TEST BANK for Company Accounting 10th Edition. Ken Leo, Jeffrey Knapp, Sue McGowan & John Sweeting

Testbank to accompany Company Accounting 10e

Chapter 1: Nature and regulation of companies Multiple-choice questions 1. The advantages of a company over a partnership and sole trader do not include which of the following? a. Members are able to sell their shares at any time to another person without having to obtain permission from the other members. b. Members are liable for only a limited amount of the company’s debts. c. A company has a legal existence distinct from its owners. *d. A company is only entitled to raise small amounts of cash by issuing shares.

Correct answer: d Learning Objective 1.1 ~ summarise the nature and attributes of a company

2. In Australia, the Corporations Act 2001 is administered by the: a. Australian Securities Exchange. b. Australian Accounting Research Foundation. *c. Australian Securities and Investments Commission. d. Securities and Exchange Commission.

Correct answer: c Learning Objective 1.1 ~ summarise the nature and attributes of a company

3. The two main types of companies permitted to be registered under the Corporations Act 2001 are a: a. private company, and a proprietary company. b. public company, and a trade union. *c. proprietary company, and a public company. d. proprietary company, and a partnership.

Correct answer: c Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

© John Wiley & Sons Australia, Ltd 2015

1.2

Chapter 1: Nature and regulation of companies

4. According to the Corporations Act 2001, a small proprietary company is one which satisfies at least two of the following tests: it must have consolidated revenue of less than $25 million, consolidated gross assets of less than $12.5 million and: a. total liabilities of less than $10 million. b. total liabilities of less than $20 million. c. fewer than 100 employees at the end of the financial year. *d. fewer than 50 employees at the end of the financial year.

Correct answer: d Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

5. A proprietary company must have at least one shareholder and cannot have more than: a. 100 shareholders. *b. 50 shareholders. c. 20 shareholders. d. 500 shareholders.

Correct answer: b Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

6. A disclosing entity includes: a. a company that is not a reporting entity. *b. an entity which has its shares listed on the ASX. c. an entity which issues its shares only to the company directors. d. a small proprietary company.

Correct answer: b Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

7. The certificate of registration issued by the Australian Securities and Investments Commission is valid: a. for 12 months only and must be renewed annually. b. for a maximum period of 5 years. c. for 15 years. *d. until the company is deregistered.

Correct answer: d Learning Objective 1.3 ~ describe the necessary documentation for forming a company

© John Wiley & Sons Australia, Ltd 2015

1.3

Testbank to accompany Company Accounting 10e

8. The replaceable rules built into the Corporations Act deal with which of the following? *a. Appointment, powers, remuneration and termination of directors. b. Meetings between the external auditors and the company’s audit committee. c. Remuneration of the external auditors. d. Annual dividend payments to members.

Correct answer: a Learning Objective 1.3 ~ describe the necessary documentation for forming a company

9. The replaceable rules that apply to a company have effect as a contract between: a. the company and each member. b. the company and each director and company secretary. c. a member and each other member. *d. all of the above.

Correct answer: d Learning Objective 1.3 ~ describe the necessary documentation for forming a company

10. The share capital of a company may consist of: *a. ordinary or preference shares issued by the company either fully paid or partly b. loans from banks. c. secured and unsecured notes issued by the company. d. debentures issued by the company.

paid.

Correct answer: a Learning Objective 1.5 ~ compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents

11. The main role of the trustee for debenture holders is to protect the interests of: a. suppliers. *b. debenture holders. c. directors. d. employees.

Correct answer: b Learning Objective 1.5 ~ compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents

© John Wiley & Sons Australia, Ltd 2015

1.4

Chapter 1: Nature and regulation of companies

12. Which of the following is not specifically excluded from the definition of a debenture under s. 9 of the Corporations Act 2001? a. Bank overdrafts in the ordinary course of business. *b. Unsecured notes. c. Money orders. d. Cheques.

Correct answer: b Learning Objective 1.5 ~ compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents

13. Which of the following statements is correct in relation to disclosure documents? a. The most complete disclosure document on the issue of securities is a profile statement. b. Prospective investors are not entitled to receive a copy of the prospectus lodged with the ASIC. *c. Information in a disclosure document must be worded and presented in a clear, concise and effective manner. d. Where a company offers to issue securities which will raise $10 million or less, an offer information statement cannot be issued in place of a prospectus.

Correct answer: c Learning Objective 1.5 ~ compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents

14. Which of the following was not one of the objectives of the Corporate Law Economic Reform Program (CLERP)? a. To make access to capital easier for small business. *b. To make access to capital easier for large business. c. To improve takeover legislation. d. To facilitate the more widespread use of electronic commerce.

Correct answer: b Learning Objective 1.6 ~ discuss the background and purpose of the Corporations Act 2001 by which companies are formed, administered and dissolved

© John Wiley & Sons Australia, Ltd 2015

1.5

Testbank to accompany Company Accounting 10e

15. The main functions of the Financial Reporting Council include: I. appointing members of the AASB and AUASB. II. determining the AASB’s broad strategic direction.

III. establishing appropriate consultative mechanisms.

IV. directing the AASB in relation to the development or making of a particular standard.

V. the power to veto a standard recommended by the AASB. a. I, II, III and V only. *b. I, II and III only. c. I, II, IV and V only. d. II, III, IV and V only.

Correct answer: b Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

16. The functions of the Australian Accounting Standards Board include: I. development of a conceptual framework for the purpose of evaluating proposed accounting standards.

II. making accounting standards for the purpose of the Corporations Act. III. participating in and contributing to the development of a single set of accounting standards for worldwide use. a. I only. b. II and III only. c. I and III only. *d. I, II and III. Correct answer: d Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

© John Wiley & Sons Australia, Ltd 2015

1.6

Chapter 1: Nature and regulation of companies

17. Which of the following statements is correct in relation to the Urgent Issues Group (UIG)? a. The UIG is now defunct. As a result, previously issued UIG interpretations are no longer enforceable. b. The UIG has been replaced by the International Accounting Standards Board. *c. Prior to ceasing to exist, the UIG provided consensus views on a range of topics peculiar to the Australian political, legal and economic systems. d. Prior to ceasing to exist, the UIG was a subcommittee of the IFRS Interpretations Committee.

Correct answer: c Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

18. In 2001, the International Accounting Standards Board replaced the: *a. International Accounting Standards Committee. b. Financial Reporting Council. c. Urgent Issues Group. d. Australian Accounting Research Foundation.

Correct answer: a Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

19. The IFRS Interpretations Committee is a subcommittee of the: a. Standing Interpretations Committee. b. Australian Accounting Standards Board. *c. International Accounting Standards Board. d. Financial Reporting Committee.

Correct answer: c Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

© John Wiley & Sons Australia, Ltd 2015

1.7

Testbank to accompany Company Accounting 10e

20. Accounting standards approved by the Accounting Standards Review Board (ASRB) had: a. no legal backing under the Companies Act, and their application was optional. b. no legal backing under the Companies Act, although almost all companies followed their guidance. *c. the force of law under the Companies Act, unless the companies could show that, by complying with any particular standard, the company’s financial reports would not show a ‘true and fair view’. d. the force of law under the Companies Act, and their application was mandatory at all times.

Correct answer: c Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

21. People cannot be appointed as members of the AASB unless: a. they are a member of one of the accounting professional bodies. b. they are a registered company auditor. *c. their knowledge and experience in business, accounting, law or government qualifies them for appointment. d. they have experience as a company director.

Correct answer: c Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

© John Wiley & Sons Australia, Ltd 2015

1.8

Chapter 1: Nature and regulation of companies

22. According to s. 224 of the ASIC Act 2001, accounting standards should result in financial information which has which of the following characteristics?

I. Allows users to make and evaluate decisions about allocating scarce resources.

II. Assists directors in discharging their obligations in relation to financial reporting.

III. Is relevant to assessing performance, financial position, financing and investment.

IV. Is readily understandable.

V. Facilitates comparability.

VI. Is relevant and reliable. a. I, IV and VI only. b. I, III, IV and VI only. c. I, II, IV, V and VI only. *d. all of the above.

Correct answer: d Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

23. In July 2002, the Financial Reporting Council (FRC) issued a bulletin requiring that the AASB would adopt IASB standards from 1 January 2005 for: a. non-reporting entities. *b. all financial statements. c. for-profit entities. d. listed entities.

Correct answer: b Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

24. In terms of the numbering of AASB accounting standards: *a. AASB 1–99 are the AASB equivalent of the IFRSs issued by the IASB. b. AASB 101–199 are the AASB equivalent of the IFRSs issued by the IASB. c. AASB 1–99 address domestic issues such as director and executive disclosures and concise financial reports. d. AASB 101–199 address domestic issues such as director and executive disclosures and concise financial reports.

Correct answer: a Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process 25. Compared to IFRS standards, Australian accounting standards initially required:

© John Wiley & Sons Australia, Ltd 2015

1.9

Testbank to accompany Company Accounting 10e

a. less disclosure in notes to the financial statements. b. identical disclosures in notes to the financial statements. *c. more information disclosed in the notes to the financial statements. d. different disclosures in the notes to the financial statements.

Correct answer: c Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

26. AASB 1048 Interpretation and Application of Standards contains the: a. IFRS interpretations approved by the AASB. b. UIG interpretations approved by the IASB. c. IFRS interpretations approved by the IASB. *d. UIG interpretations approved by the AASB. Correct answer: d Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

27. The role of the Australian Securities and Investments Commission is to: I. enforce and administer the Corporations Act. II. make information about companies and other bodies available to the public as soon as practicable.

III. issue accounting standards for reporting entities.

IV. maintain, facilitate and improve the performance of the financial system and entities in it. a. I, II, III and IV. b. I, III and IV only. *c. I, II and IV only. d. II and III only.

Correct answer: c Learning Objective 1.8 ~ discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX)

© John Wiley & Sons Australia, Ltd 2015

1.10

Chapter 1: Nature and regulation of companies

28. A key role of the Australian Securities and Investments Commission (ASIC) is to ensure that all company financial statements lodged with it: a. do not contain any fraud. b. are approved by the Financial Reporting Council. c. comply with the ASX Listing Rules. *d. comply with the Corporations Act, including accounting standards.

Correct answer: d Learning Objective 1.8 ~ discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX)

29. Which of the following statements is not correct? *a. Requirements for special purpose financial reports are contained in AASB accounting standards. b. The IASB’s Conceptual Framework identifies potential investors as a primary user group of general purpose financial reports. c. All general purpose financial reports are prepared in accordance with accounting standards. d. SAC 1 Definition of the Reporting Entity defines a general purpose financial report as ‘a report intended to meet the information needs of users who are unable to command the preparation of reports tailored to satisfy their information needs’.

Correct answer: a Learning Objective 1.9 ~ analyse the concepts of general purpose financial reporting and the reporting entity

30. The definition of a reporting entity in SAC 1 requires: a. the existence of external users. b. the existence of dependant users. c. a reasonable expectation of external users. *d. a reasonable expectation of users reliant on the entity’s general purpose financial report.

Correct answer: d Learning Objective 1.9 ~ analyse the concepts of general purpose financial reporting and the reporting entity

© John Wiley & Sons Australia, Ltd 2015

1.11

Testbank to accompany Company Accounting 10e

True/false questions 31. Members of a company are allowed to sell their shares at any time, provided they obtain permission from the other members.

The statement is false. Provided a proper instrument of transfer has been delivered to the company, members do not have to obtain permission from the other members (s. 1071B of the Corporations Act).

Learning Objective 1.1 ~ summarise the nature and attributes of a company

32. Small proprietary companies must prepare audited accounts if requested by ASIC. The statement is true. ASIC can require small proprietary companies to prepare audited financial statements under s. 294 of the Corporations Act. Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

33. When determining whether a proprietary company is classified as small or large, the consolidated gross assets test is determined based on the average of the opening and closing gross assets.

The statement is false. The assets test is based on consolidated gross assets at the end of the financial year.

Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

34. Disclosing entities must prepare annual and half-yearly financial statements, have them audited and lodge them with the ASIC. The statement is true. This is required under s. 302 of the Corporations Act. Learning Objective 1.2 ~ discuss the different types of companies which may be formed under the Corporations Act 2001

35. Costs incurred in promoting and setting up a company are considered to be capital in nature and cannot be paid from the company’s assets.

The statement is false. Section 122 of the Corporations Act allows such costs to be paid from the company’s assets.

Learning Objective 1.3 ~ describe the necessary documentation for forming a company

© John Wiley & Sons Australia, Ltd 2015

1.12

Chapter 1: Nature and regulation of companies

36. All company registers must be kept at the registered office of the company.

The statement is false. The Corporations Act (s. 172) allows company registers to be kept at the registered office, the principal place of business or at another location approved by the ASIC. Learning Objective 1.4 ~ describe the types of records needed to manage a company

37. Shares and debentures are the most common types of securities issued by companies when raising funds.

The statement is true. Companies can also issue options, but these are not as common.

Learning Objective 1.5 ~ compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents

38. All offers by a company to issue shares or debentures must be accompanied by a disclosure document.

The statement is false. Section 708 of the Corporations Act provides a number of specific exclusions where a disclosure document is not required. Examples include the offer of shares to ‘professional’ investors and offers of securities as part of a takeover bid.

Learning Objective 1.5 ~ compare and contrast shares and debentures, and discuss the reasons for issuing disclosure documents

39. The aim of the proposals in the Corporate Law Economic Reform Program (CLERP) first discussion paper was to provide a standard-setting process which would be beneficial for Australian business operating in a global environment and which would be economically efficient.

The statement is true. The government was concerned that the existing accounting standard-setting arrangements were imposing excessive costs on business.

Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

© John Wiley & Sons Australia, Ltd 2015

1.13

Testbank to accompany Company Accounting 10e

40. Prior to 1988 the role of the Accounting Standards Review Board (ASRB) was to formulate and issue accounting standards.

The statement is false. The role of the ASRB prior to 1988 was to review and approve accounting standards that had been prepared by the professional accounting bodies, via the Australian Accounting Research Foundation (AARF). The role of the ASRB expanded in 1988 to include developing accounting standards. In 1991, the ASRB was replaced by the Australian Accounting Standards Board (AASB).

Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

41. In announcing that the AASB would adopt IASB accounting standards by 1 January 2005, the Financial Reporting Council (FRC) argued that a single set of high-quality accounting standards that are accepted in international capital markets would greatly help cross-border comparisons by investors.

The statement is true. The FRC also argued that a single set of accounting standards would reduce the cost of capital and help Australian companies wishing to raise capital or list their shares on overseas stock markets.

Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

42. Under the ASIC Act 2001 one of the key functions of the Australian Accounting Standards Board (AASB) is to participate in the development of a single set of accounting standards for worldwide use.

The statement is true. This is stipulated in s. 227(1) of the ASIC Act 2001.

Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

43. Australian accounting standards are now identical to their equivalent International Financial Reporting Standards (IFRSs).

The statement is false. Australian accounting standards are substantially the same as the equivalent IFRSs, with two important exceptions: some Australian standards have increased disclosure requirements and Australian standards contain additional guidance relating to the public and not-for-profit sectors.

Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

© John Wiley & Sons Australia, Ltd 2015

1.14

Chapter 1: Nature and regulation of companies

44. As the Urgent Issues Group (UIG) is now defunct, the interpretations issued by it are no longer enforceable.

The statement is false. The interpretations issued by the UIG are listed in AASB 1048 Interpretation and Application of Standards. As they form part of an accounting standard, they are enforceable under the Corporations Act. Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

45. From March 2010, the principal objectives of the International Accounting Standards Board (IASB) include promoting the use and rigorous application of IFRSs and to bring about convergence of national accounting standards and IFRSs. The statement is true. These objectives are set out in the constitution of the IFRS Foundation and the IASB. Learning Objective 1.7 ~ evaluate the reasons for the development of accounting standards and describe the current arrangements for establishing accounting standards in Australia, subject to global influences in the standard-setting process

46. The Australian Securities and Investments Commission (ASIC) is responsible for monitoring and promoting market integrity and consumer protection in relation to the Australian financial system.

The statement is true. This responsibility is set out in s. 12A(2) of the ASIC Act. Learning Objective 1.8 ~ discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX)

47. The Australian Securities and Investments Commission (ASIC) does not determine accounting standards, but has the right to lobby for or against accounting standards as it sees fit.

This statement is true. ASIC is one of many organisations that lobby for and against accounting standards.

Learning Objective 1.8 ~ discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX)

© John Wiley & Sons Australia, Ltd 2015

1.15

Testbank to accompany Company Accounting 10e

48. The Australian Securities Exchange (ASX) played a major role in influencing the Australian Government to push the AASB towards the adoption of IASB standards.

The statement is true.

Learning Objective 1.8 ~ discuss the roles played by the Australian Securities and Investments Commission (ASIC) and the Australian Securities Exchange Limited (ASX)

49. The content and format of general purpose financial reports are determined by the company’s management and the specific user group requiring the special purpose financial report.

The statement is false. Management and specific user groups determine the content and format of special purpose financial reports.

Learning Objective 1.9 ~ analyse the concepts of general purpose financial reporting and the reporting entity

50. The seven main user groups of general purpose financial reports (GPFRs) contained in the Conceptual Framework include the management of the reporting entity.

The statement is false. The seven main user groups are investors, employees, lenders, suppliers and other trade creditors, customers, governments and their agencies and the public.

Learning Objective 1.9 ~ analyse the concepts of general purpose financial reporting and the reporting entity

© John Wiley & Sons Australia, Ltd 2015

1.16

Testbank to accompany Company Accounting 10e

Chapter 2: Financing company operations Multiple-choice questions 1. In respect to the issue of shares by companies, which of the following statements is incorrect? a. *b. c. d.

Companies can convert ordinary shares into preference shares.

Companies can only issue ordinary shares.

Companies can issue any specified number of shares at any price.

Companies can issue both ordinary and preference shares.

Correct answer: b Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

2.

According to the Corporations Act, when a company issues shares to the public, the issue price, terms and rights of the shares are determined by: a. *b. c. d.

the Australian Securities Exchange. the company’s directors. the Australian Investments and Securities Commission. the company’s auditors.

Correct answer: b Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

3.

Before a company issues shares to the public, the company must: a. b. c. *d.

register the prospectus with the Australian Accounting Standards Board. first offer the shares to the existing shareholders. register the prospectus with the Australian Securities Exchange. provide a disclosure document with an application form attached.

Correct answer: d Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

© John Wiley & Sons Australia, Ltd 2015

2.2

Chapter 2: Financing company operations

4.

ABC Limited issued a prospectus offering 100 000 ordinary shares at an issue price of $2.50 each, payable $1.50 per share on application. The company received applications for 110 000 shares. Which of the following entries correctly records the application money? a. b. *c. d.

DR

Application $165 000 CR Cash trust DR Cash trust $250 000 CR Application DR Cash trust $165 000 CR Application DR Cash trust $275 000 CR Application

$165 000 $250 000 $165 000 $275 000

Correct answer: c Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

5.

When a company requests a further payment from shareholders of the unpaid amounts on their shares, it: *a. b. c. d.

makes a call on the shares. makes a further allotment of those shares. converts the shares into debentures. forfeits the shares.

Correct answer: a Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

6.

Which of the following is the appropriate journal entry to record the cash collected from applicants for shares before the shares are actually issued? a. b. c. *d.

Increase cash trust account: increase share capital account Increase application account: decrease share capital account Increase share capital account: decrease cash trust account Increase cash trust account: increase application account

Correct answer: d Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

© John Wiley & Sons Australia, Ltd 2015

2.3

Testbank to accompany Company Accounting 10e

7.

When shares are issued fully payable on application, the journal entries to record the issue (assuming the minimum subscription is reached) are a.

b.

c.

Cash trust Application Allotment Share capital

Dr Cr Dr Cr

X

Cash trust Application Cash Cash trust

Dr Cr Dr Cr

X

Cash

X

Share capital

Dr Cr Dr Cr

Cash trust Application Application Share capital Cash Cash trust

Dr Cr Dr Cr Dr Cr

X

Call Call

*d.

X X X

X X X

X X X

X X X X X

Correct answer: d Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

8.

The journal entry to record further receipts of cash due on the allotment of shares will include which of the following line items? a. b. *c. d.

DR Allotment DR Share capital CR Allotment CR Cash

Correct answer: c Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

© John Wiley & Sons Australia, Ltd 2015

2.4

Chapter 2: Financing company operations

9.

The journal entry to record the amount receivable when a call is made by the company is: *a. b. c. d.

DR Call CR Share capital DR Allotment CR Share capital DR Share capital CR Call DR Cash trust CR Call

Correct answer: a Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

10.

After the completion of all steps in the issue of shares, the company’s statement of financial position will show which of the following changes? a. b. c. *d.

Assets increased, liabilities increased Assets decreased, equity increased Assets decreased, liabilities decreased Assets increased; equity increased

Correct answer: d Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

11.

XYZ Ltd was registered as a company on 1 July 2013. On 4 July 2013, ABC Ltd issued a prospectus offering 200 000 ordinary shares at an issue price of $5.00 each, payable $3.00 on application and $2.00 on allotment. Applications closed on 1 August 2013 with the company having received applications for 220 000 shares. After application but prior to allotment, the balance in the application account would be: a. b. c. *d.

$600 000 credit. $1 000 000 credit. $660 000 debit. $660 000 credit.

Correct answer: d Learning Objective 2.1

© John Wiley & Sons Australia, Ltd 2015

2.5

Testbank to accompany Company Accounting 10e

12.

If the minimum number of applications specified in the disclosure document is not received, all application money must be refunded to applicants. The minimum number of applications must be received within: *a. b. d.

4 months after the date of the disclosure document.

1 month after the receipt of the first application money by the company. c. 13 months after the date of the disclosure document.

75 days from the date that ASIC gives its approval of the disclosure document.

Correct answer: a Learning Objective 2.2 ~ account for undersubscriptions and oversubscriptions of shares.

13.

Interest paid to shareholders on calls in advance is: a. b. *c. d.

credited to retained earnings. recorded as an expense. debited to retained earnings. recorded as a revenue.

Correct answer: c Learning Objective 2.2 ~ account for undersubscriptions and oversubscriptions of shares.

14.

ABC Ltd was registered as a company on 1 July 2013. On 4 July 2013, ABC Ltd issued a prospectus offering 250 000 ordinary shares at an issue price of $3.50 each, payable $2.50 on application and $1.00 on allotment. Applications closed on 1 August 2013 with the company having received applications for 300 000 shares. The shares were allotted on 15 August 2013, with the over-subscription amount being refunded to unsuccessful applicants. All allotment money was received by 31 August 2013.

Following the allotment, the balance in the share capital account would be: a. *b. c. d.

$750 000 credit. $875 000 credit. $625 000 credit. $1 050 000 credit.

Correct answer: b Learning Objective 2.2 ~ account for undersubscriptions and oversubscriptions of shares.

© John Wiley & Sons Australia, Ltd 2015

2.6

Chapter 2: Financing company operations

15.

Smith Ltd was registered as a company on 1 July 2013. On 4 July 2013, Smith Ltd issued a prospectus offering 300 000 ordinary shares at an issue price of $4.00 each, payable $2.00 on application and $2.00 on allotment. Applications closed on 1 August 2013 with the company having received applications for 330 000 shares. The shares were allotted on 15 August 2013, with the over-subscription amount being refunded to unsuccessful applicants. All allotment money was received by 31 August 2013.

Following the allotment, the amount transferred from the cash trust account to the cash account would be: *a. b. c. d.

$600 000. $1 320 000. $1 200 000. $660 000.

Correct answer: a Learning Objective 2.2 ~ account for undersubscriptions and oversubscriptions of shares.

16.

The appropriate account to record any excess application money received and retained by a company to reduce allotment money due and in payment of future calls, is the: a. b. c. *d.

calls in arrears account. forfeited shares account. share capital account. calls in advance account.

Correct answer: d Learning Objective 2.2 ~ account for undersubscriptions and oversubscriptions of shares.

17.

