accounting *d. revaluation model of accounting.

19.

The key principle relating to the disclosure of information about business combinations is to disclose information that: Learning Objective 21.7 Prepare the disclosures required by IFRS 3 and IFRS 12 *a. enables users to evaluate the nature and financial effect of business combinations that occurred during the reporting period b. enables the preparation of the consolidated financial statements in the most costeffective manner c. does not give an advantage to the competitors of a business group d. provides users with information about the parent entity only.

8.15

20.

Consolidated financial statements are prepared using the following presentation method: Learning Objective 21.2 Explain how a consolidation worksheet is used: a. one-line; *b. line-by-line; c. gross; d. liquidation.

21.

Leader Limited acquired 100% of the share capital of Follower Limited. Follower had issued share capital of $100 000. The book values of Follower Limited‘s assets were: Land $50 000, Equipment $60 000. The fair values of these assets were: Land $90 000, Equipment $70 000. The tax rate is 30%. The fair value of the identifiable net assets is: Learning Objective 21.3 Prepare an acquisition analysis for the parent‘s acquisition in a subsidiary: *a. $135 000; b. $110 000; c. $160 000; d. $100 000.

22.

There is no recognition of a deferred tax item in respect to Goodwill because it is a residual amount and the recognition of a deferred tax item would: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries: a. decrease the carrying amount of Goodwill; *b. increase the carrying amount of Goodwill; c. decrease the profit on consolidation; d. increase the profit on consolidation.

A typical pre-acquisition consolidation worksheet entry to eliminate a parent entity‘s investment in a subsidiary would include the following entry: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries: 23.

a. DR Share capital of parent $X; b. CR Share capital of subsidiary $X; *c. CR Shares subsidiary $X; d. DR Shares of subsidiary $X. The effect of the pre-acquisition entry is to eliminate the asset, ‗Shares in subsidiary‘ and replace it with the: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries: 24.

*a. net assets of the subsidiary; b. profit of the subsidiary; c. equity accounts of the subsidiary; d. cash and cash equivalents held by the subsidiary.

16

Company Accounting 7e Leo et al Chapter 7 Test Bank 25.

Excelsior Limited acquired 100% of the shares in Arthur Limited on a cum.div. basis for $100 000. At acquisition date the subsidiary had a declared dividend of $5000. The preacquisition entry must include the following line: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries: a. DR Shares in subsidiary $105 000; b. DR Shares in subsidiary $100 000; *c. DR Shares in subsidiary $95 000; d. DR Shares in subsidiary $5 000.

26.

Where a parent entity acquires an investment in a subsidiary for less than the fair value of the identifiable net assets and contingent liabilities acquired, it is necessary to recognise the item in the consolidation worksheet as a gain in bargain purchase and then to: Learning Objective 21.4 Prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries: a. transfer it to a business combination valuation reserve account b. goodwill; c. investment in the shares of the subsidiary; *d. profit or loss.

27.

Which of the following items cannot be revalued in the books of the subsidiary?

Learning Objective 21.6 Prepare the worksheet entries where the subsidiary revalues its assets at acquisition date: *a. inventory b. land c. plant and equipment d. goodwill Which accounting standard established the disclosure requirements relating to a parent‘s interests in subsidiaries?

Learning Objective 21.7 Prepare the disclosures required by IFRS 3 and IFRS 12: a. IFRS 3 Business Combinations b. IFRS 10 Consolidated Financial Statements *c. IFRS 12 Disclosure of Interests in Other Entities d. IAS 27 Separate Financial Statements 28.

Testbank to accompany 8.17

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by John Sweeting, Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024

18

Company Accounting 7e Leo et al Chapter 7 Test Bank Chapter 22 Consolidation: intragroup transactions Learning Objectives 22.1 22.2 22.3 22.4 22.5

Explain the need for making adjustments for intragroup transactions Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory Prepare worksheet entries for intragroup services such as management fees Prepare worksheet entries for intragroup dividends Prepare worksheet entries for intragroup borrowings.

8.19

Multiple Choice Questions 1.

IFRS 10 requires that intragroup transactions be: Learning Objective 22.1 Explain the need for making adjustments for intragroup transactions a. eliminated on consolidation to the extent of the parent‘s interest in the subsidiary. b. adjusted for in the books of the parent and subsidiary to the extent of the parent‘s interest in the subsidiary. c. adjusted for in full in the books of the parent and subsidiary. *d. eliminated in full on consolidation.

2.