If a company’s constitution does not contain rules governing the forfeiture of shares, then the company: a. *b. c. d.

may forfeit shares but not reissue them. cannot forfeit shares. may forfeit shares and reissue them at a later date. can register the shares in the name of another shareholder, but cannot receive payment from that shareholder.

Correct answer: b Learning Objective 2.3 ~ account for the forfeiture and reissue of shares.

© John Wiley & Sons Australia, Ltd 2015

2.7

Testbank to accompany Company Accounting 10e

18.

A company’s share 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, call money was received on 45 000 shares. On 31 October, the shares on which calls were outstanding were forfeited. The company’s constitution provided for any surplus on resale to be returned to the shareholders whose shares were forfeited.

The entry to record the forfeiture of shares is: *a. Share capital First call — ordinary shares Forfeited shares

Dr Cr Cr

7 500

b.

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

c.

d.

2 500 5 000

5 000 2 500

5 000

2 500

Correct answer: a Learning Objective 2.3 ~ account for the forfeiture and reissue of shares.

19.

A company’s share capital consists of 100 000 ordinary shares issued at $4 and paid to $2 per share. On 1 February, a first call of $1 was made on the ordinary shares. By 28 February, call money was received on 90 000 shares. On 31 March, the shares on which calls were outstanding were forfeited. The company’s constitution provided for any surplus on resale to be returned to the shareholders whose shares were forfeited. On 15 April, the forfeited shares were reissued as paid to $4.00 for a payment of $3.50 per share. The entry to record the reissue of the forfeited shares is: *a. Cash Forfeited shares Share capital — ordinary

Dr Dr Cr

35 000 5 000

b.

Cash Forfeited shares Share capital — ordinary

Dr Dr Cr

5 000 35 000

Cash Share capital — ordinary

Dr Cr

35 000

Share capital Forfeited shares

Dr Cr

35 000

c.

d.

40 000

40 000

35 000

35 000

Correct answer: a Learning Objective 2.3 ~ account for the forfeiture and reissue of shares.

© John Wiley & Sons Australia, Ltd 2015

2.8

Chapter 2: Financing company operations

20.

A company forfeited 10 000 shares that had been paid to $2 but on which a $1 call was outstanding. The company’s constitution provided for any surplus on reissue to be returned to the forfeiting shareholders. The forfeited shares were reissued as paid to $4.00 for a payment of $3.50 per share. Costs of reissue amounted to $2000. The amount of the surplus repaid to the shareholders whose shares were forfeited is: a. *b. c. d.

$15 000. $13 000. $10 000. $38 000.

Correct answer: b Learning Objective 2.3 ~ account for the forfeiture and reissue of shares.

21.

If the balance in a forfeited shares account is refundable to the owners of those shares, then the account is classified as a component of: a. *b. c. d.

revenue. liabilities. equity. expense.

Correct answer: b Learning Objective 2.3 ~ account for the forfeiture and reissue of shares.

22.

The costs of issuing shares effectively: *a. b. c. d.

reduce the proceeds from the share issue. increase the proceeds from the share issue. are borne by the underwriters of the share issue. are recognised as a deferred asset on the statement of financial position.

Correct answer: a Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

23.

Which of the following journal entries shows the correct accounting treatment for share issue costs? a. b. *c. d.

Dr Deferred asset: Cr Cash Dr Cash: Cr Deferred asset Dr Share capital: Cr: Cash Dr Cash: Cr Share capital

Correct answer: c Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

© John Wiley & Sons Australia, Ltd 2015

2.9

Testbank to accompany Company Accounting 10e

24.

Underwriting and other share issue costs paid to a stockbroker or financial institution should be reported in the statement of financial position as a/an: a. b. c. *d.

liability. asset. increase in share capital. decrease in share capital.

Correct answer: d Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

25. Brown Limited was incorporated on 1 July 2013. A prospectus offering 200 000 shares at $3.00 each was released and closed fully subscribed. The share issue was underwritten by a broker for $25 000 and other costs of the share issue amounted to $13 000. The net share capital on the statement of financial position is: a. b. c. *d.

$575 000. $162 000. $587 000. $562 000.

Correct answer: d Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

26.

According to ASX Listing Rule 7.1, the proportion of existing capital that a listed company can issue in any one year without the prior approval of the ordinary shareholders is: a. b. *c. d.

5%.

10%.

15%.

20%.

Correct answer: c Learning Objective 2.5 ~ account for the subsequent issues of shares, such as rights issues and private placements.

© John Wiley & Sons Australia, Ltd 2015

2.10

Chapter 2: Financing company operations

27.

A bonus issue of shares to existing shareholders has which of the following impacts on the equity of a company? a. b. *c. d.

Total equity increases.

Total equity decreases.

No overall change in total equity.

Only the amount of issued share capital changes.

Correct answer: c Learning Objective 2.5 ~ account for the subsequent issues of shares, such as rights issues and private placements.

28.

A share option is an instrument that gives the holder the right but not the obligation to: *a. b. c. d.

buy a certain number of shares in the company by a specified date at a stipulated price. sell a certain number of shares in the company by a specified date at a stipulated price. 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.

Correct answer: a Learning Objective 2.6 ~ account for the issue and exercise of share options.

29.

Bellvista Limited issued 20 000 share options to subscribe for ordinary shares. The exercise price on the options was $5 per share. If all options were exercised by the due date, the following journal entry would be recorded for the issue of the shares. a.

b.

c.

*d.

Share capital — ordinary Cash

Dr Cr

100 000

Share options — ordinary Dr Share capital — Cr ordinary

100 000

Share options reserve Cash

Dr Cr

100 000

Dr — Cr

100 000

Cash Share ordinary

capital

100 000

100 000

100 000

100 000

Correct answer: d Learning Objective 2.6 ~ account for the issue and exercise of share options.

© John Wiley & Sons Australia, Ltd 2015

2.11

Testbank to accompany Company Accounting 10e

30.

On 1 July 2013, a company redeemed its $200 000 debenture liability using its available cash on hand. The terms of the debenture issue provided that a premium of 5% was to be paid on redemption of the debentures. Which of the following is the entry to record the redemption? a.

Debentures Redemption revenue Cash

Dr Cr Cr

210 000

Debentures Cash

Dr Cr

210 000

*c. Debenture redemption expense Debentures Cash

Dr Dr Cr

10 000 200 000

d.

Dr Cr Cr

200 000

b.

Debentures Premium on redemption Cash

10 000 200 000

210 000

210 000

10 000 190 000

Correct answer: c Learning Objective 2.10 ~ account for the issue and redemption of debentures and convertible notes.

© John Wiley & Sons Australia, Ltd 2015

2.12

Chapter 2: Financing company operations

True/false questions 31.

It is possible for a company to issue different types of preference shares provided that the rights of each type are specified in its constitution.

The statement is true. This is a requirement of s 245A(2) of the Corporations Act. Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

32.

Prior to the allotment/issue of shares, the balance in the application account represents a liability of the company to the applicants.

The statement is true. If the shares are not issued, the money must be returned to the shareholders as soon as practicable.

Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

33.

If a company has not reached a minimum subscription level within 90 days of the date of the disclosure document, the money paid in by applicants must be refunded by the company within 1 month in accordance with the requirements of ss 724(1) and (2) of the Corporations Act.

The statement is false. Section 724 (1) of the Corporation Act allows 4 months from the date of issuing the prospectus for the refund of money to the applicants.

Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

34.

Any unpaid calls are accounted for as a receivable in a company’s financial statements.

The statement is false. Unpaid calls/calls in arrears are accounted for as a reduction in share capital in a company’s financial statements.

Learning Objective 2.1 ~ account for the issue of shares fully subscribed, and payable in full or by instalments.

35.

In the case of a share issue being oversubscribed, any amount kept by the company for future calls is credited to a Calls in Advance account, which is reported as an addition to share capital in the financial statements.

The statement is true. Even though calls paid in advance are not legally part of share capital, they are not like normal unsecured liabilities, in that on liquidation, unsecured debts have priority over calls paid in advance, as per s 563A of the Corporations Act. Learning Objective 2.2 ~ account for undersubscriptions and oversubscriptions of shares.

36.

If a company forfeits shares and the company’s constitution is silent in relation to reissue of the shares, the company is entitled to keep any balance in the account after reissue, payment of unpaid calls and interest and administrative costs.

© John Wiley & Sons Australia, Ltd 2015

2.13

Testbank to accompany Company Accounting 10e

The statement is true. Such amounts from forfeited shares are typically retained in a forfeited shares reserve account.

Learning Objective 2.3 ~ account for the forfeiture and reissue of shares.

37.

Underwriting commission fees are treated as expenses as they are not considered to be an integral part of the equity issue transaction.

The statement is false. AASB 132 Financial Instruments: Presentation provides that such costs are to be accounted for as a reduction in the share capital being raised.

Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

38.

Share issue costs such as professional adviser’s fees and brokerage fees must be reported as an expense in the income statement.

The statement is false. As these share issue costs are considered to be an integral part of the equity issue transaction, they are accounted for as a reduction in equity on the statement of financial position.

Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

39.

In accordance with AASB 138 Intangible Assets, company formation costs such as professional legal and accounting advice qualifies for recognition as an asset.

The statement is false. It is doubtful whether any future economic benefits will be obtained from such formation costs. As such, paragraph 69 of AASB 138 does not permit them to be treated as an asset so they must be expensed.

Learning Objective 2.4 ~ account for underwriting and other share issue costs and formation costs.

40.

A rights issue gives all existing shareholders the right to an additional number of shares in proportion to their current shareholding.

The statement is true. Rights issues are entitlements for existing shareholders to purchase new shares. If all shareholders choose to exercise their rights, the percentage ownership interest of the shareholders will not change relative to each other.

Learning Objective 2.5 ~ account for the subsequent issues of shares, such as rights issues and private placements.

41.

If a company makes a renounceable rights issue, the shareholders are not allowed to sell their rights, but must either accept or reject the offer to purchase additional shares in the company.

© John Wiley & Sons Australia, Ltd 2015

2.14

Chapter 2: Financing company operations

The statement is false. The scenario described is that of a non-renounceable issue. Under the terms of a renounceable rights issue, shareholders may sell their rights to acquire the company’s shares to other investors.

Learning Objective 2.5 ~ account for the subsequent issues of shares, such as rights issues and private placements.

42.

Section 124 of the Corporations Act places a restriction on the private placement of shares, limiting to 15% of existing capital the amount of capital that a company can issue in any one year without prior shareholder approval.

The statement is false. The 15% restriction on private placements of shares is set out in ASX Listing Rule 7.1, rather than in the Corporations Act. Therefore, the restriction applies only to listed entities.

Learning Objective 2.5 ~ account for the subsequent issues of shares, such as rights issues and private placements.

43.

Share options issued at no cost to the recipient are accounted for in the same way as a rights issue.

The statement is true. On exercise of the options, the company records a debit to Cash and a credit to share capital.

Learning Objective 2.6 ~ account for the issue and exercise of share options.

44.

Where share options are issued and subsequently lapse, the cost of the lapsed options is transferred to a Lapsed Options Reserve account.

The statement is true. This is because the cost of the lapsed options does not qualify as ‘income’ or ‘revenue’ under the Conceptual Framework/Framework because options represent the issue of an equity instrument.

Learning Objective 2.6 ~ account for the issue and exercise of share options.

45.

Redeemable preference shares are always considered to be compound financial instruments that contain both equity and liability components.

The statement is false. Redeemable preference shares may be classified as liabilities, equity or compound financial instruments. The classification depends on the rights of the preference shareholders as set out in the company’s constitution.

Learning Objective 2.7 ~ account for the redemption of redeemable preference shares.

46.

Only fully paid-up preference shares can be redeemed by a company.

The statement is true. This is a requirement of s 254K of the Corporations Act. Learning Objective 2.7 ~ account for the redemption of redeemable preference shares.

© John Wiley & Sons Australia, Ltd 2015

2.15

Testbank to accompany Company Accounting 10e

47.

Share splits and share consolidations are only allowed if a company’s constitution contains specific provisions relating to such transactions.

The statement is false. Section 254H of the Corporations Act permits such conversions to be undertaken provided a resolution is passed at a general meeting of the company’s shareholders.

Learning Objective 2.8 ~ account for the conversion of shares into other shares.

48.

If a company uses its surplus cash reserves to buy-back its own shares, the total equity of the company will increase by the equivalent amount of cash spent.

The statement is false. If a company buys-back its own shares, the company’s share capital is effectively reduced.

Learning Objective 2.9 ~ account for the buy-back of shares.

49.

Debentures may be issued at a nominal value, a premium or a discount.

The statement is true. The issue price of the debentures depends on the current market rates for investments of similar risks.

Learning Objective 2.10 ~ account for the issue and redemption of debentures and convertible notes.

50.

Many investors may wish to purchase debentures or notes offering the ability to be converted into fully paid shares at the maturity date, in lieu of a cash payment.

The statement is true. These are known as convertible notes and their accounting treatment depends on the requirements of AASB 9.

Learning Objective 2.10 ~ account for the issue and redemption of debentures and convertible notes.

© John Wiley & Sons Australia, Ltd 2015

2.16

Chapter 3: Company operations

Chapter 3: Company operations Multiple-choice questions 1.

According to the AASB’s Conceptual Framework an asset is defined as a/an: a. b. *c. d.

contingent item depending on another event occurs at some time in the future. resource controlled by the entity as a result of future events and from which future economic benefits are expected to flow to the entity. resource controlled by the entity as a result of past events and from which future economic benefits are expected to flow to the entity. item that has a physical existence and can be converted into cash within the next accounting period.

Correct answer: c Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

2.

In the context of liabilities, present obligations may be: a. b. *c. d.

constructive. legal. both a and b. formative.

Correct answer: c Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

3.

Under the AASB’s Conceptual Framework liabilities are defined as: a. b. c. *d.

future economic benefits under the control of the entity. future sacrifices of economic benefits that are contingent upon the occurrence of an unusual event. future sacrifices of profits payable to owners in the form of dividends. 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.

Correct answer: d Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

© John Wiley & Sons Australia, Ltd 2015

3.1

Testbank to accompany Company Accounting 10e

4.

AASB 137 defines a provision as a: a. *b. c.

d.

present obligation arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. liability of uncertain timing and amount. possible obligation that arises from past events and whose existence will be confirmed only by the occurrence/non-occurrence of one or more uncertain events not wholly within the control of the entity. present obligation that arises from a past event but is not recognised because the amount of the obligation cannot be measured with sufficient reliability.

Correct answer: b Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

5.

As well as expenses that arise in the ordinary activities of a business, which of the following is recognised as an expense of a company? *a. b. c. d.

Losses Dividends Gains Transfers out of retained earnings

Correct answer: a Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

6.

Income arises because of changes in: a. *b. c. d.

revenues and expenses. assets and liabilities. assets and expenses. equity and liabilities.

Correct answer: b Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

© John Wiley & Sons Australia, Ltd 2015

3.2

Chapter 3: Company operations

7.

The AASB’s Conceptual Framework defines income as: *a.

b.

c. d.

increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants. the gross inflow of economic benefits during the period arising in the course of ordinary activities of an entity when those inflows result in increases in equity, other than increases relating to contributions from equity participants. income that arises in the ordinary course of business and is referred to by a variety of different names, including sales, fees, interest, dividends and royalties. increases in economic benefits during the accounting period in the from of outflows or decreases in assets or increases in liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Correct answer: a Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

8.

Information has the quality of reliability when it:

a. b. c. *d.

cannot be relied on by financial statement errors. is relevant to decisions being made by users. contains many material errors. is free from material error.

Correct answer: d Learning Objective 3.2 ~ describe the recognition criteria for recording the elements in the accounting system.

9.

A company incurs significant costs in relation to a speculative mining project that intends to turn rocks into gold. In accordance with the AASB’s Conceptual Framework, the costs of this project would be an: *a. b. c. d.

expense because there is little probability that future economic benefits will eventuate. expense because the recognition criteria for an asset is not satisfied. asset because the definition and recognition criteria for assets are satisfied. asset because the company will control the future economic benefits.

Correct answer: a Learning Objective 3.2 ~ describe the recognition criteria for recording the elements in the accounting system.

© John Wiley & Sons Australia, Ltd 2015

3.3

Testbank to accompany Company Accounting 10e

10.

According to AASB 111 Construction Contracts, revenue and expenses relating to long-term construction contracts are recognised on the basis of the: a. b. c. *d.

effective interest method. discounted cash flows method. receipt of cash flows. percentage of completion method.

Correct answer: d Learning Objective 3.2 ~ describe the recognition criteria for recording the elements in the accounting system.

11.

Which of the following statements is correct in relation to the recognition of expenses? a. b. *c. d.

Under the Conceptual Framework, the recognition of expenses is based on the matching process.

The recognition of expenses is not subject to the same degree of regulation as revenue.

Under the Conceptual Framework, recognition of expenses is not tied to the matching process.

Individual accounting standards do not need to be consulted to determine the appropriate treatment for particular types of expenses.

Correct answer: c Learning Objective 3.2 ~ describe the recognition criteria for recording the elements in the accounting system.

12.

According to AASB 101, an entity will classify a liability as current when: a. *b. c. d.

it expects to settle the liability outside its normal operating cycle. it expects to settle the liability within its normal operating cycle. the entity has an unconditional right to defer the settlement of the liability for at least 12 months after the reporting date. the liability is due to be settled more than 12 months after the reporting date.

Correct answer: b Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

© John Wiley & Sons Australia, Ltd 2015

3.4

Chapter 3: Company operations

13.

AASB 101 requires which of the following in relation to the classification of expenses? *a. b. c. d.

Expenses to be classified by either nature or function.

Expenses to be classified by nature, unless classification by function is more relevant.

Expenses to be classified by function, unless classification by nature is more relevant.

Expenses to be classified by both nature and function.

Correct answer: a Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

14.

In relation to the measurement of an asset, the amount of consideration given to acquire the asset at its acquisition date is known as its: *a. b. c. d.

historical cost. current cost. realisable value. present value.

Correct answer: a Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

15.

Which of the following categories of revenue is not included in AASB 118 Revenue? a. *b. c. d.

Revenues from services rendered Gains from asset revaluations Royalties Dividends

Correct answer: b Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

16.

Which of the following statements is correct in relation to the payment of dividends? a. *b. c. d.

Dividends can only be paid if a company has generated a profit in the current period.

The payment of dividends is regulated by the Corporations Act. A company can only pay an interim dividend if its constitution allows it.

Preference dividends must be paid on a cumulative basis.

Correct answer: b Learning Objective 3.4 ~ explain the nature of dividends and how to account for the declaration and payment of dividends, including bonus share issues.

© John Wiley & Sons Australia, Ltd 2015

3.5

Testbank to accompany Company Accounting 10e

17.

According to the Corporations Act, dividends may: a. b. c. *d.

only be paid to shareholders once a year. only be paid out of the current year’s profits of a company. be declared and paid to shareholders irrespective of whether a company has accumulated losses. be paid if the company has an excess of assets over liabilities.

Correct answer: d Learning Objective 3.4 ~ explain the nature of dividends and how to account for the declaration and payment of dividends, including bonus share issues.

18.

The appropriate accounting entry to record the declaration of a bonus dividend out of the Revaluation Surplus account is which of the following? a. b. *c. d.

DR Bonus dividend CR Asset revaluation surplus DR Asset revaluation surplus CR Cash DR Asset revaluation surplus CR Share capital DR Cash CR Share capital

Correct answer: c Learning Objective 3.4 ~ explain the nature of dividends and how to account for the declaration and payment of dividends, including bonus share issues.

19.

Dividends declared after the reporting period: a. b. c. *d.

meet the criteria for recognition as a liability. satisfy the criteria for recognition as an expense. are recognised in the statement of financial position as they meet the definition of equity. do not meet the AASB 132 recognition criteria for liabilities.

Correct answer: d Learning Objective 3.4 ~ explain the nature of dividends and how to account for the declaration and payment of dividends, including bonus share issues.

© John Wiley & Sons Australia, Ltd 2015

3.6

Chapter 3: Company operations

20.

Which of the following statements is not correct in relation to cumulative preference shares? *a. b. c.

d.

Holders of cumulative preference shares are guaranteed a dividend every year.

Undeclared cumulative preference share dividends accumulate, or carry forward, to future periods.

The accumulated amount of any cumulative preference share dividend plus the current year’s preference dividend must be paid before any dividend can be paid to ordinary shareholders.

Cumulative preference share dividends that are not declared in the year they are due are called dividends in arrears.

Correct answer: a Learning Objective 3.4 ~ explain the nature of dividends and how to account for the declaration and payment of dividends, including bonus share issues.

21.

In relation to a revaluation surplus, an entity: a. *b. c. d.

cannot use this surplus for the payment of future dividends. can transfer this surplus to retained earnings when the asset is derecognised or used. cannot transfer this surplus to any other reserve account. can transfer the surplus to the current period profit or loss when the asset is disposed of.

Correct answer: b Learning Objective 3.5 ~ describe the nature of reserves and how they are established and reduced.

22.

Reserves that are not required by accounting standards are known as: a. *b. c. d.

specific reserves. general reserves. current reserves. retained reserves.

Correct answer: b Learning Objective 3.5 ~ describe the nature of reserves and how they are established and reduced.

© John Wiley & Sons Australia, Ltd 2015

3.7

Testbank to accompany Company Accounting 10e

23.

When making a transfer from a general reserve to retained earnings, which of the following journals could be used? *a. b. c. d.

DR General reserve CR Retained earnings DR General reserve CR Share capital DR Retained earnings CR General reserve DR Share capital CR General reserve

Correct answer: a Learning Objective 3.5 ~ describe the nature of reserves and how they are established and reduced.

24.

Information in a company’s financial statements is considered to be reliable when it: I II III IV V

is relevant to the decision making needs of users. represents faithfully the financial position, financial performance and cash flows of the entity. is neutral. is prudent. reflects the economic substance of transactions, other events and conditions.

a. I, II, III and IV only *b. II, III, IV and V only c. II, III and IV only d. I, II, III, IV and V Correct answer: b Learning Objective 3.6 ~ explain how a company determines its accounting policies for use in preparing accounting records and financial statements.

© John Wiley & Sons Australia, Ltd 2015

3.8

Chapter 3: Company operations

25.

In relation to selecting appropriate accounting policies, the hierarchy in AASB 108 Accounting Policies, Changes in Accounting Estimates and Errors requires that consideration is secondly given to: *a. b. c. d.

management using its judgement in developing and applying an accounting policy that results in information that is relevant and reliable. the requirements in Australian Accounting Standards dealing with similar and related issues. any Australian Accounting Standard that specifically applies to the transaction, other event or condition. the definitions, recognition criteria and measurement concepts for assets, liabilities, income and expenses in the Conceptual Framework.

Correct answer: a Learning Objective 3.6 ~ explain how a company determines its accounting policies for use in preparing accounting records and financial statements.

26.

When changing an accounting policy, AASB 108 requires which of the following to be applied retrospectively? *a. b. c. d.

A voluntary change to improve the relevance of information presented.

A change due to the adoption of a new accounting standard.

A change due to the adoption of a new interpretation.

All of the options are correct.

Correct answer: a Learning Objective 3.6 ~ explain how a company determines its accounting policies for use in preparing accounting records and financial statements.

27.

Which of the following statements is not one of the four main financial statements that companies are required to prepare? a. b. *c. d.

A statement of cash flows A statement of changes in equity A statement of retained earnings A statement of financial position

Correct answer: c Learning Objective 3.7 ~ prepare a company’s statement of profit or loss and other comprehensive income for internal use from the accounting records.

© John Wiley & Sons Australia, Ltd 2015

3.9

Testbank to accompany Company Accounting 10e

28.

To be recognised in a statement of profit and loss and other comprehensive income, an item must by nature be: *a. b. c. d.

either income, an expense or item of other comprehensive income. both income and a liability. either an asset or a liability. both a liability and a direct adjustment to equity.

Correct answer: a Learning Objective 3.7 ~ prepare a company’s statement of profit or loss and other comprehensive income for internal use from the accounting records.