The test indicating that an intragroup business transaction has been realised is: Learning Objective 22.1 Explain the need for making adjustments for intragroup transactions *a. the involvement of an external party in the transaction b. the generation of profit from the transaction c. whether or not an operating profit or loss occurred as a result of the transaction d. the presence of only entities within the group as parties to the transaction.

3.

A subsidiary entity sold inventory to its parent entity at a profit of £4 000. The goods had originally cost the subsidiary £10 000. At the end of the year all the inventory was still on hand. The adjustment entry to deal with this transaction on consolidation would include the following line item: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory *a.

CR Inventory £4 000 b.

CR Inventory £6 000 c.

CR Inventory £10 000 d, CR Inventory £14 000.

4.

A subsidiary entity sold inventory to its parent entity at a profit of £8 000. The goods had originally cost the subsidiary £20 000. At the end of the year all the inventory was still on hand. The adjustment entry to deal with this transaction on consolidation would include the following line item: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a.

CR Cost of sales £28 000 *b.

CR Cost of sales £20 000 c.

CR Cost of sales £12 000 d.

CR Cost of sales £8 000.

20

Company Accounting 7e Leo et al Chapter 7 Test Bank 5.

A subsidiary entity sold goods to its parent entity at a profit of £10 000. The goods had originally cost the subsidiary £15 000. At reporting date, the parent still held all of the goods.

Which of the following adjustments must be included as part of the consolidation entry to eliminate this transaction?

Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory *a. CR Inventory £10 000 b.

CR Inventory £15 000 c.

DR Inventory £25 000 d.

DR Inventory £15 000

6.

In May 20X7, a parent entity sold inventory to a subsidiary entity for £30 000. The inventory had previously cost the parent entity £24 000. The entire inventory is still held by the subsidiary at reporting date, 30 June 20X7. Ignoring tax effects, the adjustment entry in the consolidation worksheet at reporting date is: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a. Cash Dr 24 000 Sales revenue Cr 24 000 Cost of sales Dr 24 000 Inventory Cr 24 000 b.

c.

*d

Sales revenue Cash Inventory Cost of sales

Dr Cr Dr Cr

24 000

Sales revenue Cost of sales Inventory

Dr Cr Cr

30 000

Sales revenue Cost of sales Inventory

Dr Cr Cr

30 000

24 000 24 000 24 000

6 000 24 000

24 000 6 000

7.

During the year ended 30 June 20X7 a subsidiary entity sold inventory to its parent entity at a profit of £8 000. The goods had originally cost the subsidiary £20 000. At the end of 30 June 20X7 all the inventory was still on hand. Ignoring tax effects, the adjustment entry to deal with this transaction on consolidation during the year ended 30 June 20X8 would include the following line item: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a.

DR Cost of sales £8 000 b.

CR Cost of sales £8 000

8.21

c. *d.

DR CR

Cost of sales Cost of sales

£20 000 £20 000.

22

Company Accounting 7e Leo et al Chapter 7 Test Bank 8.

A subsidiary entity sold inventory to a parent entity for $30 000. The inventory had previously cost the subsidiary entity $24 000. By reporting date the parent entity had sold 75% of the inventory to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at reporting date is: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a. Sales revenue Dr 30 000 Cost of sales Cr 24 000 Inventory Cr 6 000 Deferred tax asset Dr 1 800 Income tax expense Cr 1 800 *b

c.

d.

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

30 000

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

22 500

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

7 500

28 500 1 500 450 450

18 000 4 500 1 350 1 350

6 000 1 500 450 450

9.

Angelo Limited sold inventory to its parent entity at a profit of $4 000. The inventory cost Angelo Limited $16 000. At the end of the reporting period the parent had sold 50% of the inventory to an external party. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory *a. $2 000 b. $4 000 c. $12 000 d. $16 000

8.23

10.

During the year ended 30 June 20X7 a subsidiary entity sold inventory to a parent entity for $30 000. The inventory had previously cost the subsidiary entity $24 000. By 30 June 20X7 the parent entity had sold 75% of the inventory to a party outside the group. The company tax rate is 30%. The adjustment entry in the consolidation worksheet at 30 June 20X8 is: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a. Sales revenue Dr 30 000 Cost of sales Cr 28 500 Inventory Cr 1 500 Deferred tax asset Dr 450 Income tax expense Cr 450 b.

*c.

d.

Retained earnings Income tax expense Cost of sales

Dr Dr Cr

1 400 600

Retained earnings Income tax expense Cost of sales

Dr Dr Cr

1 050 450

Retained earnings Inventory Deferred tax asset Retained earnings

Dr Cr Dr Cr

1 500

2 000

1 500

1 500 450 450

11.