29.

For a company, retained earnings represent: a. b. c. *d.

contributed capital from shareholders. profits retained by the company before tax is paid to the government. net cash retained by the company before any payment of dividends to shareholders. profits retained by the company after payment of dividends, and after any transfer to and from reserves.

Correct answer: d Learning Objective 3.8 ~ determine the contents of a company’s Retained Earnings account and prepare a statement of changes in equity.

30.

The statement of financial position shows which of the following?

I. II. III. IV. V.

Expenses Revenues Equity Assets Liabilities

a. b. c. *d.

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

Correct answer: d Learning Objective 3.9 ~ prepare a statement of financial position (balance sheet) for internal purposes from the accounting records.

© John Wiley & Sons Australia, Ltd 2015

3.10

Chapter 3: Company operations

True/false questions 31.

Items which have only sentimental or spiritual benefits are not assets for accounting purposes.

The statement is true. To satisfy the definition of an asset, an item must contain future economic benefits.

Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

32.

Constructive obligations are those that arise from legally binding contracts.

The statement is false. Obligations that arise from legally binding contracts are legal obligations. Constructive obligations are those which arise from an established pattern of past practice, which results in an entity creating a valid expectation that certain parties can rely on the entity discharging those responsibilities.

Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

33.

Under the Conceptual Framework, the settlement of a liability can be made in a number of ways, including by conversion of the obligation into equity.

The statement is true. Although most liabilities are settled in cash, the Conceptual Framework outlines a number of other possible methods of settlement.

Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

34.

The Conceptual Framework applies a balance sheet focus to defining income, with income arising from changes in assets and liabilities.

The statement is true. Income is defined within the Conceptual Framework as increases in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in increases in equity, other than those relating to contributions from equity participants.

Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

35.

Outflows outside the ordinary course of business (eg costs incurred from a natural disaster) are classified as losses, rather than expenses.

The statement is false. Although such costs are classified as losses, they are still expenses, as losses are a sub-set of expenses.

Learning Objective 3.1 ~ describe the nature of the elements of financial statements, namely assets, liabilities, equity, income and expenses.

© John Wiley & Sons Australia, Ltd 2015

3.11

Testbank to accompany Company Accounting 10e

36.

The recognition criteria for assets, liabilities, revenues and expenses in the Conceptual Framework are the same.

The statement is true. The recognition criteria are contained within paragraph 82 of the Framework and require it to be probable that any future economic benefits will flow to or from the entity and the item has a cost or value that can be measured with reliability.

Learning Objective 3.2 ~ describe the recognition criteria for recording the elements in the accounting system.

37.

The recognition criteria for assets in the Conceptual Framework refers to the probability of future economic benefits flowing to an entity. Probable means more than a 75% chance of occurring.

The statement is false. Probable is generally defined as more likely than less likely, ie more than 50%. The test is a subjective one requiring judgement by the preparer of the financial statements.

Learning Objective 3.2 ~ describe the recognition criteria for recording the elements in the accounting system.

38.

According to the Conceptual Framework, measurement involves determining the monetary amounts at which the elements are to be recognised and carried at in the financial statements.

The statement is true. Measurement involves the assignment of monetary numbers to particular attributes of the item being measured.

Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

39.

All assets are measured initially at historical cost.

The statement is true. Historical cost is the amount of cash or cash equivalent paid or the fair value of the consideration given to acquire an asset at its acquisition date. Subsequent to initial measurement, various different measurement bases may be used, including fair value and net realisable value.

Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

40.

Assets must always be classified in the statement of financial position on the basis of the expected timing of cash flows to be derived from their use or sale.

The statement is false. Assets may be classified in many different ways including the expected timing of cash flows, liquidity and physical characteristics.

Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

© John Wiley & Sons Australia, Ltd 2015

3.12

Chapter 3: Company operations

41.

An entity’s operating cycle cannot be greater than 12 months.

The statement is false. An entity’s operating cycle is defined in AASB 101 as ‘the time between the acquisition of assets for processing and their realisation in cash or cash equivalents’. For some entities this will be longer than 12 months.

Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

42.

Nominal or face value is the most common method used for measuring liabilities.

The statement is true. The other main measurement method used for liabilities is discounted net present value.

Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

43.

There are no separate measurement methods for equity.

The statement is true. As equity is a residual amount, no separate measurement method is required. It is simply measured as assets less liabilities.

Learning Objective 3.3 ~ describe how the elements are to be measured in the entity’s accounting records and classified in the financial statements.

44.

According to the Corporations Act, dividends can only be paid out of the profits earned by a company.

The statement is false. Dividends can be paid providing the company has an excess of assets over liabilities immediately before the dividend is declared and the excess is sufficient for the payment of the dividend.

Learning Objective 3.4 ~ explain the nature of dividends and how to account for the declaration and payment of dividends, including bonus share issues.

45.

The Reserves accounts of a company are disclosed in the statement of financial position as liabilities.

The statement is false. Reserves are a component of the equity of a company.

Learning Objective 3.5 ~ describe the nature of reserves and how they are established and reduced.

46.

In the absence of an Australian accounting standard specifically applying to a transaction, accounting policies must be selected on the basis that they provide relevant and reliable information to users of the financial report.

The statement is true. Relevance and reliability are considered to be the key characteristics that must be considered when selecting accounting policies in the absence of an accounting standard specific to the transaction.

© John Wiley & Sons Australia, Ltd 2015

3.13

Testbank to accompany Company Accounting 10e

Learning Objective 3.6 ~ explain how a company determines its accounting policies for use in preparing accounting records and financial statements.

47.

According to the Conceptual Framework, an entity is not permitted to change its accounting policies.

The statement is false. There are two circumstances in which an entity is permitted to change an accounting policy. These are: if the change is required by an accounting standard; or, if the change results in the financial statements providing reliable and more relevant information about the effects of transactions, other events or conditions on the entity’s financial position, performance or cash flows.

Learning Objective 3.6 ~ explain how a company determines its accounting policies for use in preparing accounting records and financial statements.

48.

The statement of profit or loss and other comprehensive income shows both the company’s income (revenues and gains) less expenses for the year, to determine the company’s profit, to which is added other items of comprehensive income.

The statement it true. Each of these elements are included in the statement.

Learning Objective 3.7 ~ prepare a company’s statement of profit or loss and other comprehensive income for internal use from the accounting records.

49.

The statement of changes in equity shows the movement between the beginning and ending balance for the period for each equity account.

The statement is true. The statement of changes inequity shows movements in share capital (if any) and movements in every reserve account.

Learning Objective 3.8 ~ determine the contents of a company’s Retained Earnings account and prepare a statement of changes in equity.

50.

The statement of financial position must be presented to show assets less liabilities equals equity.

The statement is false. Although this is a common format for a statement of financial position, other formats or order of items are acceptable for internal reporting purposes.

Learning Objective 3.9 ~ prepare a statement of financial position (balance sheet) for internal purposes from the accounting records.

© John Wiley & Sons Australia, Ltd 2015

3.14

Chapter 4: Fundamental concepts of corporate governance

Chapter 4: Fundamental concepts of corporate governance Multiple-choice questions 1.

According to the ASX Corporate Governance Council, corporate governance influences all but which of the following? a. *b. c. d.

How risk is monitored and assessed.

How the company determines the issue price of its shares.

How performance is optimised.

How the objectives of the company are set and achieved.

Correct answer: b Learning Objective 4.1 ~ understand and explain what is meant by the term corporate governance.

2.

The theory that argues that the real power in corporate governance lies with management who can take advantage of shareholder weakness to pursue self-interest is referred to as: a. b. *c. d.

stakeholder theory. management self-interest theory. managerial hegemony theory. shareholder hegemony theory.

Correct answer: c Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

3.

Which is the major theory shaping the corporate governance debate? a. b. c. *d.

Stakeholder theory Class hegemony theory Team production theory Agency theory

Correct answer: d Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

.

4.2

Testbank to accompany Company Accounting 10e

4.

Stakeholder theory focuses: a. b. *c. d.

more on providing value to the company’s shareholders. less on providing value to all of the company’s stakeholders. more on providing value to all of the company’s stakeholders. more on providing value to the company’s directors.

Correct answer: c Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

5.

Which of the following statements is correct in relation to Australia’s corporate governance system? a. *b. c. d.

It is an example of a hybrid system.

It is an example of an agency dominated Anglo-American system.

It follows the German approach.

It is an example of a stakeholder dominated system.

Correct answer: b Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

6.

Which of the following was not one of the corporate governance deficiencies that contributed to the collapse of ABC Learning Centres Ltd? a. b. c. *d.

A dominant CEO. Poor board processes.

Failure of the board to understand the company’s strategy.

Failure of the board to increase the CEO’s remuneration.

Correct answer: d Learning Objective 4.3 ~ appreciate the role that corporate collapses and the global financial crisis have played in the development of corporate governance.

7.

The ASX Corporate Governance Principles and Recommendations are an example of: a. b. c. *d.

black-letter law. soft regulation. a voluntary industry code of conduct. hybrid regulation.

Correct answer: d Learning Objective 4.4 ~ understand the role of regulators and regulation in corporate governance.

.

4.3

Chapter 4: Fundamental concepts of corporate governance

8.

Which of the following is not an example of a hard regulation? a. b. *c. d.

Corporations Act. Trade Practices Act. ASX Listing Rules.

Accounting standards issued by the Australian Accounting Standards Board.

Correct answer: c Learning Objective 4.4 ~ understand the role of regulators and regulation in corporate governance.

9.

Which of the following statements do not apply to hard regulation? a. b. c. *d.

Hard regulation is also known as black-letter law.

Hard regulation comprises legally binding obligations.

The Corporations Act is an example of hard regulation.

Voluntary industry codes of conduct are a form of hard regulation.

Correct answer: d Learning Objective 4.4 ~ understand the role of regulators and regulation in corporate governance.

10.

The key regulators of Australian business include which of the following? a. *b. c. d.

Financial Accounting Standards Board Australian Competition and Consumer Commission Securities and Exchange Commission Environmental Protection Agency

Correct answer: b Learning Objective 4.4 ~ understand the role of regulators and regulation in corporate governance.

11.

According to the definition of an officer in the Corporations Act, which of the following parties could be considered to be an officer of an Australian company?

I II III IV

A liquidator A senior manager A trustee A receiver

.

4.4

Testbank to accompany Company Accounting 10e

a. b. c. *d.

I and IV I, II and III II, III and IV I, II, III and IV

Correct answer: d Learning Objective 4.5 ~ understand the major duties of officers and directors.

12.

Non-executive company directors are categorised into: a. b. c. *d.

grey directors and alternate directors. experienced directors and independent directors. employee directors and non-employee directors. independent directors and grey directors.

Correct answer: d Learning Objective 4.5 ~ understand the major duties of officers and directors.

13.

According to the ASX Corporate Governance Council’s independence test, which of the following is an example of an interest, position association or relationship that might cause doubts as to a director’s independence? If the director: a. b. c. *d.

is a substantial shareholder of the company. has been a director of the company for more than 9 years. has a material contractual relationship with the company. all of the options are correct.

Correct answer: d Learning Objective 4.5 ~ understand the major duties of officers and directors.

14.

Executive directors generally have which of the following two roles in a company?

a. b. *c. d.

As an independent director and senior manager.

As a senior manager and internal auditor.

As a senior manager and a director.

As a grey director and senior manager.

Correct answer: c Learning Objective 4.5 ~ understand the major duties of officers and directors.

.

4.5

Chapter 4: Fundamental concepts of corporate governance

15.

A grey director is: a. b. *c. d.

a director over the age of 65. a non-executive director who is independent. a non-executive director who is not independent. an alternate director who attends select meetings only.

Correct answer: c Learning Objective 4.5 ~ understand the major duties of officers and directors.

16.

The court decision that places a greater responsibility on the role of the chairman is: a. b. c. *d.

Aberdeen Railway Co v. Blaikie Bros.

Whitehouse v. Carlton Hotels Ltd. ASIC v. Adler.

ASIC v. Rich & Ors.

Correct answer: d Learning Objective 4.5 ~ understand the major duties of officers and directors.

17.

The classic court decision that relates to a director’s duty to avoid a conflict of interest is: *a. b. c. d.

Aberdeen Railway Co v. Blaikie Bros.

Whitehouse v. Carlton Hotels Ltd. Woodgate v. Davis.

ASIC v. Rich & Ors.

Correct answer: a Learning Objective 4.5 ~ understand the major duties of officers and directors.

18.

If a company director allows a company to trade while insolvent, the director will: a. b. *c. d.

become personally liable for the company’s debts incurred before the company became insolvent. not be personally liable for any of the company’s debts. become personally liable for the company’s debts incurred after the point of insolvency is reached. normally be paid a bonus after the end of the financial year.

Correct answer: c Learning Objective 4.5 ~ understand the major duties of officers and directors.

.

4.6

Testbank to accompany Company Accounting 10e

19.

Which of the following is not a warning signal that should raise concern with directors and officers in relation to the solvency of the company? a. *b. c. d.

Inability to raise further equity capital.

Creditors payment times shortening.

COD terms from suppliers.

Postdated cheques.

Correct answer: b Learning Objective 4.5 ~ understand the major duties of officers and directors.

20.

The ASX Corporate Governance Principles and Recommendations: a. *b. c. d.

are mandatory for all listed entities. are applied on an ‘if-not, why-not’ basis. do not require entities to disclose whether or not they have complied with the principles and recommendations. follow the requirements in the US Sarbanes–Oxley Act.

Correct answer: b Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

21.

Which of the following is not one of the ASX Corporate Governance Council’s principles of good corporate governance? *a. b. c. d.

Recognise the interests of all stakeholders.

Structure the board to add value.

Safeguard integrity in financial reporting.

Remunerate fairly and responsibly.

Correct answer: a Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

22.

How many principles are contained within the ASX Corporate Governance Council’s principles of good corporate governance? a. *b. c. d.

7 8 10 12

.

4.7

Chapter 4: Fundamental concepts of corporate governance

Correct answer: b Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

23.

Listed companies have an obligation to ensure the market is notified of information that a reasonable person would expect to have a material effect on the price or value of the companies’ shares. This obligation is known as: a. *b. c. d.

information disclosure. continuous disclosure. material disclosure. market disclosure.

Correct answer: b Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

24.

Under the CLERP 9 reforms governing auditors, which of the following statements are correct?

I II III IV

The top 500 ASX listed companies must have an audit committee.

Former auditors are prohibited from employment in or directorships of their former clients for a period of 2 years.

The oversight of auditors has been strengthened by the FRC. Audit partners must rotate off a company’s audit after a period of 5 years.

a. b. c. *d.

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

Correct answer: d Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

25.

Under the CLERP 9 reforms governing auditors, former auditors are prohibited from employment in or directorships of their former clients for a period of: a. b. *c. d.

3 months.

1 year.

2 years.

5 years.

.

4.8

Testbank to accompany Company Accounting 10e

Correct answer: c Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

26.

Under the CLEPR 9 reforms governing auditors, audit partners of listed companies must rotate off a company’s audit after a period of: a. b. *c. d.

2 years.

3 years.

5 years.

6 years.

Correct answer: c Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

27.

Which of the following reforms was introduced in the US Sarbanes–Oxley Act? a. b. c. *d.

Increased disclosures for executive remuneration.

Whistleblowing protection for all employees and directors.

Requirements to rotate audit partners every 3 years.

Creation of an entity to oversee auditors.

Correct answer: d Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

28.

The aims of the Sarbanes–Oxley Act do not include which of the following? a. *b. c. d.

Enhancing enforcement tools.

Reducing confidence in the accounting profession.

Improving disclosure and financial reporting.

Improving the ‘tone at the top’.

Correct answer: b Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

29.

Which of the following statement is incorrect? a.

Section 299A of the Corporation Act can be used to compel specific environmental and social disclosures.

.

4.9

Chapter 4: Fundamental concepts of corporate governance

*b. c. d.

The Carbon Disclosure Project will result in the mandatory introduction of carbon emission reporting.

The National Greenhouse and Energy Reporting System is an example of a scheme encouraging the disclosure of aspects of environmental performance.

Sustainability involves ensuring that development meets the needs of the present without compromising the ability to meet future needs.

Correct answer: b Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

30.

Which of the following statements is incorrect? a. b. c. *d.

Pluralist systems place a greater emphasis on stakeholders.

Corporate governance systems can be either Anglo or pluralist systems.

The Anglo system dominates in the United States, Australia, Canada and the United Kingdom.

Anglo systems tend to have dual board structures.

Correct answer: d Learning Objective 4.8 ~ identify differences in national corporate governance systems and key future trends in corporate governance.

.

4.10

Testbank to accompany Company Accounting 10e

True/false questions 31.

Corporate governance deals with the way corporations are managed and governed.

The statement is true. The ASX’s Corporate Governance Principles and Recommendations define corporate governance as the system by which companies are directed and managed.

Learning Objective 4.1 ~ understand and explain what is meant by the term corporate governance.

32.

Stakeholder theory refers to the concept of managers acting as agents of the owners of a business and arises due to the separation of ownership from control.

The statement is false. The statement is describing agency theory. Stakeholder theory focuses on providing value to all the company’s stakeholders as a whole, on the basis that this will benefit society as a whole.

Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

33.

Agency theory focuses on providing value to all the company’s stakeholders as a whole on the basis that this will benefit society as a whole.

The statement is false. The statement is describing stakeholder theory. Agency theory focuses on the concept of managers acting as agents of the owners of a business and arises due to the separation of ownership from control.

Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

34.

The Australian corporate governance system is an example of an agency-dominated AngloAmerican system which emphasises shareholder value.

The statement is true. In such systems board composition is determined by shareholder election.

Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

35.

The German system of corporate governance represents a hybrid approach to corporate governance and refers to an approach that adopts elements of agency theory and elements of stakeholder theory.

The statement is false. The German system embraces a wider set of stakeholders than the agency system whereby certain stakeholder groups (such as employees) have the right to elect members of the supervisory board.

Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

.

4.11

Chapter 4: Fundamental concepts of corporate governance

36.

Team production theory is a concept that includes elements of both agency theory and stakeholder theory.

The statement is true. Team production theory is best characterised as an offshoot of transaction cost theory.

Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

37.

Under resource dependence theory, the board of directors exists as a mediating hierarchy between the various factors of production.

The statement is false. This statement describes team production theory. Under resource dependence theory boards exist to provide companies with access to resources that they could not gain through market or management links.

Learning Objective 4.2 ~ explain and apply the major theories of corporate governance.

38.

A failed international strategy was one of the major reasons for the collapse of ABC Learning Ltd.

The statement is true. There was not one specific reason for the failure, rather a systematic failure of corporate governance.

Learning Objective 4.3 ~ appreciate the role that corporate collapses and the global financial crisis have played in the development of corporate governance.

39.

One of the key corporate governance deficiencies at ABC Learning Centres Ltd was the fact that there was no one on the board with accounting and financial experience.

The statement is true. There were numerous corporate governance deficiencies that contributed to the failure of ABC Learning Centres Ltd. Learning Objective 4.3 ~ appreciate the role that corporate collapses and the global financial crisis have played in the development of corporate governance.

40.

The ASX Corporate Governance Principles and Recommendations are legally enforceable for all listed entities and are an example of hard regulation.

The statement is false. The ASX principles and recommendations are not legally binding, but are enforced by the ASX Listing Rules on an ‘if not, why not’ basis.

Learning Objective 4.4 ~ understand the role of regulators and regulation in corporate governance.

41.

Hard regulations are also referred to as black letter law and result in legally enforceable obligations.

.

4.12

Testbank to accompany Company Accounting 10e

The statement is true. The Corporations Act 2001 is an example of ‘hard’ regulation.

Learning Objective 4.4 ~ understand the role of regulators and regulation in corporate governance.

42.

The Corporations Act definition of a director is very wide and can extend to an external advisor of the company who investigates a company’s affairs and makes suggestions as to the running of the company.

The statement is true. The definition contained within s. 9 of the Corporations Act is very broad and include both people appointed as a director and to people acting in the position of director.

Learning Objective 4.5 ~ understand the major duties of officers and directors.

43.

Under the Corporations Act in order to be a non-executive director of a company you must be independent.

The statement is false. Non-executive directors may be classified as either independent or ‘grey’ directors. Grey directors are those who may at times experience a conflict of interest because of their positions with other organisations.

Learning Objective 4.5 ~ understand the major duties of officers and directors.

44.

Recent academic studies have found that the presence of ‘grey’ directors on a company’s board consistently impacts negatively on company performance.

The statement is false. Academic studies have failed to find consistent evidence of a relationship between company performance and director independence, in spite of the fact that much has been written about the relative merits of directors’ independence.

Learning Objective 4.5 ~ understand the major duties of officers and directors.

45.

Messrs Williams and Adler were prosecuted for breaches of s.184 of the Corporations Act, and were found to have acted dishonestly and recklessly in the performance of their duties as directors of HIH Insurance Ltd.

The statement is true. Messrs Williams and Adler were found not to have acted in good faith in the best interests of the company for a proper purpose.

Learning Objective 4.5 ~ understand the major duties of officers and directors.

46.

The ASX established the ASX Corporate Governance Council following the spate of corporate collapses in Australia early this century.

.

4.13

Chapter 4: Fundamental concepts of corporate governance

The statement is true. The ASX Corporate Governance Council was established to review the corporate governance practices of ASX listed companies with a view to establishing a series of guidelines that would uphold the principles of good corporate governance.

Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

47.

Continuous disclosure requires companies to notify the ASX of any confidential information that a reasonable person would expect to have a material effect on the price of the securities of that entity.

The statement is false. If information is confidential (i.e. not known outside the company), then a company may choose not to disclose if a reasonable person would not think it necessary and the information in insufficiently clear or a trade secret.

Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

48.

Under the insider trading provisions of the Corporations Act, persons are prohibited from communicating information that is likely to have a material effect on a company’s share price to anyone they think will deal in the company’s shares.

The statement is true. Such action is referred to as ‘tipping off’.

Learning Objective 4.6 ~ identify the main corporate governance issues that face listed companies.

49.

The finance function of companies is under increasing pressure to produce meaningful information that can be readily understood by part-time directors.

The statement is true. This is as a result of directors responding to increased pressures on them to take responsibility for the company’s performance.

Learning Objective 4.7 ~ appreciate the implications of good corporate governance for accountants.

50.

Pluralist systems of corporate governance recognise a broader group of stakeholder interests than agency systems.

The statement is true. This system of corporate governance is popular in many Asian and continental European countries.

Learning Objective 4.8 ~ identify differences in national corporate governance systems and key future trends in corporate governance.

.

4.14

Chapter 5: Fair value measurement

Chapter 5: Fair value measurement Multiple-choice questions 1.

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

b. *c. d.

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.

To clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly.

To require the use of fair value when accounting for all assets and liabilities.

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.

Correct answer: c Learning Objective 5.1 ~ explain the need for an accounting standard on fair value measurement.

2.

The two most common measures for assets and liabilities used in AASB accounting standards are: a. *b. c. d.

market value and cost. cost and fair value. current replacement cost and fair value. fair value less costs to sell and cost.

Correct answer: b Learning Objective 5.1 ~ explain the need for an accounting standard on fair value measurement.

.

5.2

Testbank to accompany Company Accounting 10e

3.

The objectives of AASB 13 Fair Value Measurement include which of the following?

I II III IV

To require disclosures about fair value measurement.

To require the use of fair value when measuring all assets and liabilities.

To define fair value.

To set out in a single standard a framework for measuring fair value.

*a. b. c. d.

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

Correct answer: a Learning Objective 5.1 ~ explain the need for an accounting standard on fair value measurement.

4.

AASB 13 Fair Value Measurement defines fair value as: a. *b. c. d.

the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. 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. the price that would be received to sell an asset or paid to transfer a liability. 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).

Correct answer: b Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

5.

The date at which fair value is determined is known as the: *a. b. c. d.

measurement date. settlement date. transaction date. exchange date.

Correct answer: a Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

.

5.3

Chapter 5: Fair value measurement

6.

Which of the following is an example of an orderly transaction for the purposes of determining fair value? a. b. c. *d.

The prices of goods sold in a liquidation or fire sale.

The prices of goods sold at sale prices.

The prices of goods sold to related parties such as directors.

The price of goods sold under normal trading conditions.

Correct answer: d Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

7.

The price that would be received to sell an asset or paid to transfer a liability is referred as the: *a. b. c. d.

exit price. transfer price. selling price. settlement price.

Correct answer: a Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

8.

When determining the fair value of an asset, its fair value is measured by considering its: a. b. *c. d.

highest and current use. proposed use. highest and best use. value in exchange.

Correct answer: c Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

9.

A market in which transactions for the asset or liability take place with sufficient frequency and volume to provide pricing information on an ongoing basis is a/an: a. b. *c. d.

transaction market. information market. active market. inactive market.

Correct answer: c Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

.

5.4

Testbank to accompany Company Accounting 10e

10.

Which of the following is not a valuation technique prescribed by AASB 13 Fair Value Measurement? *a. b. c. d.

The balance sheet approach The income approach The cost approach The market approach

Correct answer: a Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

11.

The market with the greatest volume and level of activity for the asset or liability is defined as the: a. *b. c. d.

active market. principal market. liquid market. most advantageous market.

Correct answer: b Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

12.

A valuation technique that reflects the amount that would be currently required to replace the service capacity of an asset is known as: a. b. *c. d.

the fair value approach. the income approach. the cost approach. the market approach.

Correct answer: c Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

13.

Accounts receivable would be measured primarily using which level of inputs? a. b. *c. d.

Level 1 inputs Level 2 inputs Level 3 inputs Level 4 inputs

Correct answer: c Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

.

5.5

Chapter 5: Fair value measurement

14.

Inputs that are derived from or corroborated by observable market data by correlation or other means are an example of a: a. *b. c. d.

Level 1 input.

Level 2 input.

Level 3 input.

Level 4 input.

Correct answer: b Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

15.

Which of the following is not an example of a level 2 input? *a. b. c. d.

Quoted prices in active markets for identical assets or liabilities.

Quoted prices for identical or similar assets or liabilities in markets that are not active.

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.

Inputs that are derived from or corroborated by observable market data by correlation or other means.

Correct answer: a Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

16.

Trademarks would be measured primarily using which level of inputs? a. b. *c. d.

Level 1 inputs Level 2 inputs Level 3 inputs Level 4 inputs

Correct answer: c Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

17.

The fair value hierarchy prioritises inputs into how many levels? a. b. *c. d.

One level Two levels Three levels Four levels

Correct answer: c Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

.

5.6

Testbank to accompany Company Accounting 10e

18.

Which of the following steps in not relevant when valuing liabilities? a. *b. c. d.

The particular liability that is the subject of the measurement.

The highest and best use for the liability.

The principal (or most advantageous) market for the liability.

The valuation technique(s) appropriate for the measurement.

Correct answer: b Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

19.

Which of the following is an example of a liability where there is no corresponding asset? a. b. *c. d.

A loan owing to a financial institution A provision for warranties A provision for decommissioning A debenture issued by a listed company

Correct answer: c Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

20.

According to AASB 13 Fair Value Measurement which of the following should first be used when measuring the corresponding asset for a liability? a. *b. c. d.

An income approach The quoted price of the asset in an active market The quoted price for the asset in a market that is not active A market approach

Correct answer: b Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

21.

Non-performance risk refers to the risk that: a. b. c. *d.

a market participant will not fulfil an obligation. the counterparty will not fill an obligation. the holder of a corresponding asset will not fulfil an obligation. the holder of the liability will not fulfil an obligation.

Correct answer: d Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

.

5.7

Chapter 5: Fair value measurement

22.

Which of the following statements regarding measuring liabilities is incorrect? a. b. *c. d.

The effects of non-performance risk must be taken into consideration in measuring the fair value of a liability.

Present value techniques may be very useful in the measurement of liabilities.

The effects of non-performance risk is not relevant to measuring the fair value of a liability.

The highest and best use does not apply in the measurement of the fair value of a liability.

Correct answer: c Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

23.

In which circumstance will it be necessary to determine the fair value of an entity’s own equity instruments? a. *b. c. d.

Where the entity is preparing for an initial public offering of shares.

Where the entity undertakes a business combination and issues its own equity instruments in exchange for a business.

Where the entity undertakes a share buy-back.

Where the entity makes a right issue of shares to existing shareholders.

Correct answer: b Learning Objective 5.5 ~ explain how to measure the fair value of an entity’s own equity instruments.

24.

In measuring an equity instrument at fair value, the objective is to estimate an exit price at measurement date from the perspective of: a. b. *c. d.

the issuer of the equity instrument. the party to whom the instrument will be transferred. a market participant who holds the instrument as an asset. the party who intends to repurchase the instrument.

Correct answer: c Learning Objective 5.5 ~ explain how to measure the fair value of an entity’s own equity instruments.

.

5.8

Testbank to accompany Company Accounting 10e

25.

In relation to financial assets and financial liabilities, the price a dealer is willing to pay is referred to as the: a. *b. c. d.

ask price. bid price. issue price. purchase price.

Correct answer: b Learning Objective 5.6 ~ discuss issues relating to the measurement of the fair value of financial instruments.

26.

Where a foreign exchange dealer is willing to exchange one currency for another, the price that should be used in measuring fair value is: a. b. c. *d.

the bid price. the ask price. the bid-ask spread. the most representative price for the transaction.

Correct answer: d Learning Objective 5.6 ~ discuss issues relating to the measurement of the fair value of financial instruments.

27.

According to AASB 13 Fair Value Measurement, an entity holding both financial assets and liabilities is allowed to offset and determine fair value on the net position as long as: I II III IV V

they hold a net long position. they hold a net short position. they have a documented risk management strategy. they manage the group of net financial assets and liabilities on a net exposure basis. transactions are conducted in an orderly market.

a. b. *c. d.

I and III II and IV III and IV II and V

Correct answer: c Learning Objective 5.6 ~ discuss issues relating to the measurement of the fair value of financial instruments.

.

5.9

Chapter 5: Fair value measurement

28.

AASB 13 Fair Value Measurement allows the use of which of the following as a practical expedient when measuring the fair value of financial instruments where there are both bid and ask prices? a. b. c. *d.

The bid price The ask price The bid-ask spread The mid-market price

Correct answer: d Learning Objective 5.6 ~ discuss issues relating to the measurement of the fair value of financial instruments.

29.

Which of the following disclosures are not required under AASB 13 Fair Value Measurement? a. b. c. *d.

The valuation techniques used to measure fair value.

The inputs used to measure fair value.

The level of the fair value hierarchy within which the fair value measurements are categorised.

Quantitative information about all unobservable inputs used in the fair value measurement.

Correct answer: d Learning Objective 5.7 ~ prepare the disclosures required by AASB 13 Fair Value Measurement.

30.

Which of the following does Whittington (2008) see as a main feature of the alternative view? *a. b.

c. d.

Stewardship, defined as accountability to present shareholders, is a distinct objective, ranking equally with decision usefulness.

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.

Relevance is the primary characteristic.

Accounting information needs ideally to reflect the future, not the past, so past transactions and events are only peripherally relevant.

Correct answer: a Learning Objective 5.8 ~ discuss the issues associated with the measurement and use of fair values.

.

5.10

Testbank to accompany Company Accounting 10e

True/false questions 31.

One of the key reasons for issuing AASB 13 Fair Value Measurement was 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.

The statement is true. This is one of the three key reasons given in the Exposure Draft that preceded AASB 13.

Learning Objective 5.1 ~ explain the need for an accounting standard on fair value measurement.

32.

Fair value under AASB 13 Fair Value Measurement is defined as “the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction.”

The statement is false. This is the definition used in many accounting standards prior to 2011.

Learning Objective 5.1 ~ explain the need for an accounting standard on fair value measurement.

33.

When determining fair value, the exchange transaction considered is a hypothetical one.

The statement is true. The measurement of fair value is not based on an actual transaction, but a hypothetical transaction.

Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

34.

Fair value is determined at the exchange date.

The statement is false. Fair value is the price at the measurement date.

Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

35.

The price used to measure the fair value of an asset should be adjusted for transaction costs.

The statement is false. The fair value should not be adjusted for transaction costs because they are not considered to be a characteristic of the asset or liability.

Learning Objective 5.2 ~ discuss the key characteristics of the term ‘fair value’.

36.

Fair value is measured by considering the highest and best use of the asset.

The statement is true. Highest and best use is defined in Appendix of AASB 13 as ‘The use of a non-financial asset by market participants that would maximise the value of the asset or the group of assets and liabilities (e.g. a business) within which the asset would be used.’

.

5.11

Chapter 5: Fair value measurement

Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

37.

The “principal market” as defined in AASB 13 Fair Value Measurement is the market that maximises the amount that could be received to sell the asset or minimises the amount that would be required to be paid to transfer the liability, after considering transactions costs and transportation costs.

The statement is false. This is the definition of the “most advantageous market”. The principal market is the market with the greatest volume and level of activity for the asset or liability.

Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

38.

Inputs to valuation techniques can only be used if they are observable.

The statement is false. Inputs can be observable or unobservable, but the highest priority is given to observable inputs such as quoted market prices in active markets for identical assets and liabilities.

Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

39.

Price per square metre for a building derived from observable market data is an example of a level 2 input.

The statement is true. Quoted prices for similar assets in active markets are an example of a level 2 input within the fair value hierarchy.

Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

40.

To determine the fair value of the particular asset being measured one must consider such factors as the condition and location of the assets.

The statement is true. These factors will affect the price that market participants are willing to pay for the asset.

Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

41.

The use of the stand-alone valuation premise is appropriate when the market participant to whom the asset is being transferred would use the asset in conjunction with other assets.

The statement is false. An in-combination valuation premise would be appropriate where the asset is used in combination with other assets and liabilities as a group.

Learning Objective 5.3 ~ explain the steps in determining the fair value of non-financial assets.

.

5.12

Testbank to accompany Company Accounting 10e

42.

In the context of a liability, the fair value is the amount required to be paid to settle a liability.

The statement is false. The fair value of a liability is the amount paid to transfer the liability to another party.

Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

43.

AASB 13 Fair Value Measurement considers that the fair value of a liability is equal to the fair value of a properly defined corresponding asset.

The statement is true. In most, but not all cases, a liability will be held as an asset by another entity. Paragraph 37 of AASB 13 requires that the measurement of the fair value of the liability be calculated from the perspective of a market participant that holds the identical item as an asset at measurement date.

Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

44.

When valuing a liability and a corresponding asset is not held by another entity, the fair value is typically determined by applying a present value technique.

The statement is true. In these circumstances, the entity measuring the fair value of a liability must use a valuation technique from the perspective of a market participant that owes the liability. An example of where this may occur is in valuing a provision for decommissioning an offshore oil platform when drilling ceases.

Learning Objective 5.4 ~ describe how to measure the fair value of liabilities.

45.

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

The statement is false. In measuring the fair value of an equity instrument, the objective is to estimate an exit price at measurement date from the perspective of a market participant who holds the instrument as an asset.

Learning Objective 5.5 ~ explain how to measure the fair value of an entity’s own equity instruments.

46.

AASB 13 Fair Value Measurement does not apply to the measurement of equity instruments.

The statement is false. Measurement of equity instruments may be needed in such circumstances where an entity undertakes a business combination and issues its own equity instruments in exchange for another entity’s business.

Learning Objective 5.5 ~ explain how to measure the fair value of an entity’s own equity instruments.

.

5.13

Chapter 5: Fair value measurement

47.

AASB 13 Fair Value Measurement states that the price within a bid-ask spread that is most representative of fair value should be used to measure fair value.

The statement is true. AASB 13 notes that the use of a mid-market price may be used as a practical expedient.

Learning Objective 5.6 ~ discuss issues relating to the measurement of the fair value of financial instruments.

48.

AASB 13 Fair Value Measurement allows the offsetting of financial assets and liabilities where the assets and liabilities are managed as a group.

The statement is true. This exception is allowed under paragraph 48 of AASB 13. A net exposure to risk arises when an entity holds both assets and liabilities in a particular market and manages them as a group.

Learning Objective 5.6 ~ discuss issues relating to the measurement of the fair value of financial instruments.

49.

AASB 13 Fair Value Measurement does not prescribe any disclosures as these are contained in other accounting standards

The statement is false. Paragraphs 91 – 99 contain the disclosures required under AASB 13. For users to assess the relevance of the fair value information provided, AASB 13 requires the disclosure of both the valuation techniques used to measure fair value and the inputs used to measure fair value.

Learning Objective 5.7 ~ prepare the disclosures required by AASB 13 Fair Value Measurement.

50.

One of the key concerns surrounding the increased use of fair value is the reliability of the data.

The statement is true. Inputs into determining fair values (other than level 1 inputs) can be easily manipulated, hence reducing their reliability.

Learning Objective 5.8 ~ discuss the issues associated with the measurement and use of fair values.

.

5.14

Chapter 6: Accounting for company income tax

Chapter 6: Accounting for company income tax Multiple-choice questions 1.

The recognition of __________ provides more complete or relevant information for economic decision making than __________ . a. *b. c. d.

current tax and deferred tax; deferred tax alone current tax and deferred tax; current tax alone deferred tax alone; current tax and deferred tax combined current tax alone; current tax and deferred tax combined

Correct answer: b Learning Objective 6.1 ~ explain the benefit of having information regarding current and deferred tax in the financial statements.

2.

The tax expense related to profit or loss of the period is required to be presented: a. *b. c. d.

on the face of the statement of financial position. on the face of the statement of profit or loss and other comprehensive income. in the statement of cash flows. in the statement of changes in equity.

Correct answer: b Learning Objective 6.2 ~ describe how income tax is included in the financial statements.

3.

The entries for income tax for the period are comprised of three components. Which of the following is NOT included in the components? a. b. *c. d.

Recognition of the current tax liability.

Recognition of the movement in deferred tax liability included in the profit or loss for the period.

Recognition of the temporary difference on the purchase of goodwill.

Recognition of the movement in deferred tax asset included in the profit or loss for the period.

Correct answer: c Learning Objective 6.3 ~ explain the general principles of current and deferred tax set out in AASB 112.

4.

Generally, when considering the differences between the accounting treatment and the income tax treatment of a particular item the accounting treatment is based on: a. b.

cash flows. the income tax legislation.

© John Wiley & Sons Australia, Ltd 2012

6.1

Testbank to accompany Company Accounting 10e

c. *d.

cash flows adjusted for depreciation charges. accrual accounting and is subject to the requirements of accounting standards.

Correct answer: d Learning Objective 6.4 ~ describe how taxable profit is generally determined according to Australian income tax legislation and explain how it differs from accounting profit.

5.

During the year ended 30 June 2015 Harry Ltd, pays quarterly PAYG tax instalments as follows: $6000 on 28 July 2014 $2000 on 28 October 2014 $8000 on 28 February 2015 $10 000 on 28 April 2015.

On 30 June 2015, Harry Ltd determines its total current tax liability for the year to be $28 000.

The final tax instalment for the year will be a: a. b. *c. d.

refund of $2000. payment of $2000. payment of $8000. payment of $28 000.

Correct answer: c Learning Objective 6.4 ~ describe how taxable profit is generally determined according to Australian income tax legislation and explain how it differs from accounting profit.

6.

The following information relates to Hoover Limited for the year ended 30 June 2015.

Accounting profit before income tax (after all expenses have been included) Fines and penalties (not tax deductible) Depreciation of plant (accounting) Depreciation of plant (tax) Long-service leave expense (not a tax deduction until the leave is paid) Income tax rate

$280 000 22 000 50 000 110 000 10 000 30%

No employee has been paid long-service leave in the current year. On the basis of this information the current tax liability is: a. *b. c. d.

$69 000. $75 600. $72 600. $92 400.

Correct answer: b Learning Objective 6.5 ~ prepare a current tax worksheet that reconciles from accounting profit to taxable profit and then use the worksheet to record the entries for current tax.

© John Wiley & Sons Australia, Ltd 2015

6.2

Chapter 6: Accounting for company income tax

7.

Differences between the carrying amounts of an entity’s net assets determined under accounting standards and accrual accounting, and the tax bases of those net assets determined under the Income Tax Assessment Act, are described as: a. *b. c. d.

tax losses. temporary differences. permanent differences. the current income tax liability.

Correct answer: b Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

8.

A taxable temporary difference is expected to lead to the payment of: a. b. c. *d.

less tax in the future and gives rise to a deferred tax asset. more tax in the future and gives rise to a deferred tax asset. less tax in the future and gives rise to a deferred tax liability. more tax in the future and gives rise to a deferred tax liability.

Correct answer: d Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

9.

A deductible temporary difference is expected to lead to the payment of: *a. b. c. d.

less tax in the future and gives rise to a deferred tax asset. more tax in the future and gives rise to a deferred tax asset. less tax in the future and gives rise to a deferred tax liability. more tax in the future and gives rise to a deferred tax liability.

Correct answer: a Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

10.

CTV Limited has an asset which cost $400 and against which depreciation of $200 has accumulated. The accumulated depreciation for tax purposes is $280 and the company tax rate is 30%. The tax base of this asset is: a. b. *c. d.

$36. $320. $120. $80.

© John Wiley & Sons Australia, Ltd 2015

6.3

Testbank to accompany Company Accounting 10e

Correct answer: c Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

11.

Deferred tax accounting adjustments are recorded at what point in time? a. b. c. *d.

As each transaction arises or is incurred As the cash flows from each transaction occur At the end of each month At balance date

Correct answer: d Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

12.

Silver Bullet Limited has a product warranty liability amounting to $12 000. The product warranty costs are not tax deductible until paid out to customers. The company tax rate is 30%. The company has a: a. b. c. *d.

tax base of $12 000. future deductible amount of $0. taxable temporary difference of $12 000. deductible temporary difference of $12 000.

Correct answer: d Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

13.

The following information was extracted from the financial records of Panda Limited: equipment purchased on 1 July 2014 for $140 000 (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 Panda Limited at 30 June 2015 is which of the following? a. b. c. *d.

Dr Deferred tax asset $14 000 Cr Deferred tax asset $4200 Dr Deferred tax liability $14 000 Cr Deferred tax liability $4200

Correct answer: d Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

© John Wiley & Sons Australia, Ltd 2015

6.4

Chapter 6: Accounting for company income tax

14.

Sydney Limited accrued $20 000 for employees’ long service leave in the year ended 30 June 2015. This item will not be tax deductible until it is paid in approximately 10 years’ time. If the company tax rate is 30%, Sydney Limited must record which of the following tax effects as a balance date adjustment? *a. b. c. d.

Dr Deferred tax asset $6000 Cr Deferred tax asset $6000 Dr Deferred tax liability $6000 Cr Deferred tax liability $6000

Correct answer: a Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

15.

In jurisdictions where the impairment of goodwill is not tax deductible, AASB 112 Income Taxes: a. b. *c. d.

requires that any deferred tax items for goodwill be capitalised in the carrying amount of goodwill. requires that any deferred tax items in relation to goodwill be recognised directly in equity. does not permit the application of deferred tax accounting to goodwill. allows the recognition of a deferred tax item in relation to goodwill.

Correct answer: c Learning Objective 6.6 ~ prepare a deferred tax worksheet to determine the differences between the accounting and tax values for assets and liabilities and use the worksheet to record the entries for deferred tax.

16.

Unless a company has a legal right of set-off, AASB 112 Income Taxes, requires disclosure of which of the following information for deferred tax statement of financial position items?

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. *a. b. c. d.

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

Correct answer: a Learning Objective 6.7 ~ determine the tax bases of various assets and liabilities included in the statement of financial position.

© John Wiley & Sons Australia, Ltd 2015

6.5

Testbank to accompany Company Accounting 10e

17.

Under AASB 112 Incomes Taxes, deferred tax assets and liabilities are measured at the tax rates that: *a. b. c. d.

are expected to apply when the asset is realised or the liability is settled. applied at the beginning of the reporting period. applied at the end of the reporting period. prevail at the reporting date.

Correct answer: a Learning Objective 6.8 ~ calculate the taxable and deductible temporary differences of various assets and liabilities included in the statement of financial position and identify items that are excluded from the calculation of deferred tax liabilities and assets.

18.

On 1 April 2015, the company rate of income tax changed from 35% to 30%. At the previous reporting date (30 June 2014) Monty Limited had the following tax balances: ➢ deferred tax assets $20 250 ➢ deferred tax liabilities $15 000.

What is the impact of the tax rate change on income tax expense? *a. b. c. d.

Increase $750 Decrease $750 Increase $875 Decrease $875

Correct answer: a Learning Objective 6.8 ~ calculate the taxable and deductible temporary differences of various assets and liabilities included in the statement of financial position and identify items that are excluded from the calculation of deferred tax liabilities and assets.

19.

Jackson Limited had the following deferred tax balances at reporting date: ➢ deferred tax assets $10 000 ➢ deferred tax liabilities $26 000.

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

Cr $4000.

Cr $5333.

Dr $4000.

Dr $5333.

Correct answer: a

© John Wiley & Sons Australia, Ltd 2015

6.6

Chapter 6: Accounting for company income tax

Learning Objective 6.8 ~ calculate the taxable and deductible temporary differences of various assets and liabilities included in the statement of financial position and identify items that are excluded from the calculation of deferred tax liabilities and assets.

20.

Tax losses can be viewed as providing: a. b. *c. d.

taxable temporary differences, and therefore a current tax liability. taxable temporary differences, and therefore a current tax refund. deductible temporary differences, and therefore a deferred tax asset. deductible temporary differences, and therefore deferred tax liabilities.

Correct answer: c Learning Objective 6.8 ~ calculate the taxable and deductible temporary differences of various assets and liabilities included in the statement of financial position and identify items that are excluded from the calculation of deferred tax liabilities and assets.

© John Wiley & Sons Australia, Ltd 2015

6.7

Chapter 7: Financial Instruments

Chapter 7: Financial instruments Multiple-choice questions 1.

All of the following would be regarded as financial instruments except: a. b. c. *d.

cash on hand. bank overdraft. forward exchange contracts. property, plant and equipment.

Correct answer: d Learning Objective 7.1 ~ define a financial instrument and identify transactions that give rise to financial instruments.

2.

Which of the following are regarded as financial instruments?

I Ordinary shares II Raw materials inventories III Property, plant and equipment IV Deposits held by a financial institution V Accounts receivable and accounts payable a. b. c. *d.

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

Correct answer: d Learning Objective 7.1 ~ define a financial instrument and identify transactions that give rise to financial instruments.

3.

Which of the following items is classified as a financial asset? a. b. *c. d.

Buildings.

Loans payable.

Trade receivables.

Ordinary shares held in a subsidiary.

Correct answer: c Learning Objective 7.2 ~ define a financial asset and identify examples.

.

7.2

Testbank to accompany Company Accounting 10e

4.

According to AASB 132 Financial Instruments: Presentation and Disclosure, which of the following items would be regarded as a financial liability? *a. b. c. d.

Debentures issued.

Promissory notes held.

Ordinary shares held in another entity.

An option to purchase shares below the market price.

Correct answer: a Learning Objective 7.3 ~ define a financial liability and identify examples.

5.

Which of the following is NOT an example of a derivative financial instrument? a. b. *c. d.

A futures contract.

An option contract.

A commercial bill contract.

A forward exchange contract.

Correct answer: c Learning Objective 7.4 ~ explain what is meant by a derivative and an embedded derivative.

6.

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

I Its value changes 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 requires no initial net investment or it is smaller than for other types of contracts expected to have a similar response to changes in market factors.

IV It is to be settled at a future date. a. b. *c. d.

I, II and III I, II and IV I, III and IV II, III and IV

Correct answer: c Learning Objective 7.4 ~ explain what is meant by a derivative and an embedded derivative.

7.

Cathy Limited buys an option that entitles it to purchase 3000 shares in Colin Limited at $6 per share at any time in the next 6 months. The derivative financial instrument in this transaction is the: a. b.

shares in Cathy Limited. shares in Colin Limited.