During the year ended 30 June 20X7, a parent entity rents a warehouse from a subsidiary entity for $100 000. The company tax rate is 30%. The consolidation adjustment entry needed at reporting date is: Learning Objective 22.3 Prepare worksheet entries for intragroup services such as management fees *a. Rent revenue Dr 100 000 Rent expense Cr 100 000 b.

c.

d.

Rent revenue Rent expense Income tax expense Deferred tax liability

Dr Cr Dr Cr

100 000

Rent revenue Rent expense Deferred tax asset Income tax expense

Dr Cr Dr Cr

100 000

Rent expense Rent revenue

Dr Cr

100 000

100 000 30 000 30 000

100 000 30 000 30 000

100 000

24

Company Accounting 7e Leo et al Chapter 7 Test Bank 12. If a dividend is paid out of profits that are earned after the acquisition date, it is known as: Learning Objective 22.4 Prepare worksheet entries for intragroup dividends a. a final dividend *b. a post-acquisition dividend c. a temporary dividend d. a pre-acquisition dividend.

13.

Andronico Limited provided an advance of $500 000 to its subsidiary Galactico Limited. On consolidation the following adjustment is needed in relation to this intragroup advance: Learning Objective 22.5 Prepare worksheet entries for intragroup borrowings a. no adjustment needed b.

*c.

d.

DR

$500 000

CR

Advances to subsidiaries Advances from parent Advances from parent Advances to subsidiaries

$500 000

CR

Advances from parent Cash

$500 000

CR

DR

DR

$500 000

$500 000

$500 000

14.

JoJo Ltd provided an advance of $500 000 to its subsidiary BoBo Ltd. Interest of $50 000 was charged during the year ended 30 June 20X8. On consolidation the following adjustment is needed at 30 June 20X8 in relation to the interest charged: Learning Objective 22.5 Prepare worksheet entries for intragroup borrowings a. no adjustment needed; *b.

c.

d.

DR

Interest revenue Interest expense

$50 000

CR

$50 000

CR

Interest expense Interest revenue Retained earnings Cash

$50 000

CR

DR

DR

$50 000

$50 000

$50 000

15.

A consolidation adjustment entry made to eliminate the intragroup sales of inventory at a profit would take the following form: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a. DR Cost of Sales, CR Sales, CR Inventory *b. DR Sales, CR Cost of Sales, CR Inventory c. DR Cash, DR Cost of Sales, CR Inventory d. DR Inventory, CR Sales, CR Cash.

8.25

Jameson purchased goods from its subsidiary for €10 000. The goods cost the subsidiary €6000. At reporting date, Jameson still held all of the goods. The company rate of tax is 30%. Which of the following consolidation adjustment entries is correct?

Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a. DR Income tax expense €1 200, CR Deferred tax liability €1 200 b. DR Income tax expense €1 200, CR Deferred tax asset €1 200 *c. DR Deferred tax asset €1 200, CR Income tax expense €1 200 d. DR Deferred tax liability €1 200, CR Income tax expense €1 200.

16.

A subsidiary sold inventory to a parent entity for €10 000. The inventory originally cost the subsidiary €6000. At the end of the reporting period the parent had sold 50% of the inventory to an external party. The company tax rate is 30%. The deferred tax item that is recognised on consolidation is: Learning Objective 22.2 Prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory a. CR Deferred tax liability €1 200 b. CR Deferred tax liability €600 c. DR Deferred tax asset €1 200 *d. DR Deferred tax asset €600.

17.

18.

When eliminating an intragroup service which of the following would appear in the consolidation worksheet entry?

Learning Objective 22.3 Prepare worksheet entries for intragroup services such as management fees a. Dr Services expense *b. Dr Services revenue c. Cr Income tax expense d. Cr Deferred tax liability.

19.

When a subsidiary declares a final dividend payable to a parent who has a 100% interest in the subsidiary the parent recognises a dividend receivable and the subsidiary recognises a dividend payable. In addition to the elimination of these two items on consolidation, the following items must also be eliminated: Learning Objective 22.4 Prepare worksheet entries for intragroup dividends a. Dividend declared and Retained earnings *b. Dividend declared and Dividend revenue c. Dividend revenue and Cash d. Dividend declared and Cash.

20.

A consolidation worksheet adjustment to eliminate the effect of interest revenue and interest expense relating to intragroup advances has the following tax effect: Learning Objective 22.5 Prepare worksheet entries for intragroup borrowings *a. No tax effect; b. Increase in deferred tax asset; c. Increase in deferred tax liability; d. Decrease in income tax expense.