.

7.3

Chapter 7: Financial Instruments

*c. d.

option priced at $6 per share. market price of the shares in Colin Limited after 6 months have elapsed.

Correct answer: c Learning Objective 7.4 ~ explain what is meant by a derivative and an embedded derivative.

8.

All of the following are equity instruments except: *a. b. c. d.

forward rate agreements. non-puttable ordinary shares. preference shares that do not carry an unconditional right to cash. call options that allow the holder to purchase a fixed number of non-puttable ordinary shares for a fixed amount of cash.

Correct answer: a Learning Objective 7.5 ~ define an equity instrument and identify examples.

9.

Company A issues preference shares to Company B, the terms of which entitle Company 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: a. *b. c. d.

a financial asset. a financial liability. an equity instrument. a compound financial instrument.

Correct answer: b Learning Objective 7.6 ~ distinguish between financial liabilities and equity instruments.

10.

The classification of a financial instrument on the statement of financial position of an entity is governed by the principle of: a. b. c. *d.

fair value. legal form. net present value. substance over form.

Correct answer: d Learning Objective 7.6 ~ distinguish between financial liabilities and equity instruments.

.

7.4

Testbank to accompany Company Accounting 10e

11.

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 ______ component that relates to the notes which have been converted ______. a. *b. c. d.

liability; remains as a liability liability; is transferred to equity equity; is transferred to profit or loss liability; is transferred to profit or loss

Correct answer: b Learning Objective 7.7 ~ explain the concept of a compound financial instrument.

12.

Dividends or gains and losses on redemption of equity instruments are recognised: a. b. c. *d.

as an asset. as an expense in the profit or loss. as income in the profit or loss. directly in equity.

Correct answer: d Learning Objective 7.8 ~ explain the consequential effects of financial instrument classifications for dividends, interest, and gains and losses.

13.

The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to recognise it as: *a. b. c. d.

a deduction in equity. an addition in equity. an expense in profit or loss. a liability.

Correct answer: a Learning Objective 7.8 ~ explain the consequential effects of financial instrument classifications for dividends, interest, and gains and losses.

14.

An entity must recognise a financial asset or a financial liability when it becomes subject to the contractual provisions of the instrument. Which of the following are NOT recognised? a. b. *c. d.

Trade debtors.

Forward contracts at commitment date.

Planned future transactions.

Option contracts when the holder becomes a party to the contract.

.

7.5

Chapter 7: Financial Instruments

Correct answer: c Learning Objective 7.9 ~ describe the criteria for the recognition of a financial asset or financial liability.

15.

AASB 132 requires an entity to offset a financial asset and a financial liability and present the net amount in the statement of financial position when two conditions are satisfied.

Conditions for offsetting are generally NOT satisfied when: a. b. c. *d.

financial assets and liabilities have the same primary risk exposure that involve different counterparties. financial assets are pledged as collateral for non-recourse financial liabilities. obligations are expected to be recovered from a third party because of claims under insurance contracts. all of the above situations.

Correct answer: d Learning Objective 7.10 ~ describe the conditions under which a financial asset and a financial liability must be offset.

16.

Which of the following is an example where derecognition of a financial instrument is NOT justified? a. b. *c. d.

The contractual rights to cash flows from the financial asset have expired.

The entity has transferred the financial asset so that it no longer has control of the asset.

Sale of short-term receivables by an entity accompanied by a guarantee to compensate the purchaser for any credit losses that are likely to occur.

The entity has transferred the financial asset in such a way that it is no longer subject to the risks and rewards of ownership.

Correct answer: c Learning Objective 7.11 ~ describe the requirements for the derecognition of a financial asset or a financial liability.

17.

AASB 9 requires that on initial recognition, financial assets and liabilities be measured at: *a. b. c. d.

fair value. historical cost. net present value. lower of cost or market value.

Correct answer: a

.

7.6

Testbank to accompany Company Accounting 10e

Learning Objective 7.12 ~ outline the requirements for the initial measurement of a financial asset or a financial liability and prepare entries to apply these requirements in specific cases.

18.

Which of the following categories of financial instruments is NOT subsequently measured at amortised cost? a.

Purchased bonds. b.

Purchased secured loans. c.

Purchased unsecured loans. *d. Financial assets held for trading.

Correct answer: d Learning Objective 7.13 ~ outline the requirements for the subsequent measurement of a financial asset and prepare entries to apply these requirements in specific cases.

19.

Financial assets classified as subsequently measured at fair value through profit and loss (FVTPL) are: I. designated as such upon initial recognition.

II. equity instruments held for trading.

III. derivative financial instruments.

IV. part of a portfolio that is managed together and for which there is evidence of a recent pattern of short-term profit-taking. a. b. c. *d.

I, II and III I, II and IV I, III and IV I, II, III and IV

Correct answer: d Learning Objective 7.13 ~ outline the requirements for the subsequent measurement of a financial asset and prepare entries to apply these requirements in specific cases.

20.

Financial liabilities classified as subsequently measured at fair value through profit and loss (FVTPL) are: I. derivative instruments.

II. financial guarantee contracts.

III. commitments to provide loans at a below-market interest rate.

IV. debt instruments incurred principally for the purpose of shortterm repurchase. a. *b. c. d.

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

.

7.7

Chapter 7: Financial Instruments

Correct answer: b Learning Objective 7.14 ~ outline the requirements for the subsequent measurement of a financial liability and prepare entries to apply these requirements in specific cases.

.

7.8

Chapter 8: Foreign currency transactions and forward exchange contracts

Chapter 8: Foreign currency transactions and forward exchange contracts Multiple-choice questions 1.

All the following items are ‘monetary items’ according to AASB 121 except: a. b. *c. d.

trade payable of ₤50 000. borrowings €30 000. shares held in BHP Ltd listed on the ASX. trade receivable of US$12 000.

Correct answer: c Learning Objective 8.1 ~ explain the need for translating foreign currency balances, the meaning of ‘functional currency’, the different types of foreign currency transactions and the concept of ‘monetary items’.

2.

All of the following are foreign currency transactions for a company that has A$ as its functional currency, except: a. *b. c. d.

goods sold at prices denominated in Japanese Yen. inventory sold to a customer in Hong Kong who pays in A$. borrowing funds where amounts are payable in NZ$. equipment sold at prices denominated in pounds.

Correct answer: b Learning Objective 8.1 ~ explain the need for translating foreign currency balances, the meaning of ‘functional currency’, the different types of foreign currency transactions and the concept of ‘monetary items’.

3.

The Australian Financial News quoted A$1.00 equals US$1.05/1.08. What does this represent? a. b. c. *d.

A bid rate of US$1.08.

An offer rate of A$1.08.

A bid rate of A$1.05.

An offer rate of US$1.08.

Correct answer: d Learning Objective 8.2 ~ define ‘exchange rates’ and explain how the rates are quoted and used to translate foreign currency balances into Australian dollars (A$).

4.

Which exchange rate is used at the end of the reporting period?

© John Wiley & Sons Australia, Ltd 2015

8.2

Chapter 8: Foreign currency transactions and forward exchange contracts

a. b. *c. d.

The indirect rate.

The spot rate.

The closing rate.

The ending rate.

Correct answer: c Learning Objective 8.2 ~ define ‘exchange rates’ and explain how the rates are quoted and used to translate foreign currency balances into Australian dollars (A$).

5.

The Australian financial news quoted US$1.00 equals A$0.9399/0.9649. What does this represent? a. *b. c. d.

A bid rate of A$0.9649.

The direct form of quotation.

An offer rate of A$0.9399.

A bid-ask spread of A$0.0351.

Correct answer: b Learning Objective 8.2 ~ define ‘exchange rates’ and explain how the rates are quoted and used to translate foreign currency balances into Australian dollars (A$).

6.

A decrease in the direct rate of US$1 to A$# results in: a. *b. c. d.

an increase in US$ amount for a payable in A$. a decrease in A$ amount for a payable in US$. an exchange loss. an increase in A$ amount for receivable in US$.

Correct answer: b Learning Objective 8.3 ~ describe how ‘foreign exchange differences’ arise on monetary assets or liabilities denominated in foreign currency and distinguish between realised and unrealised exchange differences.

7.

A realised exchange difference arises: *a. b. c. d.

when the exchange rate changes between initial recognition and cash settlement. when the exchange rate changes between initial recognition and end of reporting period. on remeasurement of a monetary liability at the end of the reporting period. on initial recognition of a monetary asset.

Correct answer: a Learning Objective 8.3 ~ describe how ‘foreign exchange differences’ arise on monetary assets or liabilities denominated in foreign currency and distinguish between realised and unrealised exchange differences.

© John Wiley & Sons Australia, Ltd 2015

8.3

Chapter 8: Foreign currency transactions and forward exchange contracts

8.

At the date of the transaction, a foreign currency monetary item is initially recognised and measured using: a. b. *c. d.

the closing rate. the foreign currency monetary value. spot exchange rate.

US dollars.

Correct answer: c Learning Objective 8.4 ~ outline the techniques used for the recognition and measurement of monetary items denominated in foreign currency and prepare the applicable entries.

9.

At the end of the reporting period, a foreign currency monetary item is remeasured using: a. b. c. *d.

the foreign currency monetary value. spot exchange rate.

US dollars. the closing rate.

Correct answer: d Learning Objective 8.4 ~ outline the techniques used for the recognition and measurement of monetary items denominated in foreign currency and prepare the applicable entries.

10.

All of the following assets can be defined as ‘qualifying assets’ except: a. *b. c. d.

manufacturing plants. inventories purchased ready for sale. power generation facilities. investment properties.

Correct answer: b Learning Objective 8.5 ~ describe the techniques used for the recognition and measurement of non-monetary items denominated in foreign currency and prepare the applicable entries.

11.

Foreign exchange risk may relate to: a. b. c. *d.

recognised assets and liabilities. planned foreign currency transactions. unrecognised firm commitments. all of the above.

Correct answer: d Learning Objective 8.6 ~ explain what is meant by ‘foreign exchange risk’ and the circumstances in which it can arise.

© John Wiley & Sons Australia, Ltd 2015

8.4

Chapter 8: Foreign currency transactions and forward exchange contracts

12.

If an Australian company enters a forward exchange contract to buy US$15 000, then which of the following applies? *a. b. c. d.

The company’s contractual obligation (at the forward rate) and contractual right (at the spot rate) are settled on a net basis.

The company has a contractual obligation to deliver foreign currency at the settlement date and that obligation is realised at the spot rate.

The company has a contractual right to receive US$15 000 at the settlement date and that right is an asset fixed in A$ at the forward rate.

The company’s forward contract will act as a hedge against a recognised asset.

Correct answer: a Learning Objective 8.7 ~ describe a ‘forward exchange contract’ and prepare the entries to account for a contract that buys or sells foreign currency.

13.

The formal documentation of a hedging relationship must include identification of: I The hedging instrument II The hedged item III The nature of the risk being hedged IV How the entity will assess hedge effectiveness a. b. c. *d.

I, II and III only.

I, II and IV only.

II, III and IV only.

I, II, III and IV.

Correct answer: d Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

14.

All of the following are examples of a fair value hedge, except: a. *b. c. d.

a forward contract to sell US$ hedging a recognised trade receivable in US$. a forward contract to buy US$ hedging a highly probable purchase of inventory in US$. a forward contract to buy US$ hedging a recognised trade payable in US$. a forward contract to sell US$ hedging a recognised loan receivable in US$.

Correct answer: b Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

15.

Hedge effectiveness is ascertained from: a.

the hedge ratio of the hedging relationship reflects actual quantities and is consistent with the purpose of hedge accounting.

© John Wiley & Sons Australia, Ltd 2015

8.5

Chapter 8: Foreign currency transactions and forward exchange contracts

b. c. *d.

there is an economic relationship between the hedging instrument and the hedged item. the effect of credit risk does not dominate the economic relationship hedging instrument and the hedged item. all of the above.

Correct answer: d Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

16.

All of the following are examples of a cash flow hedge, except: *a. b. c. d.

a forward contract to buy US$ hedging recognised borrowings in US$. a forward contract to buy US$ hedging future interest payments on variable rate debt in US$. a forward contract to sell US$ hedging a highly probable sale of inventory in US$. a forward contract to buy US$ hedging an unrecognised firm commitment to purchase goods in US$.

Correct answer: a Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

17.

The __________ is a hedge of the exposure to the variability in cash flows that is attributable to a particular risk that is associated with all, or some component of, a recognised asset or liability. a. b. *c. d.

fair value hedge hedge of a net investment in a foreign operation cash flow hedge all of the above

Correct answer: c Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

18.

The degree to which changes in the fair value of a forward contract offset changes in the fair value or cash flows of a hedged item, describes: a. b. *c. d.

transaction exposure. hedge ineffectiveness. hedge effectiveness. transaction variability.

Correct answer: c

© John Wiley & Sons Australia, Ltd 2015

8.6

Chapter 8: Foreign currency transactions and forward exchange contracts

Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

19.

A forward contact to buy US$40 000 for a planned purchase transaction of US$50 000 has a hedge ratio of: a. b. *c. d.

40%.

125%.

80%.

20%.

Correct answer: c Learning Objective 8.8 ~ explain the objective of hedge accounting and prepare the entries for a hedging relationship involving a forward exchange contract.

20.

AASB 121 requires that the financial report disclose which of the following? a. b.

c. *d.

The net exchange differences recognised in OCI and accumulated in a separate component of equity.

The amount of exchange differences recognised in the profit or loss for the period other than those that relate to financial instruments measured at fair value through profit or loss.

Any change in functional currency and reason for change.

All of the above.

Correct answer: d Learning Objective 8.9 ~ describe the disclosures required in the financial report relating to foreign currency transactions.

© John Wiley & Sons Australia, Ltd 2015

8.7

Chapter 9: Property, plant and equipment

Chapter 9: Property, plant and equipment Multiple-choice questions 1.

Property, plant and equipment are assets that: a. b. *c. d.

are expected to be used up within the current financial period. are held for resale within the current period. are tangible in nature. have a remaining productive life of less than one financial year.

Correct answer: c Learning Objective 9.1 ~ discuss the nature of property, plant and equipment.

2.

Property, plant and equipment includes items that are: a. b. c. *d.

intangible. held for resale. held for investment. used in an entity’s production process.

Correct answer: d Learning Objective 9.1 ~ discuss the nature of property, plant and equipment.

3.

According to AASB 116 Property, Plant and Equipment, 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: *a. b. c. d.

the cost can be reliably measured. it is a physical asset. the asset has been received by the purchaser. the asset is held for rental.

Correct answer: a Learning Objective 9.2 ~ explain the recognition criteria for initial recognition of property, plant and equipment.

4.

An entity acquired an item of plant in exchange for an item of equipment. The equipment has a carrying amount of $15 000 and a fair value of $20 000. The journal entry to record the acquisition of the plant will show: a. *b. c. d.

a loss on acquisition of $5000. a gain on sale of $5000. proceeds on sale of equipment of $15 000. proceeds on sale of plant of $15 000.

© John Wiley & Sons Australia, Ltd 2012

7.1

Testbank to accompany Company Accounting 10e

Correct answer: b Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

5.

Hoffman Limited acquired a bundle of assets for a cash consideration of $400 000. The fair values of the assets on date of acquisition were as follows: machinery $264 000, motor vehicles $176 000. Which of the following is the appropriate journal entry to record this acquisition? a.

b.

*c.

d.

DR Property, plant and equipment CR Cash

$400 000

DR Property, plant and equipment CR Cash

$220 000

DR Machinery DR Motor vehicles CR Cash

$240 000 $160 000

DR Machinery DR Motor vehicles CR Cash

$264 000 $176 000

$400 000

$220 000

$400 000

$440 000

Correct answer: c Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

6.

Which of the following are not examples of directly attributable costs that should be included in the cost of acquisition for property, plant and equipment? a. b. c. *d.

Costs of site preparation Installation and assembly costs Initial delivery and handling costs Costs of opening a new facility

Correct answer: d Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

7.

Estimated future restoration costs associated with mining land are: a. b. c. *d.

expensed in the period in which they are incurred. recorded directly into equity. regarded as contingent liability and are disclosed in the notes to the financial statements. capitalised into the cost of the land.

© John Wiley & Sons Australia, Ltd 2015

9.2

Chapter 9: Property, plant and equipment

Correct answer: d Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

8.

For the purpose of the initial recognition of an item of property, plant and equipment, the date on which the fair values should be measured is referred to as the: *a. b. c. d.

acquisition date. recognition date. measurement date. fair value date.

Correct answer: a Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

9.

For the purposes of recognising an item of property, plant and equipment, the acquisition date is defined in AASB 3 Business Combination as the date: *a. b. c. d.

on which the acquirer obtains control of the acquiree. the contract to exchange the assets is signed. on which the offer to acquire the asset becomes unconditional. the consideration is paid.

Correct answer: a Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

10.

After an asset has been initially recognised, an entity has a choice between the cost model and the: a. b. *c. d.

liquidation value model. accrual model. revaluation model. realisable value model.

Correct answer: c Learning Objective 9.4 ~ explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition.

11.

When changing from the revaluation to the cost model of measurement for non-current assets, the model must be applied: a. b.

in the current and future accounting periods. only to assets acquired after date of changing to the cost model.

© John Wiley & Sons Australia, Ltd 2015

9.3

Testbank to accompany Company Accounting 10e

*c. d.

retrospectively. prospectively.

Correct answer: c Learning Objective 9.4 ~ explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition.

12.

Under the cost model, after initial recognition an item of property, plant and equipment must be carried at its: a. *b. c. d.

estimated liquidation value. cost less accumulated depreciation and less accumulated impairment losses. initial cost. current replacement cost.

Correct answer: b Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

13.

The cost of an asset less its residual value is referred to as its: a. b. *c. d.

book value. residual amount. depreciable amount. carrying amount.

Correct answer: c Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

14.

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

The cost of the buildings was $850 000, the residual value is $150 000 and the useful life is 10 years. The annual depreciation expense is: a. b. c. *d.

$100 000. $15 000. $85 000. $70 000.

Correct answer: d Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

© John Wiley & Sons Australia, Ltd 2015

9.4

Chapter 9: Property, plant and equipment

15.

Webcke Limited acquired an item of machinery with an expected useful life of 4 years.

The expected total production output over this period was: year 1, 30 000 units; year 2, 25 000 units; year 3, 15 000 units; year 4, 10 000 units. The machinery cost $85 000 and the residual value is $15 000. The amount of depreciation expense recorded in the first year is: *a. b. c. d.

$26 250. $31 875. $21 875. $17 500.

Correct answer: a Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

16.

Which of the following depreciation methods is most appropriate when the asset’s benefits are expected to be received evenly over its useful life? a. *b. c. d.

Consistent benefit method Straight-line method Diminishing balance method Unit-of-production method

Correct answer: b Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

17.

Under AASB 116 Property, Plant and Equipment, the purpose of calculating the depreciation charge for a period on an item of property, plant and equipment is to measure: a. b. c. *d.

the fall in the fair value of the asset across the period. a change in the re-sale value of the asset that has occurred over the period. a reduction in the estimated market value of the asset across the period. the consumption of economic benefits over the period.

Correct answer: d Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

© John Wiley & Sons Australia, Ltd 2015

9.5

Testbank to accompany Company Accounting 10e

18.

On 1 July 2009, Barba Limited acquired an item of equipment for $105 000 which it depreciated using the straight line basis. The equipment had an estimated useful life of 10 years and its residual value was $15 000. The carrying amount of the equipment in the financial statements dated 30 June 2014 is: *a. b. c. d.

$60 000. $45 000. $52 500. $0.

Correct answer: a Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

19.

Which of the following is the appropriate journal entry to recognise depreciation expense calculated using the diminishing balance method? a.

DR

b.

DR

*c.

DR

d.

DR

CR CR CR CR

Depreciation expense Non-current asset Accumulated depreciation Non-current asset Depreciation expense Accumulated depreciation Accumulated depreciation Depreciation expense

Correct answer: c Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

20.

The depreciation expense calculated using the diminishing balance method reflects: a. *b. c. d.

an increasing pattern of benefits over the asset’s useful life. a decreasing pattern of benefits over the asset’s useful life. a constant pattern of benefits over the asset’s useful life. a fluctuating pattern of benefits over the asset’s useful life.

Correct answer: b Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

© John Wiley & Sons Australia, Ltd 2015

9.6

Chapter 9: Property, plant and equipment

21.

Which of the following is not an example of a separate class of property, plant and equipment? a. b. *c. d.

Office equipment Land and buildings Inventory Motor vehicles

Correct answer: c Learning Objective 9.6 ~ explain the revaluation model of measurement.

22.

A non-current property, plant and equipment asset is depreciated using the straight-line method over a 10 year useful life. 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 future depreciation of the asset?

*a. b. c. d.

Depreciation rate Same Same Higher Higher

Annual depreciation expense Higher Same Higher Same

Correct answer: a Learning Objective 9.6 ~ explain the revaluation model of measurement.

23.

Under AASB 116 Property, Plant and Equipment, the revaluation model is applied to: a. b. c. *d.

all assets on an individual basis. individual current assets only. individual property, plant and equipment assets only. property, plant and equipment assets on a class-by-class basis.

Correct answer: d Learning Objective 9.6 ~ explain the revaluation model of measurement.

© John Wiley & Sons Australia, Ltd 2015

9.7

Testbank to accompany Company Accounting 10e

24.

On 30 June 2014, Walters Limited had an item of plant with an original cost of $140 000 and accumulated depreciation of $56 000. At this date, the fair value of the plant was $100 000. The net effect of the journal entries necessary to record the revaluation of the plant by Walters to fair value on 30 June 2014 in accordance with AASB 116 Property, Plant and Equipment is which of the following? *a. Accumulated depreciation — plant Plant Asset revaluation surplus

Dr Cr Cr

28 000

b.

Plant Asset revaluation surplus

Dr Cr

12 000

Gain on revaluation — OCI Asset revaluation surplus

Dr Cr

12 000

Plant Gain on revaluation — OCI Accumulated depreciation — plant

Dr Dr Cr

12 000 16 000

c.

d.

12 000 16 000

12 000

12 000

28 000

Correct answer: a Learning Objective 9.6 ~ explain the revaluation model of measurement.

25.

On 30 June 2014, Walters Limited had an item of plant with an original cost of $140 000 and accumulated depreciation of $56 000. At this date, the fair value of the plant was $100 000 and Walters Limited revalued the plant. Assuming a tax rate of 30%, the tax effect of the revaluation would be recorded as which of the following? a.

b.

c.

*d

Income tax expense — OCI Current tax liability

Dr Cr

4 800

Deferred tax asset Income tax expense — OCI

Dr Cr

4 800

Deferred tax asset Current tax liability

Dr Cr

4 800

Income tax expense — OCI Deferred tax liability

Dr Cr

4 800

4 800

4 800

4 800

4 800

Correct answer: d Learning Objective 9.6 ~ explain the revaluation model of measurement.

© John Wiley & Sons Australia, Ltd 2015

9.8

Chapter 9: Property, plant and equipment

26.

Gillet Limited acquired a block of land for $150 000 on 1 January 2012. This amount was also the tax base of the land. On 30 June 2014, the land was revalued to $200 000.

The tax rate is 30%. The appropriate journal entry to recognise the net effect of the revaluation is which of the following? a.

b.

*c.

d.

DR CR

Gain on revaluation — OCI Asset revaluation surplus

$50 000

DR DR CR

Land Deferred tax asset Asset revaluation surplus

$35 000 $15 000

DR CR CR

Land Deferred tax liability Asset revaluation surplus

$50 000

DR CR CR

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

$50 000

$50 000

$50 000

$15 000 $35 000

$15 000 $35 000

Correct answer: c Learning Objective 9.6 ~ explain the revaluation model of measurement.

27.

Copely Limited had an existing asset 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 which of the following? a. b. c. *d.

DR CR DR CR

Gain on revaluation — OCI Asset revaluation surplus Retained earnings Retained earnings

Correct answer: d Learning Objective 9.6 ~ explain the revaluation model of measurement.