26

Company Accounting 7e Leo et al Chapter 7 Test Bank

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by Emma Holmes and Elisabetta Barone

John Wiley & Sons, Ltd 2024 8.27

Chapter 23 Consolidation: non-controlling interest Learning Objectives 23.1 23.2 23.3 23.4 23.5

Discuss the nature of the non-controlling interest (NCI) Explain the effects of the NCI on the consolidation process Explain how to calculate the NCI share of equity Explain how the calculation of the NCI is affected by the existence of intragroup transactions Explain how the NCI is affected by the existence of a gain on bargain purchase.

Company Accounting 7e Leo et al Chapter 7 Test Bank Multiple Choice Questions 1.

A non-controlling interest (NCI) is a contributor of: Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) *a. equity to a consolidated group; b. debt to a consolidated group; c. assets to a consolidated group; d. profit to a consolidated group.

2.

According to IFRS 10, the term ‗non-controlling interest‘ means: Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) a. the total equity of the combined group b. the equity in the parent entity other than the portion owned by the subsidiary entity c. the equity in the economic entity other than that which can be attributed to the subsidiary entity *d. equity in a subsidiary not attributable, directly or indirectly, to a parent.

3.

According to IFRS 10, NCI is classified as: Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) a. part of the equity of the parent entity *b. part of the equity of the group c. a liability of the parent entity d. a liability of the group.

4.

When preparing and presenting a consolidated statement of comprehensive income the NCI is: Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) a. presented as a separate component of revenue b. shown as a separate component of profit before tax and a separate component of tax expense c. shown as a separate component of each line item *d. presented as a separate portion of profit or loss.

5.

In a consolidated statement of financial position, the NCI is shown: Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) a. separately within the non-current liabilities b. separately within the non-current investments *c. separately within the equity section d. as part of the total current liabilities of the group.

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6.

When preparing a consolidated statement of changes in equity, IFRS 10 requires that any NCI in equity of subsidiaries is: Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) a. shown as a one-line item b. disclosed in the statement of financial position, and not in the statement of changes in equity c. shown as a share of total ending equity of the subsidiary only *d. shown on a line-by-line basis.

7.

A NCI is entitled to a share of: I Equity of the parent at acquisition date II Current period profit or loss of the subsidiary entity III Changes in equity of the subsidiary since acquisition date and the beginning of the financial period IV Equity of the subsidiary at acquisition date Learning Objective 23.1 Discuss the nature of the non-controlling interest (NCI) a.

I, II and III b.

I and II only *c. II, III and IV only d.

III only.

Xin Limited paid €12 000 for 75% of Yan Limited. At the date of acquisition Yan Limited had equity as follows:  Share capital of €10 000  Retained earnings of €5000  Other reserves of €3000 All of Yan Limited‘s assets and liabilities were recorded at fair value. The fair value of identifiable net assets acquired by Xin Limited amounted to: Learning Objective 23.2 Explain the effects of the NCI on the consolidation process a. €9750 b. €12 000 *c. €13 500 d. €18 000 8.

9.

When preparing a set of consolidated financial statements, the pre-acquisition entry relates to: Learning Objective 23.2 Explain the effects of the NCI on the consolidation process a. both the parent and the NCI in the subsidiary; *b. only the investment by the parent in the subsidiary; c. only the investment by the NCI in the subsidiary; d. the total investment by the parent in the subsidiary plus the after tax effect of the investment by the NCI.

1.2

Company Accounting 7e Leo et al Chapter 7 Test Bank 10.

Company A Limited owns 70% of the share capital of Company B Limited. Company B Limited paid a dividend of £10 000 during the financial period. The adjustment entries in the consolidation worksheet for the dividend include: Learning Objective 23.2 Explain the effects of the NCI on the consolidation process: *a. DR Dividend revenue £7 000; b.

DR Dividend revenue £10 000; c.

DR Dividend payable £7 000; d.

DR Dividend payable £10 000.

11.

Lu Nan Limited acquired 80% of the share capital and reserves of Hui Limited for £20 000.

Share capital was £10 000 and reserves amounted to £6000. All assets and liabilities were recorded at fair value except plant which was recorded at £1000 below fair value.

The company tax rate was 30%. The partial goodwill method is adopted by the group.

The amount of goodwill acquired by Lu Nan Limited in this business combination was: Learning Objective 23.2 Explain the effects of the NCI on the consolidation process a. £4000 *b. £6640 c. £7200 d. £13 360.

12.

Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for £180 000. Share capital was £100 000 and reserves amounted to £50 000. All assets and liabilities were recorded at fair value except buildings which was recorded at £10 000 below fair value. The fair value of the NCI at the date of Jiminez‘s acquisition was £35 000 and the full goodwill method is adopted by the group. If the company tax rate was 30%, the goodwill recorded in relation to this business combination amounts to: Learning Objective 23.2 Explain the effects of the NCI on the consolidation process a. £3 600 b. £23 000 c. £54 400 *d. £58 000.

13.

Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for £180 000. Share capital was £100 000 and reserves amounted to £50 000. All assets and liabilities were recorded at fair value except buildings which was recorded at £10 000 below fair value. The fair value of the NCI at the date of Jiminez‘s acquisition was £35 000 and the partial goodwill method is adopted by the group. If the company tax rate was 30%, the goodwill recorded in relation to this business combination amounts to: Learning Objective 23.2 Explain the effects of the NCI on the consolidation process a. £3 600 b. £23 000 *c. £54 400 d. £58 000.

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14.

Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for $180 000. Share capital was $100 000 and reserves amounted to $50 000. All assets and liabilities were recorded at fair value except buildings which was recorded at $10 000 below fair value. The fair value of the NCI at the date of Jiminez‘s acquisition was $35 000. If the company tax rate was 30%, and the partial goodwill method was adopted, the NCI share of equity at the date of acquisition was: Learning Objective 23.3 Explain how to calculate the NCI share of equity a. $30 000 *b. $31 400 c. $35 000 d. $43 000.

15.

Jiminez Limited acquired 80% of the share capital and reserves of Mustang Limited for $180 000. Share capital was $100 000 and reserves amounted to $50 000. All assets and liabilities were recorded at fair value except buildings which was recorded at $10 000 below fair value. The fair value of the NCI at the date of Jiminez‘s acquisition was $35 000. If the company tax rate was 30%, and the full goodwill method was adopted, the NCI share of equity at the date of acquisition was: Learning Objective 23.3 Explain how to calculate the NCI share of equity a. $30 000 b. $31 400 *c. $35 000 d. $43 000.

16.

Petros Limited is a subsidiary of Butros Limited. When Butros acquired its 60% interest, the retained earnings of Petros Limited were $20 000. At the beginning of the current period Petros Limited‘s retained earnings had increased to $50 000. Petros earned profit of $10 000 during the current period. The share of the NCI in the closing retained earnings of Petros Limited at reporting date is: Learning Objective 23.3 Explain how to calculate the NCI share of equity a. $20 000 *b. $24 000 c. $32 000 d. $36 000

17.

During the current year a partly owned subsidiary has made a transfer from retained earnings to a general reserve. Which of the following lines would appear in the NCI journal relating to the current year transfer?

Learning Objective 23.3 Explain how to calculate the NCI share of equity a.

DR NCI b.

DR Retained earnings c.

CR General reserve *d. CR Transfer to general reserve

1.4

Company Accounting 7e Leo et al Chapter 7 Test Bank 18.

A NCI in a subsidiary entity is entitled to a share of the following items:

Subsidiary equity at acquisition date Changes in equity since acquisition date Changes in equity of the current period

Yes

Yes Yes No

I Yes No Yes

II Yes No No

III

IV

Yes Yes

Learning Objective 23.3 Explain how to calculate the NCI share of equity a.

I; b.

II; c.

III; *d. IV.

19.

P Ltd paid $169 600 for 80% of the shares of S Ltd on 1 July 2013. All identifiable assets and liabilities of the subsidiary were recorded at fair value, except for land for which the fair value was $10 000 greater than cost. The tax rate is 30%. The NCI in S Ltd was considered to have a fair value of $42 000 and the group applies the full goodwill method.

At acquisition date, the equity of S Ltd consisted of:  Share capital $100 000  General reserve $60 000  Retained earnings $40 000 The control premium paid by P Ltd is: Learning Objective 23.3 Explain how to calculate the NCI share of equity a. $600 *b. $1600 c. $3000 d. $4600

20.

A Ltd holds a 60% interest in B Ltd. On 1 January 2014 B Ltd paid an interim dividend of €25 000 and on 30 June 2014 B Ltd declared a final dividend of €15 000.

The NCI journals at 30 June 2014 will include: Learning Objective 23.3 Explain how to calculate the NCI share of equity a.

DR Interim dividend paid €10 000 *b.

DR NCI €16 000 c.

CR Dividend receivable €6 000 d.

CR Final dividend declared €9 000

21.

A Ltd holds a 60% interest in B Ltd. A Ltd sells inventory to B Ltd during the year for $10 000. The inventory originally cost $7000. At the end of the year 50% of the inventory is still on hand. The tax rate is 30%. The NCI adjustment required in relation to this transaction is a debit of: Learning Objective 23.4 Explain how the calculation of the NCI is affected by the existence of intragroup transactions *a. NIL b. $420 c. $630 d. $1050.