28.

When using the revaluation model: a. *b. c. d.

ongoing record keeping costs are generally lower than if the cost model were used. the values reported for property, plant and equipment will provide more relevant information to users of the financial statements. depreciation expenses will generally be lower than under the cost model. the entity’s financial statements will be consistent with US GAAP requirements.

Correct answer: b Learning Objective 9.7 ~ confirm the factors to consider when choosing which measurement model to apply.

© John Wiley & Sons Australia, Ltd 2015

9.9

Testbank to accompany Company Accounting 10e

29.

When an item of property, plant and equipment is sold, the resulting gain or loss is calculated as the difference between the: a. b. c. *d.

net proceeds from sale and the asset’s original cost. asset’s estimated fair value and its carrying amount at the date of sale. asset’s original cost and its accumulated depreciation at the date of sale. net proceeds from sale and the asset’s carrying amount at the date of sale.

Correct answer: d Learning Objective 9.8 ~ account for derecognition.

30.

Which of the following statements is not correct in relation to the disclosure of property, plant and equipment balances? a. b. c. *d.

Paragraph 79 of AASB 116 contains information that entities are encouraged to disclose, but not required to do so.

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

A summary of movements in the revaluation surplus must be disclosed.

Information on assets carried at revalued amounts must be disclosed on an individual asset basis.

Correct answer: d Learning Objective 9.9 ~ apply the disclosure requirements of AASB 116.

© John Wiley & Sons Australia, Ltd 2015

9.10

Chapter 9: Property, plant and equipment

True/false questions 31.

On initial recognition of property, plant and equipment, the cost only comprises the purchase price plus an initial estimate of dismantling and/or restoration costs.

The statement is false. There are three components to the cost of property, plant and equipment per paragraph 16 of AASB 116 Property, Plant and Equipment. In addition to the two components referred to above directly attributable costs also form part of the cost of property, plant and equipment.

Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

32.

Fair value is defined in AASB 116 Property, Plant and Equipment as the amount for which an asset can be exchanged between knowledgeable willing parties in an arm’s length transaction.

The statement is false. Fair value is defined in paragraph 6 of AASB 116 as ‘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.’

Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

33.

Where an entity acquires a bundle of assets and the total cost of the assets is greater than the sum of the fair values of the assets acquired, a bargain purchase has been made.

The statement is false. A bargain purchase occurs if the cost of the assets is less than the total of the fair value of the assets acquired.

Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

34.

Costs of testing whether an asset is functioning property should be capitalised into the initial cost of the asset under AASB 116 Property, Plant and Equipment.

The statement is true. This is an example of a directly attributable cost per paragraph 17 of AASB 116.

Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

35.

Costs of training staff in the use of a new asset are capitalised into the initial cost of the asset under AASB 116 Property, Plant and Equipment.

The statement is false. Such costs are specifically excluded as an example of directly attributable costs per paragraphs 19 and20 of AASB 116.

Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

© John Wiley & Sons Australia, Ltd 2015

9.11

Testbank to accompany Company Accounting 10e

36.

Costs of removal or dismantling an asset at the end of its useful life are measured on a present value basis and capitalised into the initial cost of the asset.

The statement is true. AASB 137 Provisions Contingent Liabilities and Contingent Assets, requires that a liability for future restoration be recognised. Acceptance of the liability for dismantling and removal is an essential part of bringing the asset to a position of intended use.

Learning Objective 9.3 ~ describe how to measure property, plant and equipment on initial recognition.

37.

Under AASB 116 Property, Plant and Equipment, subsequent to initial recognition property, plant and equipment assets can only be measured using the revaluation model.

The statement is false. Subsequent to initial recognition, an entity can measure property, plant and equipment assets using either the cost or the revaluation models.

Learning Objective 9.4 ~ explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition.

38.

Expenditure designed to improve the quality of the output of an asset are capitalised into the cost of the asset in accordance with paragraph 7 of AASB 116 Property, Plant and Equipment.

The statement is true. Such costs should be capitalised if it is probable that the expenditure increases the future economic benefits embodied in the asset in excess of its standard of performance assessed at the time the expenditure is made.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

39.

Depreciation is an accounting process which involves a systematic allocation of the depreciable amount of an asset over its useful life.

The statement is true. This principle is provided in the definitions in AASB 116 Property, Plant and Equipment.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

40.

Depreciation is not recognised if an asset’s residual value exceeds its carrying amount.

The statement is true. The recognition of depreciation requires the existence of an asset’s depreciable amount which is the asset’s cost less its residual value.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

© John Wiley & Sons Australia, Ltd 2015

9.12

Chapter 9: Property, plant and equipment

41.

The residual value of a non-current asset is the amount or consideration actually received by an entity at the date of the asset’s disposal.

The statement is false. The residual value is the estimated amount or consideration that the entity expects to receive from disposal after deducting the estimated costs of disposal.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

42.

The units-of-production method of recognising depreciation is only suitable for use by entities involved in manufacturing.

The statement is false. AASB 116 Property, Plant and Equipment allows entities to choose the depreciation method that most closely reflects the pattern of consumption of future economic benefits embodied in the asset. Where an entity in a service industry has an asset that has a finite life in terms of the number of hour’s usage, they may depreciate the asset using the units-of-production method.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

43.

Once an entity has selected a depreciation method to use to depreciate an asset, it must use that same method for the entire useful life of the asset.

The statement is false. AASB 116 Property, Plant and Equipment requires entities to review the depreciation method chosen at least at the end of each financial year If there has been a change in the pattern of benefits such that the current method is inappropriate, the method should be changed to one that reflects the changed pattern of benefits.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

44.

The expected physical wear and tear on an asset should be taken into account when determining the useful life of the asset.

The statement is true. Paragraph 56 of AASB 116 Property, Plant and Equipment provides a number of factors to consider when determining an asset’s useful life, of which the expected physical wear and tear is one. Others are: the expected usage of the asset; technical or commercial obsolescence; and legal or similar limits on the asset’s use.

Learning Objective 9.5 ~ explain the cost model of measurement and understand the nature and calculation of depreciation.

45.

The revaluation model must be applied to classes of assets.

The statement is true. This is a requirement of paragraph 36 of AASB 116 Property, Plant and Equipment. For each class of assets, management must choose whether to apply the cost model or the revaluation model.

Learning Objective 9.6 ~ explain the revaluation model of measurement.

© John Wiley & Sons Australia, Ltd 2015

9.13

Testbank to accompany Company Accounting 10e

46.

A revaluation increment reversing a previous revaluation decrement must be credited to the profit or loss.

The statement is true. AASB 116 paragraph 39 requires that revaluation increments shall be recognised in profit or loss to the extent that it reverses a revaluation decrease of the same asset previously recognised in profit or loss. Where there has been no previous revaluation decrement, the increment is credited to the Asset Revaluation Surplus.

Learning Objective 9.6 ~ explain the revaluation model of measurement.

47.

When a property, plant and equipment asset is derecognised through sale, any associated asset revaluation surplus must always be transferred to retained earnings.

The statement is false. There is no requirement in AASB 116 that the asset revaluation surplus must be transferred, although it may be transferred if the entity chooses to do so.

Learning Objective 9.6 ~ explain the revaluation model of measurement.

48.

One of the reasons for selecting the cost model over the revaluation model is because of the increased relevance of such measures.

The statement is false. It is argued that the revaluation model provides more relevant information than the cost model.

Learning Objective 9.7 ~ confirm the factors to consider when choosing which measurement model to apply.

49.

Items of property, plant and equipment may only be derecognised if they are sold.

The statement is false. Items of property, plant and equipment may also be derecognised when no future economic benefits are expected, either from future use or from disposal.

Learning Objective 9.8 ~ account for derecognition.

50.

Disclosures under AASB 116 Property, Plant and Equipment are required on an assetby-asset basis where the revaluation model has been used.

The statement is false. Disclosures are required on a class-by-class basis where the revaluation model has been used.

Learning Objective 9.9 ~ apply the disclosure requirements of AASB 116.

© John Wiley & Sons Australia, Ltd 2015

9.14

Testbank to accompany Company Accounting 10e

Chapter 10: Leases Multiple choice questions 1.

Which of the following is included within the scope of AASB 117? *a. b. c. d.

Lease agreement for an oil refinery.

Lease agreements for biological assets.

Lease agreements to explore for minerals.

Licensing agreements for motion picture films.

Correct answer: a Learning Objective 10.1 ~ define a ‘lease’ and identify lease characteristics by reference to the lessor and lessee.

2.

Which of the following is not an example of a risk of ownership of an asset? a. b. c. *d.

Uninsured damage.

Idle capacity.

Technical obsolescence.

Gains on the eventual sale of the asset.

Correct answer: d Learning Objective 10.2 ~ define a ‘finance lease’ and an ‘operating lease’ and explain how they differ.

3.

Which of the following is not one of the situations provided in AASB 117 in relation to the classification of leases as finance leases? a. b. *c. d.

Losses from the fluctuation of the fair value of the asset accrue to the lessee.

Leased assets are of a specialised nature.

The lessee has provided a guarantee that they will acquire the asset at the end of the lease term.

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

Correct answer: c Learning Objective 10.3 ~ describe and apply the classification guidance applicable to a finance lease.

4.

AASB 117 defines a non-cancellable lease to mean a lease that is cancellable in limited circumstances only if: a. *b. c.

the lessor cancels with the permission of the lessee. some remote contingency occurs. the lessor incurs a penalty large enough to discourage cancellation.

© John Wiley & Sons Australia, Ltd 2015

10.2

Chapter 10: Leases

d.

the lessee can cancel the lease at any time without any significant impediment or economic disincentive.

Correct answer: b Learning Objective 10.3 ~ describe and apply the classification guidance applicable to a finance lease.

5.

Features of lease agreements that can be manipulated to support the lease being classified as an operating lease include: a. b. c. *d.

bargain price options. economic life estimates. residual values. all of the above.

Correct answer: d Learning Objective 10.4 ~ explain the management incentives to avoid classification as a finance lease and provide examples of how avoidance has been achieved in practice.

6.

Which of the following statements is incorrect? a. *b.

c. d.

The capitalisation of a leased asset increases the value of reported non-current assets and reduces the return on assets ratio.

Recognition of the present value of future lease payments as a liability increases reported current and non-current liabilities. This favourably affects gearing ratios.

The recognition of finance leases may have adverse consequences on the financial statements of a lessee entity.

The different accounting approaches for finance leases and operating leases provide an incentive for managers to misclassify lease arrangements as operating leases.

Correct answer: b Learning Objective 10.4 ~ explain the management incentives to avoid classification as a finance lease and provide examples of how avoidance has been achieved in practice.

7.

Interpretation 4 Determining Whether an Arrangement Contains a Lease provides that the following arrangements which are not in the legal form of a lease may in fact fall within the definition of a lease for accounting purposes, except for: a. *b. c. d.

outsourcing arrangements. non-cancellable service agreements. service concession arrangements. take-or-pay contracts.

Correct answer: b Learning Objective 10.5 ~ describe the lease issues covered in Australian Interpretations.

© John Wiley & Sons Australia, Ltd 2015

10.3

Testbank to accompany Company Accounting 10e

8.

According to AASB 117 Leases, the payments made under a finance lease over the lease term must be divided and allocated into four components. Which of the following is NOT one of the relevant components? a. b. c. *d.

Reduction of the lease liability.

Interest expense incurred.

Reimbursement of lessor costs.

Receipt of lease incentives.

Correct answer: d Learning Objective 10.6 ~ demonstrate how a lessee accounts for a finance lease.

9.

When depreciating a leased asset which it expects to buy, a lessee will use which of the following calculations to determine the annual depreciation amount? a. b. *c. d.

Depreciable amount of leased asset / lease term.

Total of minimum lease payments / lease term.

Depreciable amount of leased asset / useful life of leased asset.

Useful life of leased asset/Total of minimum lease payments.

Correct answer: c Learning Objective 10.6 ~ demonstrate how a lessee accounts for a finance lease.

10.

The following information relates to a lease between Canneries Limited (lessor) and Fruiterers Limited (lessee). 3 lease payments of $20 000 each are made annually in advance and a final lease payment of $15 000 is made at the end of the 3 year lease term. The implicit interest rate is 10%. The amount of the interest expense that is recognised when the second payment of the lease is paid is: *a. b. c. d.

$4598. $6598. $7500. $15 402.

Correct answer: a Learning Objective 10.6 ~ demonstrate how a lessee accounts for a finance lease.

11.

Assets that are leased under an operating lease should be: a. b. *c. d.

depreciated by the lessee over the economic life of the asset. recognised by the lessee as an asset and depreciated according to the pattern of economic benefits from use. regarded as an operating activity by lessees and lease payments charged to profit and loss on a systematic basis. recognised as an unidentifiable intangible asset and tested annually for impairment.

© John Wiley & Sons Australia, Ltd 2015

10.4

Chapter 10: Leases

Correct answer: c Learning Objective 10.7 ~ demonstrate how a lessee accounts for an operating lease.

12.

On 30 June 2015, Malta Ltd leased a vehicle to Tango Ltd. Malta Ltd had purchased the vehicle on that day for its fair value of $75 625. The lease agreement cost Malta Ltd $1200 to have drawn up and requires Tango to reimburse Malta for annual insurance costs of $945. The amount recorded as a lease receivable by Malta Ltd at the inception of the lease is: a. b. c. *d.

$74 425. $75 625. $76 570. $76 825.

Correct answer: d Learning Objective 10.9 ~ demonstrate how a lessor that is a non-manufacturer or nondealer accounts for a finance lease.

13.

Initial direct costs incurred by a manufacturer or dealer lessor effectively are recognised as: a. *b. c. d.

a component of the lease receivable. part of the profit or loss on sale. part of the carrying amount of the asset. part of the lease expense.

Correct answer: b Learning Objective 10.10 ~ demonstrate how a lessor that is a manufacturer or dealer accounts for a finance lease.

14.

Under AASB 117 Leases, lessors are required to account for lease receipts from operating leases as: a. b. *c. d.

revenue, on a reducing balance basis over the lease term. income, on inception date of the lease. income, on a straight-line basis over the lease term. revenue, at the end of the lease term.

Correct answer: c Learning Objective 10.11 ~ demonstrate how a lessor accounts for an operating lease.

15.

With respect to finance leases, lessors are required under AASB 117 Leases, to disclose: *a. b.

unguaranteed residual values accruing to the benefit of the lessor. total contingent rents recognised as expense in the period.

© John Wiley & Sons Australia, Ltd 2015

10.5

Testbank to accompany Company Accounting 10e

c. d.

a general description of the lessee’s material leasing arrangements. the aggregate of future minimum lease payments under non-cancellable leases.

Correct answer: a Learning Objective 10.12 ~ outline the note disclosures required of a lessor for finance leases and operating leases.

16.

With respect to operating leases, lessors are NOT required under AASB 117 Leases, to disclose: a. *b. c. d.

total contingent rents recognised as income in the period. future minimum lease payments under cancellable operating leases, separately. a general description of the lessee’s leasing arrangements. future minimum lease payments under non-cancellable operating leases in aggregate.

Correct answer: b Learning Objective 10.12 ~ outline the note disclosures required of a lessor for finance leases and operating leases.

17.

Freedom Limited accepts a lease incentive to enter into a 3-year operating lease for a building. The incentive is a cash amount of $3000 received on signing of the lease agreement. The lessee initially records this transaction as follows: a. b. c. *d.

DR DR DR DR

Lease expense; CR Cash $3000 Incentive from lessor; CR Cash $3000 Incentive to lessee; CR Rent income $3000 Cash; CR Incentive from lessor $3000

Correct answer: d Learning Objective 10.13 ~ describe the accounting issue that arises when a lessor offers a lessee incentives to enter into a non-cancellable operating lease.

18.

ABC Limited accepts a lease incentive to enter into a 4-year operating lease for equipment. The incentive is cash amounting to $800 that will be paid on the date the lease agreement is signed. On inception of the lease, the lessor will record which of the following? a. *b. c. d.

Cash Incentive to lessee Incentive to lessee Cash Rent income Rent expense Cash Rent income

Dr Cr Dr Cr Dr Cr Dr Cr

$800 $800 $800 $800 $800 $800 $800 $800

© John Wiley & Sons Australia, Ltd 2015

10.6

Chapter 10: Leases

Correct answer: b Learning Objective 10.13 ~ describe the accounting issue that arises when a lessor offers a lessee incentives to enter into a non-cancellable operating lease.

19.

A lessee when accounting for a lease incentive received under an operating lease treats it as a(n): a. b. c. *d.

increase in rental expense over the lease term. increase in rental income over the lease term. reduction in rental income over the lease term. reduction in rental expense over the lease term.

Correct answer: d Learning Objective 10.13 ~ describe the accounting issue that arises when a lessor offers a lessee incentives to enter into a non-cancellable operating lease.

20.

If a sale and leaseback transaction results in a finance lease, AASB 117 Leases, provides the following accounting treatment for any excess of sales proceeds over the carrying amount: a. *b. c. d.

recognise directly in retained earnings of the seller-lessee. defer and amortise over the lease term. immediately recognise as income by the seller-lessee. include in the capitalised amount of the leased asset.

Correct answer: b Learning Objective 10.14 ~ demonstrate how to account for a sale and leaseback transaction.

© John Wiley & Sons Australia, Ltd 2015

10.7

Chapter 11: Intangible assets

Chapter 11: Intangible assets Multiple-choice questions 1.

An identifiable non-monetary asset without physical substance is known as a/an: a. *b. c. d.

tangible asset. intangible asset. non-physical asset. non-current asset.

Correct answer: b Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

2.

For an asset to be defined as an identifiable intangible, AASB 138 Intangible Assets requires that it meet which of the following criteria?

I. II. III. IV.

It arises from a contractual or legal right.

Its fair value must be able to be reliably measured.

It is separable from the entity.

Its cost must be reliably measurable.

a. b. c. *d.

I or IV only I or II only II or III only I or III only

Correct answer: d Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

3.

Which of the following items would not meet the criterion of separability for identifiable intangible assets? a. b. *c. d.

Licence Patent Ongoing training or recruiting programs Brand name

Correct answer: c Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

© John Wiley & Sons Australia, Ltd 2015

11.1

Testbank to accompany Company Accounting 10e

4.

Money held and assets to be received in fixed or determinable amounts of money are referred to as: a. b. *c. d.

non-monetary assets. current assets. monetary assets. non-current assets.

Correct answer: c Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

5.

Assets that could potentially meet the identifiability criteria for intangible assets include which of the following? a. b. c. *d.

Franchise agreements Plays, operas and ballets Internet domain names All of the above

Correct answer: d Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

6.

Which of the following statements is incorrect? *a. b. c. d.

Intangible assets are fundamentally the same as tangible assets for recognition purposes.

Financial assets such as loans and receivables are excluded from being classified as intangible assets.

Separability tests whether an entity can divide an asset from other assets and transfer it to another entity.

Non-physical assets cannot be recognised unless they are identifiable.

Correct answer: a Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

7.

The characteristic that separates assets such as property, plant and equipment from intangible assets is: a. b. c. *d.

separability. reliability. relevance. lack of physical substance.

Correct answer: d Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

© John Wiley & Sons Australia, Ltd 2015

11.2

Chapter 11: Intangible assets

8.

The unique characteristics of intangible assets raised by Lev (2001) do not include which of the following? *a. b. c. d.

There is a high degree of certainty regarding the future benefits of intangible assets.

Intangible assets may have network effects.

Intangibles may be more difficult to manage and operate than tangible assets.

The relationship between the investment and return is skewed.

Correct answer: a Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

9.

The two gaps that frustrate attempts to recognise intangible assets are: a. b. c. *d.

time gap and expectation gap. outlay gap and correlation gap. relevance gap and reliability gap. time gap and correlation gap.

Correct answer: d Learning Objective 11.2 ~ 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.

10.

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 the cost of the intangible asset? *a. b. c. d.

The fair value of the asset given up.

The initial cost of the asset given up.

The carrying amount of the asset received.

The replacement cost of the asset received.

Correct answer: a Learning Objective 11.2 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

11.3

Testbank to accompany Company Accounting 10e

11.

In accordance with AASB 3 Business Combinations, if an intangible asset is acquired in a business combination, the cost of the asset is its: a. *b. c. d.

fair value at the combination date. fair value at the acquisition date. current replacement cost at the acquisition date. discounted present value at the acquisition date.

Correct answer: b Learning Objective 11.2 ~ 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.

12.

Paragraph 63 of AASB 138 Intangible Assets, prohibits the recognition of which of the following internally generated identifiable intangibles? a. b. c. *d.

Publishing titles Customer lists Mastheads All of the above

Correct answer: d Learning Objective 11.2 ~ 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.

Which of the following intangibles may be capitalised as an asset by an entity? *a. b. c. d.

Goodwill acquired as part of a business combination.

Internally generated mastheads.

Publishing titles developed within the entity.

Customer lists developed by the entity’s marketing division.

Correct answer: a Learning Objective 11.2 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

11.4

Chapter 11: Intangible assets

14.

The cost of an intangible asset is comprised of the purchase price: a. b. c. *d.

less legal costs incurred in the purchase. plus indirectly attributable costs. less directly attributable costs. plus directly attributable costs.

Correct answer: d Learning Objective 11.2 ~ 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.

15.

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 is known as the: *a. b. c. d.

fair value. cost. net present value. realisable value.

Correct answer: a Learning Objective 11.2 ~ 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.

16.

From an accounting perspective, expenditure on development is: a. *b. c. d.

expensed as incurred. capitalised as an intangible asset. regarded as a contingent asset and not capitalised. recognised directly as a part of equity.

Correct answer: b Learning Objective 11.2 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

11.5

Testbank to accompany Company Accounting 10e

17.

Which of the following is an example of a development activity? a. b. *c. d.

Search for new knowledge Search for alternative materials Design of pre-production prototypes Search for alternative processes

Correct answer: c Learning Objective 11.2 ~ 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.

18.

The application of research findings to a plan for the production of new materials before the start of commercial production is described as: a. b. *c. d.

exploration. research. development. investigation.

Correct answer: c Learning Objective 11.2 ~ 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.

19.

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

Discounted cash flows Fair value Net present value Cost

Correct answer: d Learning Objective 11.2 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

11.6

Chapter 11: Intangible assets

20.

According to AASB 138 Intangible Assets, activities undertaken in the ‘research’ phase of the generation of an asset may include: a. *b. c. d.

the application of knowledge to a design for the production of new materials. original and planned investigation with the prospect of gaining new scientific knowledge. the use of research findings to create a substantially improved product. using knowledge to materially improve a manufacturing device.

Correct answer: b Learning Objective 11.2 ~ 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.

21.

Lewis 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 2014: researcher’s salary $5000, research consumables $3000, re-development of the detecting equipment $4000 and final adjustments to the detecting equipment $2500. The amount to be capitalised by this company as an intangible asset, for the 2014 financial year, is: *a. b. c. d.

$6500. $8000. $11 500. $14 500.

Correct answer: a Learning Objective 11.2 ~ 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.

22.

Renouf 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 during the year ended 30 June 2014: research salaries $50 000; research materials $30 000; re-development of the extrusion plant $400 000; 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 2014, is: a. b. *c. d.

$30 000. $50 000. $80 000. $425 000.

Correct answer: c Learning Objective 11.2 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

11.7

Testbank to accompany Company Accounting 10e

23.

AASB 138 Intangible Assets, requires that an intangible asset with a finite life: *a. b. c. d.

be amortised across its useful life. be amortised across a period of no greater than 20 years. not be amortised in periods when it is been properly maintained. not be subject to amortisation charges.

Correct answer: a Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

24.

Under AASB 138 Intangible Assets, an intangible asset with an indefinite useful life is: a. *b. c. d.

not able to be recognised as an asset. not subject to annual amortisation charges. amortised using the straight-line method over a period of no more than 20 years. amortised using the reducing balance method over a period not exceeding 5 years.

Correct answer: b Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

25.