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22.

A transaction requiring an adjustment to the calculation of a NCI share of equity has the following characteristics: I. The transaction must result in the subsidiary recording a profit or a loss.

II. After the transaction the other party to the transaction must have on hand an asset on which unrealised profit is accrued.

III. The initial consolidation adjustment must affect both the statement of financial position and statement of comprehensive income.

Learning Objective 23.4 Explain how the calculation of the NCI is affected by the existence of intragroup transactions a.

I and II only; *b. I, II and III; c.

II and III only; d.

None of the above.

23.

A Ltd holds a 60% interest in B Ltd. B Ltd sells inventory to A Ltd during the year for £10 000. The inventory originally cost £7000. At the end of the year 50% of the inventory is still on hand. The tax rate is 30%. The NCI adjustment required in relation to this transaction is a debit of: Learning Objective 23.4 Explain how the calculation of the NCI is affected by the existence of intragroup transactions a.

NIL *b. £420 c. £630 d. £1050.

24. In respect to the intragroup transfer of services any profit or loss is regarded as: Learning Objective 23.4 Explain how the calculation of the NCI is affected by the existence of intragroup transactions: a. insignificant and so not adjusted when performing NCI calculations; b. extraordinary and so ignored for consolidation reporting purposes; *c. immediately realised; d. unrealised.

25.

A Ltd holds a 60% interest in B Ltd. On 1 July 2014 B Ltd transferred a depreciable noncurrent asset to A Ltd at a profit of £5000. The remaining useful life of the asset at the date of transfer was 4 years and the tax rate is 30%. The impact of the above on the NCI share of profit for the year ended 30 June 2015 is: Learning Objective 23.4 Explain how the calculation of the NCI is affected by the existence of intragroup transactions a. an increase of £2625 b. a decrease of £2625 c. an increase of £1050 *d. a decrease of £1050.

1.6

Company Accounting 7e Leo et al Chapter 7 Test Bank 26. If a gain on bargain purchase arises on a business combination, the NCI: Learning Objective 23.5 Explain how the NCI is affected by the existence of a gain on bargain purchase. a. is allocated 100% of the gain *b. has no involvement with the gain c. is entitled to a proportionate share of the gain based on its level of share ownership d. receives a proportionate share of the gain after adjustments for tax effects have been made.

Testbank to accompany

®

Applying IFRS Standards 5e

Ruth Picker, Kerry Clark, John Dunn, David Kolitz, Gilad Livne, Janice Loftus, Leo van der Tas

Prepared by Emma Holmes and Elisabetta Barone

1.7

John Wiley & Sons, Ltd 2024

1.8

Company Accounting 7e Leo et al Chapter 7 Test Bank CHAPTER 24 Translation of the financial statements of foreign entities Learning Objectives 24.1

Identify the reason for translation of financial statements and the applicable accounting standard 24.2 Explain the difference between functional and presentation currencies 24.3 Discuss the rationale underlying the choice of a functional currency 24.4 Apply the indicators in choosing a functional currency 24.5 Translate a set of financial statements from local currency into the functional currency 24.6 Account for changes in the functional currency 24.7 Translate financial statements into the presentation currency 24.8 Prepare consolidated financial statements including foreign subsidiaries where the local currency is the functional currency 24.9 Prepare consolidated financial statements including foreign subsidiaries where the functional currency is that of the parent entity 24.10 Explain what constitutes the net investment in a foreign operation 24.11 Prepare the disclosures required by IAS 21.

1.9

Multiple Choice Questions

1.

When an entity has an investment in a foreign domiciled entity it is necessary to translate the financial statements of the foreign operation to the currency used by the investor: Learning Objective 24.1 Identify the reason for translation of financial statements and the applicable accounting standard a. regardless of the ownership interest in the entity b. only where the entity is a wholly owned subsidiary *c. where the investor has control over the foreign entity d. where the investment is material to the investor

2.