When subsequent expenditure on intangible assets are incurred, the costs are: a. b. c. *d.

debited to the retained earnings account. transferred to a revaluation reserve account. capitalised as part of the cost of the asset. immediately expensed, rather than being capitalised.

Correct answer: d Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

26.

Subsequent to initial recognition of an intangible asset, an entity may choose to measure the asset using either the: a. b. *c. d.

gross model or revaluation model. cost model or cash flow model. cost model or revaluation model. net model or gross model.

Correct answer: c Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

© John Wiley & Sons Australia, Ltd 2015

11.8

Chapter 11: Intangible assets

27.

Which of the following statements is incorrect? a. b. *c. d.

Intangible assets are to be derecognised when there are no expected future benefits from the asset.

Amortisation of an intangible with a finite useful life does not cease when the asset becomes temporarily idle.

Amortisation of an intangible with a finite useful life ceases when the asset is retired from active use.

Gains or losses on disposal are calculated as the difference between the proceeds on disposal and the carrying amount at point of sale.

Correct answer: c Learning Objective 11.4 ~ explain the accounting for retirement and disposal of intangible assets.

28.

AASB 138 Intangible Assets, requires that which of the following items each be disclosed separately? a. b. *c. d.

The opening balance of each intangible.

The closing balance of each intangible.

Any impairment losses reversed in profit or loss during the period.

All amounts of intangibles acquired during the period.

Correct answer: c Learning Objective 11.5 ~ apply the disclosure requirements of AASB 138.

29.

Which of the following is a technique proposed by the Initial Accounting for Internally Generated Intangible Assets Discussion Paper to account for internally generated intangibles? a. b. *c. d.

Hypothetical market value method Substituted future value method Hypothetical business combination method Future benefit method

Correct answer: c Learning Objective 11.6 ~ discuss changes to AASB 138 proposed in the AASB Discussion Paper (2008).

© John Wiley & Sons Australia, Ltd 2015

11.9

Testbank to accompany Company Accounting 10e

30.

Which of the following is not a component of human capital? a. *b. c. d.

Creativity Corporate reputation Employee loyalty Education

Correct answer: b Learning Objective 11.7 ~ discuss innovative suggestions for improving the reporting of intangible assets.

© John Wiley & Sons Australia, Ltd 2015

11.10

Chapter 11: Intangible assets

True/false questions 31.

Physical form is not essential to the existence of an asset.

The statement is true. Items are regarded as assets if future economic benefits are expected to flow from them to the enterprise and if they are controlled by the enterprise. Intangible assets are defined by AASB 138 as identifiable non-monetary assets without physical substance.

Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

32.

Customer service capability does not qualify for recognition as an intangible asset because it does not meet the identifiability criterion.

The statement is true. Customer service capability is an example of an asset that does not meet the identifiability criterion because it cannot be divided from other assets and transferred to another party.

Learning Objective 11.1 ~ describe the key characteristics of an intangible asset.

33.

If the cost of an intangible asset cannot be measured reliably but the fair value can be determined, under AASB 138 Intangible Assets it can be recognised.

The statement is false. AASB 138 requires that an intangible asset be initially measured at cost. If cost cannot be reliably measured the asset cannot be recognised in the financial statements.

Learning Objective 11.2 ~ 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.

34.

If an intangible asset is allocated to an entity via a government grant, it can initially be recognised at fair value.

The statement is true. AASB 120 Accounting for Government Grants and Disclosure of Government Assistance allows an entity to choose to initially recognise both the intangible asset and the grant at fair value.

Learning Objective 11.2 ~ 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.

35.

The recognition criteria for intangible assets under AASB 138 Intangible Assets is that same as in AASB 116 Property, Plant and Equipment.

The statement is true. In order to be recognised, for both tangible and intangible assets it must be probable that future economic benefits will flow to the entity and the cost of the asset must be able to be reliably measured.

Learning Objective 11.2 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

11.11

Testbank to accompany Company Accounting 10e

36.

When an intangible asset is separately acquired, the probability test will always be met as the price paid for the asset automatically takes into account the probability of the expected benefits being received.

The statement is true. This comment is made in paragraph 25 of AASB 138 Intangible Assets.

Learning Objective 11.2 ~ 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.

37.

Goodwill may only be recognised as an intangible asset when it is acquired as part of a business combination.

The statement is true. Paragraph 49 of AASB 138 Intangible Assets states that internally generated goodwill cannot be recognised as an asset.

Learning Objective 11.2 ~ 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.

38.

Intangible assets acquired in a business combination may be initially recognised at fair value.

The statement is true. An intangible asset, under AASB 138 Intangible Assets, must be initially recognised at cost. However, in accordance with AASB 3 Business Combinations, for intangible assets acquired under a business combination, the cost is the fair value at acquisition date.

Learning Objective 11.2 ~ 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.

39.

Amounts spent on intangible assets cannot be capitalised if they have previously been expensed.

The statement is true. The capitalisation of past expenditure as assets at a later date is prohibited under AASB 138 Intangible Assets.

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

40.

Subsequent expenditures on intangibles may be capitalised as part of the cost of the intangible item.

The statement is false. Subsequent expenditures are considered to maintain rather than to increase the future economic benefits from intangible assets. As a result, according to paragraph 20 of AASB 138 Intangible Assets, they are required to be expensed as incurred.

© John Wiley & Sons Australia, Ltd 2015

11.12

Chapter 11: Intangible assets

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

41.

Subsequent to initial recognition, AASB 138 Intangible Assets allows intangible assets to be measured under the cost model or revaluation model.

The statement is true. However, intangible assets can only be measured under the revaluation model where the fair value can be determined by reference to an active market. In practice it is rare for an active market to exist for intangibles, so most intangibles are measured under the cost model on an ongoing basis.

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

42.

Where an intangible asset has an indefinite useful life, there is no amortisation expense recorded.

The statement is true. Intangible assets with indefinite useful lives are subject to annual impairment testing.

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

43.

In general, the principles of amortisation of intangible assets are the same as those for depreciating property, plant and equipment.

The statement is true. For both amortisation and depreciation, the process involves the allocation of the depreciable amount on a systematic basis over the useful life, with the method chosen reflecting the pattern in which the expected benefits are expected to be consumed by the entity.

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

44.

When determining the depreciable amount of an intangible asset with a finite useful life, the residual value is always assumed to be zero.

The statement is false. There may be a residual value for an intangible where there is a commitment from a third party to purchase the asset at the end of its useful life or there is an active market for the asset.

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

45.

The factors that should be considered in determining the useful life of an intangible asset includes the expected use of the asset by the entity and whether the asset could be managed efficiently by another management team.

© John Wiley & Sons Australia, Ltd 2015

11.13

Testbank to accompany Company Accounting 10e

The statement is true. Other factors include typical product life cycles for the asset, the stability of the industry and expected actions by competitors.

Learning Objective 11.3 ~ explain how to measure intangibles subsequent to initial recognition, including the principles relating to the amortisation of intangibles.

46.

Amortisation of an intangible with a finite useful life does not cease when the asset becomes temporarily idle or is retired from active use.

The statement is true. This is confirmed in paragraph 117 of AASB 138 Intangible Assets.

Learning Objective 11.4 ~ explain the accounting for retirement and disposal of intangible assets.

47.

AASB 138 Intangible Assets requires that disclosures for each class of intangibles be distinguished from other disclosures.

The statement is true. This is a requirement of paragraph 118 of AASB 138 Intangible Assets.

Learning Objective 11.5 ~ apply the disclosure requirements of AASB 138.

48.

The 2008 Discussion Paper on intangible assets published by the AASB proposes dividing internally generated intangibles into planned and unplanned assets.

The statement is true. This is one of the three alternative techniques proposed in the Discussion Paper. The other techniques are using a hypothetical business combination or the use of indicators.

Learning Objective 11.6 ~ discuss changes to AASB 138 proposed in the AASB Discussion Paper (2008).

49.

Financial statements do not recognise any attempts by management to increase the human capital of the organisation.

The statement is true. Such items do not meet the recognition criteria for classification as an intangible and are not reported in financial statements.

Learning Objective 11.7 ~ discuss innovative suggestions for improving the reporting of intangible assets.

50.

Physical capital is a separate component of intellectual capital.

The statement is false. The three components of intellectual capital are human capital, relational capital and structural capital.

Learning Objective 11.7 ~ discuss innovative suggestions for improving the reporting of intangible assets.

© John Wiley & Sons Australia, Ltd 2015

11.14

Chapter 12: Business combinations

Chapter 12: Business combinations Multiple-choice questions 1.

A business combination is defined in AASB 3 as a transaction: a. b. *c. d.

in which an acquiree obtains control of one or more businesses. in which one entity obtains significant influence over one or more other entities. or other event in which an acquirer obtains control of one or more businesses. or other event in which an entity obtains control of one or more businesses.

Correct answer: c Learning Objective 12.1 ~ discuss the nature of a business combination and its various forms.

2.

In a business combination, the acquirer is the entity that: *a. b. c. d.

obtains control of the acquiree. concedes control over the acquired entities. sells the acquired entity. the acquire obtains control of in a business combination.

Correct answer: a Learning Objective 12.2 ~ explain the basic steps in the acquisition method of accounting for business combinations.

3.

In a business combination, the acquiree is the business that: a. *b. c. d.

finances the business combination. the acquirer obtains control of in a business combination. obtains control of the acquiree. pays the acquisition consideration.

Correct answer: b Learning Objective 12.2 ~ explain the basic steps in the acquisition method of accounting for business combinations.

© John Wiley & Sons Australia, Ltd 2012

10.1

Testbank to accompany Company Accounting 10e

4.

The date on which the acquirer obtains control of the acquiree is referred to as the: a. *b. c. d.

business combination date. acquisition date. control date. purchase date.

Correct answer: b Learning Objective 12.2 ~ explain the basic steps in the acquisition method of accounting for business combinations.

5.

Under AASB 3 Business Combinations, the required method of accounting for a business combination is the: a. *b. c. d.

control method. acquisition method. purchase method. combination method.

Correct answer: b Learning Objective 12.2 ~ explain the basic steps in the acquisition method of accounting for business combinations.

6.

Where the acquirer purchases the assets and assumes the liabilities of another entity, it does not need to consider the measurement of: a. b. *c. d.

the liabilities assumed. the identifiable assets. the equity of the acquiree. goodwill or a gain from bargain purchase.

Correct answer: c Learning Objective 12.3 ~ account for a business combination in the records of the acquirer.

7.

According to the Conceptual Framework, recognition of an asset occurs if it is probable that future economic benefits will flow to the entity and: *a. b. c. d,

it has a value that can be measured with reliability. it is a non-current asset. it has a value that can be measured with certainty. it is a current asset.

Correct answer: a Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

© John Wiley & Sons Australia, Ltd 2015

12.2

Chapter 12: Business combinations

8.

The two types of contingent liabilities are: a. *b. c. d.

current obligations and non-current obligations. present obligations and possible obligations. present obligations and impossible obligations. future obligations and possible obligations.

Correct answer: b Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

9.

Which of the following is an example of asset recognised by the acquirer as part of a business combination but that is not recognised by the acquiree? a. b. c. *d.

Inventory Land and buildings Prepaid insurance Internally generated brands

Correct answer: d Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

10.

The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at measurement date is defined in AASB 3 Business Combinations as the: a. *b. c. d.

market value. fair value. present value. current replacement cost.

Correct answer: b Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

11.

Which of the following is an example of a contract-based intangible asset? *a. b. c. d.

Franchise agreements Patented technology Trademarks Pictures and photographs

Correct answer: a Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

© John Wiley & Sons Australia, Ltd 2015

12.3

Testbank to accompany Company Accounting 10e

12.

The cost approach to determining fair value involves: *a. b. c. d.

determining an amount which reflects the amount currently needed to replace the service capacity of an asset. using prices generated by market transactions involving identical or comparable assets or liabilities. converting future amounts such as cash flows to a current, discounted amount. none of the above.

Correct answer: a Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

13.

How many input levels does AASB 13 Fair Value Measurement identify for the inputs to the valuation techniques? a. b. c. *d.

2 6 4 3

Correct answer: d Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

14.

According to AASB 3 Business Combinations, the appropriate accounting treatment for the costs of issuing shares by the acquirer as part of a business combination is to record them as a debit to: *a. b. c. d.

share capital. share issue reserve. retained earnings. acquisition expenses.

Correct answer: a Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

© John Wiley & Sons Australia, Ltd 2015

12.4

Chapter 12: Business combinations

15.

Goodwill arising in a business combination is classified as a/an: a. *b. c. d.

item in equity. asset. liability. expense associated with the acquisition.

Correct answer: b Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

16.

According to Johnson and Petrone (1998), which of the following is not a component of goodwill? a. b. *c. d.

Overpayment by the acquirer.

Overvaluation of the consideration paid by the acquirer.

Excess of the book values over the fair values of the acquiree’s recognised assets.

Excess of the fair values over the book values of the acquiree’s recognised assets.

Correct answer: c Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

17.

Ying Limited acquires the net assets of Yang Limited for a cash consideration of $50 000. One half is to be paid on acquisition date and one half is payable in one year’s time. The appropriate discount rate is 5% p.a. The present value of the cash outflow in one year’s time is: *a. b. c. d.

$23 810. $25 000. $26 190. $30 000.

Correct answer: a Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

© John Wiley & Sons Australia, Ltd 2015

12.5

Testbank to accompany Company Accounting 10e

18.

Under AASB 3 Business Combinations, a gain on bargain purchase arises when the acquirer’s interest in the net fair value of the acquiree’s identifiable assets and liabilities is: a. b. *c. d.

less than the carrying amount of the net assets acquired. less than the consideration transferred. greater than the consideration transferred. more than the book values of the identifiable assets acquired.

Correct answer: c Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

19.

Maroons Limited acquired the net assets and contingent liabilities of Lewis Limited for $60 000. Lewis Limited's net assets and contingent liabilities were: total assets $84 000; total liabilities $10 000; and contingent liabilities $12 000. Maroons Limited will record a: a. *b. c. d.

goodwill of $2000. gain on bargain purchase of $2000. goodwill of $14 000. gain on bargain purchase of $60 000.

Correct answer: b Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

20.

Bellvista Limited acquired the net assets and contingent liabilities of Aroona Limited for a purchase consideration of $600 000. Aroona Limited's net assets and contingent liabilities at fair value were: total assets $840 000; total liabilities $300 000; and contingent liabilities $100 000. The amount of goodwill to be recognised by Bellvista Limited when recording the business combination is: *a. b. c. d.

$160 000. $260 000. $400 000. $440 000.

Correct answer: a Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

© John Wiley & Sons Australia, Ltd 2015

12.6

Chapter 12: Business combinations

21.

Cockroaches Limited acquired the identifiable assets, liabilities and contingent liabilities of Inglis Limited for $268 000. The items acquired, stated at fair value, are: plant $144 000; inventory $80 000; accounts receivable $36 000; patents $20 000; and accounts payable $32 000. The difference on acquisition is: a. b. *c. d.

gain on bargain purchase $20 000. gain on bargain purchase $32 000. goodwill of $20 000. goodwill of $248 000.

Correct answer: c Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

22.

Suncorp Limited acquired a 15% interest in Milton Pty Ltd on 1 January 2014. On 15 September 2014 it acquired an additional 25% interest, and on 15 March 2015 a further 15%. Under AASB 3, a business combination occurs on: a. b. *c. d.

1 January 2014.

15 September 2014.

15 March 2015. all of the above.

Correct answer: c Learning Objective 12.6 ~ account for shares acquired in the acquiree.

23.

Core goodwill consists of: a. *b. c. d.

current goodwill and non-current goodwill. going concern goodwill and combination goodwill. current goodwill and future goodwill. present goodwill and future goodwill.

Correct answer: b Learning Objective 12.6 ~ account for shares acquired in the acquiree.

© John Wiley & Sons Australia, Ltd 2015

12.7

Testbank to accompany Company Accounting 10e

24.

Apha Limited acquired the net assets of Beta Limited. Alpha Limited provided an item of equipment as part of the consideration. The fair value of the equipment was $26 000.

It cost $40 000 and had a carrying amount of $24 000. Which of the following entries appropriately reflects the gain or loss on the equipment? a. b. *c. d.

DR CR CR Dr

Loss on sale Loss on sale Gain on sale Gain on sale

$2000 $2000 $2000 $2000.

Correct answer: c Learning Objective 12.7 ~ prepare the accounting records of the acquiree.

25.

The owners of Emily Limited sold the business to Georgia Limited. At acquisition date, the business had an item of plant which cost $70 000 and had accumulated depreciation of $24 000. The liquidation journal entry is which of the following? a.

*b.

c.

DR Liquidation CR Plant

$70 000

DR Liquidation DR Accumulated depreciation CR Plant

$46 000 $24 000

DR Plant

$46 000

$70 000

$70 000

CR Liquidation d.

DR Plant DR Accumulated depreciation CR Liquidation

$46 000 $46 000 $24 000 $70 000

Correct answer: b Learning Objective 12.7 ~ prepare the accounting records of the acquiree.

26.

When an acquiree liquidates, the accounts of the acquiree are transferred to which two accounts? a. *b. c. d.

Share capital and retained earnings Liquidation and shareholders’ distribution Cash at bank and liquidation Shareholders’ distribution and retained earnings

Correct answer: b Learning Objective 12.7 ~ prepare the accounting records of the acquiree.

© John Wiley & Sons Australia, Ltd 2015

12.8

Chapter 12: Business combinations

27.

Which of the following statements is incorrect? a.

Goodwill cannot be revalued. *b. Goodwill is subject to amortisation. c.

Goodwill is not subject to amortisation. d.

AASB 138 Intangible Assets does not allow the recognition of internally generated goodwill.

Correct answer: b Learning Objective 12.8 ~ account for subsequent adjustments to the initial accounting for a business combination.

28.

Which of the following statements in relation to contingent consideration is incorrect? a. b. *c. d.

At acquisition date, contingent consideration is measured at fair value.

Where the contingent consideration is classified as equity, there is no remeasurement required on settlement.

Subsequent adjustments to contingent consideration affect the goodwill calculated at acquisition date.

Changes in the amount of an expected cashflow where the contingent consideration represents a liability that is within the scope of AASB 137 are accounted for through profit and loss.

Correct answer: c Learning Objective 12.8 ~ account for subsequent adjustments to the initial accounting for a business combination.

29.

Appendix B of AASB 3 Business Combinations requires disclosure of which of the following?

I. II. III. IV.

Details of contingent consideration.

The date of exchange.

Carrying amounts of assets and liabilities in business combinations where shares are acquired.

A qualitative description of the factors that make up goodwill.

a. *b. c. d.

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

Correct answer: b Learning Objective 12.9 ~ apply the disclosures required under AASB 3.

© John Wiley & Sons Australia, Ltd 2015

12.9

Testbank to accompany Company Accounting 10e

30.

The information contained within Appendix B of AASB 3 Business Combinations in relation to disclosure: *a. b. c. d.

is an integral part of AASB 3 containing application guidance. is not mandatory, but contains optional additional disclosures. contains prescribed presentation formats for disclosure of business combinations. is complementary to the main disclosure requirements within the body of AASB 3.

Correct answer: a Learning Objective 12.9 ~ apply the disclosures required under AASB 3.

© John Wiley & Sons Australia, Ltd 2015

12.10

Chapter 12: Business combinations

True/false questions 31.

For a group of assets to constitute a business, they must be capable of providing a return.

The statement is true. In order to provide a return, a business will normally consist of inputs, processes and outputs.

Learning Objective 12.1 ~ discuss the nature of a business combination and its various forms.

32.

The acquirer in a business combination is the party that loses control of a business.

The statement is false. The acquirer is the entity that obtains control of the acquiree.

Learning Objective 12.2 ~ explain the basic steps in the acquisition method of accounting for business combinations.

33.

The acquisition date is the date on which the contract between the acquirer and acquire is signed.

The statement is false. The acquisition date is the date on which the acquirer obtains control of the acquiree.

Learning Objective 12.2 ~ explain the basic steps in the acquisition method of accounting for business combinations.

34.

The use of estimates when measuring the fair values of assets results that the measures are unreliable.

The statement is false. The use of estimates simply means that the measure may involve uncertainty, but does not mean the measure is unreliable.

Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

35.

Newspaper mastheads are an example of a marketing-related intangible asset.

The statement is true. Other examples of marketing-related intangible assets are trademarks, and internet domain names.

Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

36.

Fair value is determined in the first instance by reference to observable prices in an active market for identical assets or liabilities.

The statement is true. This is the first level in the AASB 13 fair value hierarchy.

Learning Objective 12.4 ~ recognise and measure the assets acquired and liabilities assumed in the business combination.

© John Wiley & Sons Australia, Ltd 2015

12.11

Testbank to accompany Company Accounting 10e

37.

For a deferred payment, the fair value to the acquirer is the amount the entity would have to borrow to settle the debt in the future.

The statement is false. For a deferred payment, the fair value to the acquirer is the amount the entity would have to borrow to settle the debt immediately.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

38.

Property, plant and equipment and investments are both examples of monetary assets.

The statement is false. Property, plant and equipment and investments are examples of nonmonetary assets.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

39.

In a business combination, equity instruments issued as part of the purchase consideration should be measured at their original issue price.

The statement is false. The equity instruments should be measured at their fair value as at the acquisition date.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

40.

Acquisition-related costs associated with a business combination, such as professional fees paid to accountants, legal advisers and other consultants, are considered part of the cost of acquisition.

The statement is false. Such acquisition related costs are treated as an expense in the periods in which they are incurred and the services are received.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

41.

Where equity instruments are issued as part of the consideration in a business combination, any costs associated with issuing such equity instruments are included as part of the cost of the business combination.

The statement is false. Such costs should be treated as a reduction in the share capital of the entity in accordance with AASB 132 Financial Instruments: Presentation. This is because such costs reduce the proceeds from the equity issue.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

© John Wiley & Sons Australia, Ltd 2015

12.12

Chapter 12: Business combinations

42.

At the date of acquisition, goodwill is measured as the excess of the consideration transferred over the net fair value of the identifiable assets acquired and liabilities assumed.

The statement is true. Goodwill is a residual, after the acquirer’s interest in the identifiable tangible assets, intangible assets, and liabilities of the acquiree is recognised.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

43.

In respect to a business combination, a gain on bargain purchase arises where the acquirer’s interest in the net fair value of the identifiable assets and liabilities acquired is greater than the consideration transferred by the acquirer to the acquiree.

The statement is true. A gain on bargain purchase arises where the acquirer’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the consideration transferred in the business combination.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

44.

A gain on bargain purchase is recognised in profit or loss in the year it arises.

The statement is true. Such gains are rare and are only recognised after reassessments of fair values are made.

Learning Objective 12.5 ~ discuss the nature of and the accounting for goodwill and gain from bargain purchase.

45.

In a business combination achieved in stages, the acquirer shall remeasure its previously held equity interest in the acquiree at its acquisition-date fair value and recognise the resulting gain or loss, if any, in profit or loss or other comprehensive income.

The statement is true. This the required process of accounting for a step acquisition as per paragraph 42 of AASB 3 Business Combinations.

Learning Objective 12.6 ~ account for shares acquired in the acquiree.

46.

Where an acquiree liquidates, the balance of the Shareholders’ Distribution account is transferred to the Liquidation account.

The statement if false. The balance of the Liquidation account is transferred to the Shareholders’ Distribution account.

Learning Objective 12.7 ~ prepare the accounting records of the acquiree.

47.

When the acquirer buys only shares in the acquiree, there are no entries in the records of the acquiree.

© John Wiley & Sons Australia, Ltd 2015

12.13

Testbank to accompany Company Accounting 10e

The statement is true. When the acquirer buys only shares in the acquiree, there are no entries in the records of the acquiree because the transaction is between the acquirer and the shareholders of the acquiree entity. The acquiree itself is not involved.

Learning Objective 12.7 ~ prepare the accounting records of the acquiree.

48.

AASB 3 Business Combinations requires an acquiree to go into liquidation in the event of a business combination.