In order for the financial statements of a foreign operation to be included in the consolidated financial statements of the parent it is necessary to translate the foreign operation‘s financial statements into: Learning Objective 24.1 Identify the reason for translation of financial statements and the applicable accounting standard *a. the presentation currency of the reporting entity; b. the functional currency of the foreign operation; c. the local currency of the foreign operation; d. the domestic currency of the foreign operation;

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Company Accounting 7e Leo et al Chapter 7 Test Bank The following information relates to question 3 and 4 Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The statement of financial position of Sing Sing on that date was as follows: Statement of Financial Position as at 1 July 20X0 S$ Machinery at cost 280,000 Investment property 200,000 Receivables 50,000 Cash 70,000 600,000

Share capital General Reserve Retained earnings

S$ 200,000 100,000 300,000 600,000

The statement of financial position of Sing Sing as at 30 June 20X1was as follows: Statement of Financial Position as at 30 June 20X1 S$ Machinery- carrying value 150,000 Investment property 200,000 Trade receivables 250,000 Cash 300,000

Share capital General Reserve Retained earnings Trade payables Income tax payable

900,000

S$ 200,000 100,000 500,000 85,000 15,000 900,000

Relevant exchange rates are as follows:

1 July 20X0 30 June 20X1 Average 20X0-X1

A$ 1.00 1.00 1.00

= = =

S$ 1.25 1.28 1.18

3.

If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian dollars the total assets of S$900,000 would translate into Australian dollars as: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. $703 125 *b. $709 688 c. $1 141 500 d. $1 152 000

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4.

If the functional currency of Sing Sing is Singapore dollars and the presentation currency is Australian dollars the total assets of S$900,000 would translate into Australian dollars as: Learning Objective 24.7 Translate financial statements into the presentation currency *a. $703 125 b. $709 688 c. $1 141 500 d. $1 152 000

5.

Indicators pointing towards the local overseas currency as the functional currency include, that the: I. Parent‘s cash flows are directly affected on a current basis.

II. Cash flows are primarily in the local currency and do not affect the parent‘s cash flows.

III. Sales prices are primarily responsive to exchange rate changes in the short-term.

IV. Production costs are determined primarily by local conditions.

Learning Objective 24.4 Apply the indicators in choosing a functional currency a.

I and III only; *b.

II and IV only; c.

I, III and IV only; d.

I, II and IV only.

6.

When translating into the functional currency foreign currency denominated nonmonetary items measured using historical cost must be translated using the: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. rate current at end of reporting period; b. average rate for the reporting period; *c. exchange rate at the date of the transaction; d. rate prevailing at the end of the last financial year.

7.

Monetary items are best described as: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. plant and equipment; *b. units of currency held and assets and liabilities to be received or paid in fixed numbers of currency units; c. all intangible items including goodwill; d. all items that are contingent in nature.

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Company Accounting 7e Leo et al Chapter 7 Test Bank 8.

Post acquisition date retained earnings that are denominated in a foreign currency are: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. translated into the functional currency using the rate current at the latest end of reporting period; b. translated into the functional currency using the average rate since acquisition date; c. translated into the functional currency using the rates at the end of each year since acquisition date; *d. balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.

9.

When translating into the functional currency monetary liabilities are translated using the: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. exchange rate current at the date the item was first recorded; b. exchange rate prevailing at the end of the last reporting period; c. closing exchange rate; *d. exchange rate current at end of reporting period.

10.

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency *a. as an item of gain or loss in the statement of profit or loss and other comprehensive income; b. directly in the retained earnings account; c. as a deferred asset or liability; d. as a separate component of equity.

11.

If foreign currency denominated non-monetary items are measured using the fair value method, they must be translated into the functional currency using the: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency *a. exchange rate at the date when the value was determined; b. exchange rate current at end of reporting period; c. closing exchange rate for the financial year; d. exchange rate at the transaction date.

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12.

When translating the revenue and expenses in the statement of profit or loss and other comprehensive income, theoretically each item of revenue and expense should be translated using the spot exchange rate between the: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. functional currency and the foreign currency on the reporting date; b. presentation currency and the functional currency on the reporting date; *c. functional currency and the foreign currency on the date the transaction occurred; d. presentation currency and the local currency on the transaction date.

13.

By applying the definition provided in IAS 21 The Effects of Changes in Foreign Exchange Rates, the following items will be regarded as a monetary item: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. property, plant and equipment; b. land and buildings; c. inventory; *d. accounts receivable.

14.

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to: Learning Objective 24.5 Translate a set of financial statements from local currency into the functional currency a. translate all liabilities using the current rate existing at end of reporting period; b. first classify the liabilities into current and non-current; *c. first classify the liabilities as monetary or non-monetary; d. translate all liabilities using the rate current on entering into the transaction.

15.

Where a change in the functional currency occurs, the translation procedures as outlined in IAS 21 The Effects of Changes in Foreign Exchange Rules, apply: Learning Objective 24.6 Account for changes in the functional currency *a. prospectively, from the date of the change; b. prospectively, from the next reporting date; c. retrospectively and must be adjusted in the opening balance of retained earnings; d. retrospectively and must be adjusted directly into the current period profit or loss.

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Company Accounting 7e Leo et al Chapter 7 Test Bank 16.

Differences arise in relation to the treatment of which of the following when translating from the local to functional currency as opposed to the functional to presentation currency?

Learning Objective 24.7 Translate financial statements into the presentation currency a. accounts receivable b. cost of goods sold *c. depreciation expense d. share capital

17.

When translating into the presentation currency the translation difference is recognised: Learning Objective 24.7 Translate financial statements into the presentation currency a. in profit or loss *b. as a separate component of equity c. in retained earnings d. as an asset or liability, depending on whether it is a debit or credit balance.

18.

Mortimer Limited has the following items in its statement of profit or loss and other comprehensive income: Revenue FC60 000, Cost of goods sold FC25 000, Interest expense FC8 000, Income tax expense FC10 000.

All items arose evenly across the year. The following exchange rates applied: End of reporting period FC1 = $0.80 Average rate for year FC1 = $0.75

The net profit after tax translated into the presentation currency is: Learning Objective 24.7 Translate financial statements into the presentation currency *a. $12 750; b. $13 600; c. $21 250; d. $26 667.

1.15

The following information relates to questions 19 to 21 On 1 January 20X3, Claudia Ltd, an Australian company, acquired 80% of the shares of Saskia Ltd, a New Zealand company, for A$2 498 000. At that date the share capital of Saskia was NZ$2 million and the retained earnings were NZ$1 440 000.

All the assets and liabilities of Saskia were recorded at fair value except for land, for which the fair value was NZ$200 000 higher than the carrying amount and equipment, for which the fair value was NZ$80 000 higher than the carrying amount. The undervalued equipment had a further 4-year life. The tax rate in New Zealand is 25%.

Exchange rates are as follows: 1 January 20X3 31 December 20X3 Average for the year

A$1.00 = NZ$1.20 A$1.00 = NZ$1.40 A$1.00 = NZ$1.30

19. The goodwill arising on Claudia‘s acquisition of Saskia is: Learning Objective 24.8 Prepare consolidated financial statements including foreign subsidiaries where the local currency is the functional currency *a. NZ$77 600; b. NZ$88 800; c. A$93 120; d. A$422 000.

20.

The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is New Zealand dollars is: Learning Objective 24.8 Prepare consolidated financial statements including foreign subsidiaries where the local currency is the functional currency a. 5 953 debit b. 5 953 credit *c. 17 857 debit d. 17 857 credit

21.

The adjustment to the foreign currency translation reserve on 31 December 20X3 relating to the revaluation of the land if the functional currency of Saskia is Australian dollars dollars is: Learning Objective 24.9 Prepare consolidated financial statements including foreign subsidiaries where the functional currency is that of the parent entity a. 5 953 debit *b. 5 953 credit c. 17 857 debit d. 17 857 credit

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Company Accounting 7e Leo et al Chapter 7 Test Bank 22.

Yandos Limited has made a loan of A$50 000 to a foreign subsidiary in Japan, Yamuchi Limited. The loan was made when the exchange rate was A$4 = Y1. By reporting date, the exchange rate had changed to A$5 = Y1. The Australian parent will need to recognise the following as part of the entry to revalue the loan: Learning Objective 24.10 Explain what constitutes the net investment in a foreign operation a.

DR Loan receivable $62 500; b.

DR Loan receivable $50 000 *c. DR Loan receivable $12 500; d.

DR Loan receivable $2500.

23.

A parent entity has recognised an increase of $50 000 in a Loan Receivable from a foreign subsidiary as a result of a change in exchange rates. On consolidation the following adjustment is necessary: Learning Objective 24.10 Explain what constitutes the net investment in a foreign operation *a.

DR Exchange gain $50 000 CR Foreign currency translation reserve $50 000; b.

CR

DR

Exchange gain Loan receivable

$50 000 $50 000;

c.

DR CR

Loan receivable Foreign currency translation reserve

d.

CR

Foreign currency translation reserve $50 000 Exchange gain

DR

$50 000 $50 000; $50 000.

1.17

24.

Under IAS 21 The Effects of Changes in Foreign Exchange Rates, an entity must disclose:

I. The amount of exchange differences included in profit or loss of the period.

II. The amount of the exchange difference included directly in share capital during the period.

III. Whether a change in the functional currency has occurred.

IV. The reason for using a presentation currency that is different from the functional currency.

Learning Objective 24.11 Prepare the disclosures required by IAS 21 a.

I, II, III and IV; b.

II and III only; *c. I, III and IV only; d.

I and IV only.

Jm,.

1.18