The statement is false. An acquiree may continue to exist as an entity subsequent to a business combination, or may go into liquidation Learning Objective 12.7 ~ prepare the accounting records of the acquiree.

49.

Subsequent to initial recognition, goodwill acquired under a business combination may be revalued.

The statement is false. Any goodwill acquired under a business combination cannot be revalued because AASB 138 Intangible Assets does not allow the recognition of internally generated goodwill.

Learning Objective 12.8 ~ account for subsequent adjustments to the initial accounting for a business combination.

50.

AASB 3 Business Combinations requires disclosure of ‘a qualitative description of the factors that make up goodwill recognised, such as expected synergies from combining operations of the acquiree and the acquirer, intangible assets that do not qualify for separate recognition or other factors’.

The statement is true. Goodwill is not to be considered just a residual calculation.

Learning Objective 12.9 ~ apply the disclosures required under AASB 3.

© John Wiley & Sons Australia, Ltd 2015

12.14

Testbank to accompany Company Accounting 10e

Chapter 13: Impairment of assets Multiple-choice questions 1.

The amount by which the carrying amount of an asset or a cash-generating unit exceeds its carrying amount is referred to as a/an: a. b. *c. d.

depreciation expense. amortisation cost. impairment loss. loss on disposal.

Correct answer: c Learning Objective 13.1 ~ explain the purpose of the impairment test for assets.

2.

Under AASB 136 Impairment of Assets, which of the following assets are subject to impairment testing?

Financial assets Biological assets measured at fair value less costs to sell Deferred acquisition costs Property, plant and equipment a.

I b.

II *c. III d.

IV

I. No Yes No No

II. No Yes Yes Yes

III. No No No Yes

IV. No No Yes No

Correct answer: c Learning Objective 13.1 ~ explain the purpose of the impairment test for assets.

3.

An impairment test is conducted only: a. b. *c. d.

at each balance date. every three years. when there is evidence that assets have been impaired. at each reporting date including interim reporting dates such as half-year.

Correct answer: c Learning Objective 13.2 ~ assess when to undertake an impairment test.

© John Wiley & Sons Australia, Ltd 2015

13.2

Chapter 13: Impairment of assets

4.

Which of the following assets need to be tested for impairment every year?

I II III IV

Intangible assets with indefinite useful lives Intangible assets not yet available for use Internally generated goodwill Goodwill acquired in a business combination

a. b. *c. d.

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

Correct answer: c Learning Objective 13.2 ~ assess when to undertake an impairment test.

5.

Which of the following is an internal source of information that may be used to indicate if an asset is impaired? *a. b. c. d.

Economic performance of the asset Market capitalisation Interest rates Asset’s value

Correct answer: a Learning Objective 13.2 ~ assess when to undertake an impairment test.

6.

Value in use is: *a. b. c. d.

the present value of future cash flows expected to be derived from an asset or cash-generating unit. amount obtainable from disposal of an asset excluding any selling costs. initial cost of an asset less any expected disposal costs. incremental costs directly attributable to disposal of an asset.

Correct answer: a Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

© John Wiley & Sons Australia, Ltd 2015

13.3

Testbank to accompany Company Accounting 10e

7.

The impairment test involves comparing the asset’s: a. *b. c. d.

carrying amount with its fair value. carrying amount with its recoverable amount. fair value with its residual value. fair value with its replacement cost.

Correct answer: b Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

8.

According to AASB 136 Impairment of Assets, the recoverable amount of an asset or cash-generating asset is the: a. b. c. *d.

lower of its fair value less costs of disposal and its value in use. higher of its fair value less costs of disposal and its value in exchange. lower of its fair value less costs of disposal and its value in exchange. higher of its fair value less costs of disposal and its value in use.

Correct answer: d Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

9.

Holly Limited estimated that it would receive future cash flows from the use of its equipment as follows. ➢ ➢ ➢

End of year 1 $25 000.

End of year 2 $40 000.

End of year 3 $15 000.

The discount rate was determined as 5%. The ‘value in use’ of the equipment is: a. $80 000. b. $76 190. *c. $73 047. d. $63 500.

Correct answer: c Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

© John Wiley & Sons Australia, Ltd 2015

13.4

Chapter 13: Impairment of assets

10.

When assessing the value in use of equipment the following estimates of cash flows and risk rates were made. In one year: $1000 at 4%; in 2 years $1000 at 4.5%, and in 3 years $1000 at 5%. The expected present value of the asset is: a. b. c. *d.

$3000. $2886. $2591. $2742.

Correct answer: d Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

11.

Bella Limited expected future cash flows from the use of equipment as follows: end of year 1 $1500; end of year 2 $4500; end of year 3 $7000. The discount rate was determined as 8%. The value in use of the equipment is: *a. b. c. d.

$10 804. $12 037. $13 000. $14 040.

Correct answer: a Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

12.

When an asset is measured at fair value, the appropriate journal entry to record an impairment loss will include which of the following entries? a. *b. c. d.

DR Asset DR Loss-downward revaluation of asset DR Revaluation increment DR Depreciation expense

Correct answer: b Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

© John Wiley & Sons Australia, Ltd 2015

13.5

Testbank to accompany Company Accounting 10e

13.

Where an asset is measured using the cost model, any impairment loss is: a. b. c. *d.

debited to the retained earnings account. debited to the depreciation expense account. credited to the asset account. credited to the accumulated depreciation and impairment losses account.

Correct answer: d Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

14.

Which of the following is an appropriate journal entry to recognise an impairment loss under the cost model? a.

DR Depreciation expense CR Impairment loss b. DR Retained earnings CR Asset revaluation (equity) *c. DR Impairment loss CR Accumulated depreciation & impairment losses d. DR Revenue CR Impairment loss Correct answer: c Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

15.

Under AASB 136 Impairment of Assets, impairment of an asset and the accounting treatment using the cost model are which of the following?

a.

b.

Impairment Accounting treatment Carrying amount of an asset is less Asset is written up to its recoverable amount than its recoverable amount Carrying amount of an asset is less No change to the asset value than its recoverable amount

*c. Carrying amount of an asset is greater than its recoverable amount

Asset is written down to its recoverable amount

d.

No change to the asset value

Carrying amount of an asset is greater than its recoverable amount

Correct answer: c Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

© John Wiley & Sons Australia, Ltd 2015

13.6

Chapter 13: Impairment of assets

16.

When an asset is measured using the revaluation model, any impairment loss is treated as: *a. b. c. d.

a revaluation decrement. a revaluation increment. a set-off against depreciation expense. an addition to depreciation expense.

Correct answer: a Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

17.

In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of: *a. b. c. d.

value in use and zero. present value and zero. cost and market value. initial cost and replacement cost.

Correct answer: a Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

18.

Kerri Limited recognised an impairment loss on an item of plant asset on the 30th June.

The recoverable amount of the asset after the loss is $900 and the asset has an estimated useful life of 4 years. Accumulated depreciation was $250 at that date and the straight line depreciation method is used. The original cost of the asset was $2500. The future annual depreciation amount is: a. *b. c. d.

$625. $225. $163. $400.

Correct answer: b Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

© John Wiley & Sons Australia, Ltd 2015

13.7

Testbank to accompany Company Accounting 10e

19.

If an impairment loss is recognised against an asset that has previously been revalued up to fair value, the impairment journal entry must include a reduction of the previously recorded: a. *b. c. d.

deferred tax asset. deferred tax liability. income tax payable. income tax expense.

Correct answer: b Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

20.

Gairdner Limited recognised an impairment loss of $50 000 against a cash-generating unit consisting of the following assets: buildings $500 000; roads $300 000; and equipment $600 000. The net carrying amount of the roads after allocation of the impairment loss is: a. b. *c. d.

$310 714. $278 571. $289 286. $282 143.

Correct answer: c Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

21.

The smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets is referred to as a/an: a. *b. c. d.

small-group unit. cash-generating unit. identifiable unit. independent unit.

Correct answer: b Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

© John Wiley & Sons Australia, Ltd 2015

13.8

Chapter 13: Impairment of assets

22.

Which of the following is not one of the guidelines in AASB 136 Impairment of Assets for identifying a cash-generating unit? a. b. *c. d.

Consider how management makes decisions about continuing or disposing of the entity’s assets and operations.

If the output of the group of assets can be sold internally, then these process can be used to measure the value in use of the group of assets.

If there is no active market for the output of the group of assets, the group constitutes a cash-generating unit.

Consider how management monitors the entity’s operations, such as by product lines, business, individual locations, districts or regional areas.

Correct answer: c Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

23.

Which of the following assets is incorrect? *a. b. c.

d.

Corporate assets should never be allocated to cash-generating units.

There are restrictions on how far a particular asset can be written down in the allocation process.

Where an impairment loss occurs in a cash-generating unit, and no goodwill exists, the impairment loss is allocated across the carrying amounts of the unit’s assets.

AASB 136 Impairment of Assets provides guidelines to help determine the cashgenerating units in an entity.

Correct answer: a Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

24.

Under AASB 136 Impairment of Assets, the impairment testing of goodwill occurs at the: a. *b. c. d.

level of the entity itself. lowest level at which goodwill is allocated to cash-generating units. combined segments level. operating division level.

Correct answer: b Learning Objective 13.5 ~ account for the impairment of goodwill.

© John Wiley & Sons Australia, Ltd 2015

13.9

Testbank to accompany Company Accounting 10e

25.

At reporting date, the carrying amount of a cash-generating unit was considered to be have been impaired by $1000. The unit included the following assets: land $5000; plant $4000; and goodwill $1250. The carrying amount of goodwill after the allocation of the impairment loss is: a. *b. c. d.

$0. $250. $3000. $4000.

Correct answer: b Learning Objective 13.5 ~ account for the impairment of goodwill.

26.

The impairment test for goodwill must be conducted: *a. b. c. d.

annually or more frequently if there is an indication the cash-generating unit may be impaired. on 1 January each year. once every three years at balance date. only if it is reasonable to expect that goodwill has been impaired.

Correct answer: a Learning Objective 13.5 ~ account for the impairment of goodwill.

27.

If the recoverable amount of a cash-generating unit exceeds its carrying amount: a. *b. c. d.

the carrying amount must be increased to the recoverable amount. there is no impairment loss. the carrying amount must be decreased to the fair value. there is an impairment loss.

Correct answer: b Learning Objective 13.5 ~ account for the impairment of goodwill.

28.

According to AASB 136 Impairment of Assets, which of the following indicators assist in providing external evidence that an impairment loss has reversed? a. b. *c. d.

Market interest rates have increased during the period.

Significant changes with an adverse effect on the entity have taken place.

Market interest rates have decreased during the period.

Internal reporting sources indicate that the economic performance of the asset will not be as good as expected.

Correct answer: c Learning Objective 13.6 ~ account for reversals of impairment losses.

© John Wiley & Sons Australia, Ltd 2015

13.10

Chapter 13: Impairment of assets

29.

During 2013, Langer Limited estimated that the carrying amount of goodwill was impaired and wrote it down by $100 000. In 2014, the company reassessed goodwill was decided that the old acquired goodwill still existed. The correct accounting treatment in 2014 is: a. b. *c. d.

reverse the previous goodwill impairment loss. decrease goodwill by an adjustment to retained earnings. ignore the reversal as it is prohibited by AASB 136 Impairment of Assets. increase goodwill by an adjustment to retained earnings.

Correct answer: c Learning Objective 13.6 ~ account for reversals of impairment losses.

30.

In relation to the impairment of assets, AASB 136 Impairment of Assets requires which of the following disclosures for each class of assets?

I II III IV

The line item(s) of the income statement in which impairment losses are included.

The amount of reversals of impairment losses on revalued assets.

The amount of impairment losses recognised in profit or loss.

The amount of impairment losses on revalued assets.

*a. b. c. d.

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

Correct answer: a Learning Objective 13.7 ~ apply the disclosure requirements of AASB 136.

© John Wiley & Sons Australia, Ltd 2015

13.11

Testbank to accompany Company Accounting 10e

True/false questions 31.

Deferred tax assets are subject to annual impairment tests.

The statement is false. AASB 136 Impairment of Assets does not apply to deferred tax assets.

Deferred tax assets are covered by AASB 112 Income Taxes.

Learning Objective 13.1 ~ explain the purpose of the impairment test for assets.

32.

Intangible assets that are not yet available for use are not required to be tested for impairment.

The statement is false. AASB 136 Impairment of Assets requires that intangible assets that are not yet available for use to be tested for impairment on an annual basis.

Learning Objective 13.2 ~ assess when to undertake an impairment test.

33.

A decrease in interest rates is an example of an external source of information that may indicate that an asset is impaired.

The statement is false. An increase in interest rates is an example of an external source of information that may indicate that an asset is impaired.

Learning Objective 13.2 ~ assess when to undertake an impairment test.

34.

Higher cash outflows and/or lower cash inflows expected from an asset are examples of internal sources of information that may indicate that an asset is impaired.

The statement is true. Both of these situations indicate that the asset’s economic performance is worse than expected.

Learning Objective 13.2 ~ assess when to undertake an impairment test.

35.

The recoverable amount of an asset is defined as the lower of the fair value less costs of disposal and value in use.

The statement is false. The recoverable amount of an asset is defined as the higher of the fair value less costs of disposal and value in use.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

36.

Where the carrying amount of an asset exceeds the fair value less costs of disposal, it is necessary to calculate the value in use of the asset to determine whether it is impaired.

The statement is true. The recoverable amount of an asset is defined as the higher of the fair value less costs of disposal and value in use. Even though the fair value less costs of disposal is lower than the carrying amount of the asset the value in use may be higher than the carrying amount — resulting in the asset being impaired.

© John Wiley & Sons Australia, Ltd 2015

13.12

Chapter 13: Impairment of assets

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

37.

Where the fair value less costs of disposal exceeds the carrying amount, it is necessary to calculate the value in use of the asset to determine whether it is impaired.

The statement is false. The recoverable amount of an asset is defined as the higher of the fair value less costs of disposal and value in use. In this case, regardless of whether the value in use was higher or lower than the fair value less costs of disposal the asset would not be impaired. Therefore it is not necessary to calculate the value in use.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

38.

Any costs arising after the sale of an asset are included in the disposal costs of that asset.

The statement is false. Any costs arising after the sale of an asset even if arising as a result of the sale, are not regarded as costs of disposal.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

39.

When calculating value in use, cash flow projections should cover a maximum period of three years.

The statement is false. Such cash flow projections should cover a maximum period of five years, unless a longer period can be justified.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

40.

When calculating value in use, cash inflows relating to financing activities and income tax must be excluded from the calculation.

The statement is true. As the discount rate used is a pre-tax rate, future cash flows must also be calculated on a pre-tax basis.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

41.

The discount rate used in the determination of the value in use of an asset may be selected from rates used for similar assets in the market.

The statement is true. The rate should reflect assumptions that are consistent with those inherent in the estimated cash flows.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

© John Wiley & Sons Australia, Ltd 2015

13.13

Testbank to accompany Company Accounting 10e

42.

Where an asset is measured using the cost model, any impairment loss is recognised immediately in profit and loss.

The statement is true. This is the required treatment under paragraph 60 of AASB 136 Impairment of Assets.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

43.

Where an asset is measured using the revaluation model, any impairment loss is recognised immediately in profit and loss.

The statement is false. Under the revaluation model, the impairment loss is treated as a revaluation decrement. As such, any previous increments relating to the asset are reversed with any excess being recognised in profit & loss.

Learning Objective 13.3 ~ explain how to undertake an impairment test for an individual asset.

44.

A cash generating unit is defined in AASB 136 Impairment of Assets as the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.

The statement is true. This is the definition of a cash generating unit in paragraph 6 of AASB 136.

Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

45.

If some or all of the output of a group of assets is used internally, the assets may still constitute a cash generating unit.

The statement is true. Even if some of the output of a group of assets is used internally, if the output could be sold externally, then these prices can be used to measure the value in use of the group of assets..

Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

46.

Cash-generating units should be identified consistently from period to period for the same group of assets.

The statement is true. This is one of the guidelines in AASB 136 Impairment of Assets for identifying a cash-generating unit.

Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

47.

Corporate assets are tested separately for impairment from other assets within an entity.

© John Wiley & Sons Australia, Ltd 2015

13.14

Chapter 13: Impairment of assets

The statement is false. Corporate assets do not generate independent cash flows and so cannot be tested for impairment separately. Instead they are allocated across the cash generating units of an entity and tested as part of the cash generating units.

Learning Objective 13.4 ~ identify a cash-generating unit, and account for an impairment loss for a cash-generating unit — not including goodwill.

48.

When a cash generating unit containing goodwill is impaired, the impairment loss is allocated on a pro-rata basis across all of the assets in the cash generating unit.

The statement is false. Under such circumstances, the impairment loss is first allocated against goodwill, with any excess being allocated on a pro-rata basis across the remaining assets in the cash generating unit.

Learning Objective 13.5 ~ account for the impairment of goodwill.

49.

AASB 136 Impairment of Assets prohibits the reversals of impairment losses relating to goodwill.

The statement is true. Impairment losses in relation to goodwill are unable to be reversed in future periods.

Learning Objective 13.6 ~ account for reversals of impairment losses.

50.

AASB 136 Impairment of Assets requires disclosures about estimates and judgements made in the impairment testing process.

The statement is true. This is because of the judgements required in measuring variables such as value in use.

Learning Objective 13.7 ~ apply the disclosure requirements of AASB 136.

© John Wiley & Sons Australia, Ltd 2015

13.15

Chapter 14: Disclosure: legal requirements and accounting polices

Chapter 14: Disclosure: legal requirements and accounting polices Multiple-choice questions 1.

Which type of financial statements is prepared for users who depend on them for information to enable them to make decisions about the allocation of scarce resources? a. b. c. *d.

Management financial statements Short-term financial statements Specific purpose financial statements General purpose financial statements

Correct answer: d Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

2.

Information about the financial position of an entity is largely contained in the: *a. b. c. d.

statement of financial position. statement of comprehensive income. statement of cash flows. directors’ report.

Correct answer: a Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

3.

A statement of financial position provides information about which of the following? a. b. c. *d.

Solvency Capacity to adapt Resources controlled All of the above

Correct answer: d Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

.

14.2

Testbank to accompany Company Accounting 10e

4.

The statement of profit or loss and other comprehensive income provides information relating to: a. *b. c. d.

financial position and the capacity of an organisation to adapt. financial performance. cash flows and the liquidity and solvency of an entity. the debt and equity structure of an entity.

Correct answer: b Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

5.

Information about how a company has financed its operations and invested surplus cash is found in the: a. b. d.

directors’ report. statement of profit or loss and other comprehensive income.*c. statement of cash flows. statement of financial position.

Correct answer: c Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

6.

According to the Corporations Act, a company is required to include which of the following financial statements in its annual financial report?

I II III IV V

Statement of profit or loss and other comprehensive income Statement of financial income Statement of financial position Statement of changes in equity Statement of cash flows

a. b. c. *d.

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

Correct answer: d Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

.

14.3

Chapter 14: Disclosure: legal requirements and accounting polices

7.

Which of the following statements is incorrect? a. b. c. *d.

Financial records must be retained for 7 years.

Financial records may be kept in any language.

A company can decide where to keep its financial records.

Financial records must be retained for 10 years.

Correct answer: d Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

8.

If a company is a small proprietary company, it must comply with accounting standards if directed to prepare an annual financial report by shareholders with at least: a. b. c. *d.

1% of the company’s votes.

2% of the company’s votes.

3% of the company’s votes.

5% of the company’s votes.

Correct answer: d Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

9.

The Corporations Act allows a company the right to prepare and send a concise report to members which consists of which of the following?

I. II. III. IV.

A concise financial report drawn up in accordance with accounting standards.

A directors’ report for the year.

An auditor’s statement.

A statement that the report is a concise report and that the full financial report and auditor’s report is available if requested.

a. b. c. *d.

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

Correct answer: d Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

.

14.4

Testbank to accompany Company Accounting 10e

10.

In the preparation of financial statements, it is necessary to present comparative information for: a. b. c. *d.

statement of profit or loss and other comprehensive income items only. statement of financial position items only. statement of cash flow items only. all amounts reported in the financial statements.

Correct answer: d Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

11.

Instead of sending each shareholder a full set of financial statements including notes and the directors’ and auditor’s reports to members, a company has a right to instead send: a. b. *c. d.

a notice that the report has been lodged with ASIC. a statement of financial position only. a concise report. an income statement and statement of financial position only.

Correct answer: c Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

12.

If in the directors’ opinion compliance with accounting standards will not provide a true and fair view, then a reporting entity must also provide: *a. b. c. d.

additional information in the notes. a concise financial report. a letter of explanation from the auditors. a letter of explanation from the most senior financial officer in the company.

Correct answer: a Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

.

14.5

Chapter 14: Disclosure: legal requirements and accounting polices

13.

Which of the following matters does an auditor of the financial report not have to form an opinion about? a. *b. c. d.

Whether the financial report gives a true and fair view.

Whether any financial statement fraud has occurred.

Whether the auditor has been given all information, explanation and assistance necessary for the conduct of the audit.

Whether the company has kept financial records sufficient to enable the financial report to be prepared and audited.

Correct answer: b Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

14.

The general information component of a Directors’ Report must contain which of the following information?

I. II. III. IV.

A review of operations and the results of operations.

The entity’s principal activities.

Likely future developments in the entity’s operations.

Whether the financial report is in accordance with the Corporations Act.

*a. b. c. d.

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

Correct answer: a Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

15.

Which of the following is not a type of specific information required to be included in a directors’ report? a. b. c. *d.

The name of each director and the period for which they were a director.

Dividends paid to shareholders during the year.

Details of options granted to any of the directors.

The name of the company’s auditor.

Correct answer: d Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

.

14.6

Testbank to accompany Company Accounting 10e

16.

Half yearly reports are required to be prepared by: a. *b. c. d.

small proprietary companies. disclosing entities. reporting entities. private companies.

Correct answer: b Learning Objective 14.3 ~ explain the nature of a disclosing entity and the legal requirements for half-year financial reporting.

17.

Which of the following is not required to be disclosed in an entity’s accounting policy note? a. b. *c. d.

That the financial statements are general purpose financial statements.

The measurement bases used in the preparation of the financial statements.

That the financial statements have been prepared on the going concern basis.

A description of the entity’s key accounting policies.

Correct answer: c Learning Objective 14.4 ~ describe how accounting policies and changes to accounting policies are disclosed in general purpose financial statements.

18.

If an accounting policy change is voluntary, which of the following disclosures is required

by AASB 108? a. b. c. *d.

The nature of the change.

The reasons that applying the new accounting policy provides reliable and more relevant information.

The amount of the adjustment relating to periods prior to those presented to the extent practicable.

All of the above.

Correct answer: d Learning Objective 14.4 ~ describe how accounting policies and changes to accounting policies are disclosed in general purpose financial statements.

.

14.7

Chapter 14: Disclosure: legal requirements and accounting polices

19.

Canetoads Ltd has discovered that the estimated useful life made on a material depreciable asset was incorrect due to a change in the way the asset was being used. The correct accounting treatment of this event is to: a. b. *c. d.

disclose the change in the notes to the financial statements. treat it as an error and adjust retrospectively. treat it as a change in an accounting estimate and adjust prospectively. treat it as a change in an accounting estimate and adjust retrospectively.

Correct answer: c Learning Objective 14.5 ~ describe how changes in accounting estimates are accounted for and disclosed in general purpose financial statements.

20.

Which of the following does not involve the use of estimates by an entity in preparing its financial statements? a. b. *c. d.

Doubtful debts expense Depreciation expense The original purchase price of an asset Employee benefit liabilities such as long-service leave

Correct answer: c Learning Objective 14.5 ~ describe how changes in accounting estimates are accounted for and disclosed in general purpose financial statements.

21.

The correction of a material error that occurred in a previous period must be accounted for by: a. b. c. *d.

disclosure in the notes to the financial statements. an adjustment in future accounting periods. a prospective adjustment to the financial statements. a retrospective restatement in the first financial statements issued after the discovery of the error.

Correct answer: d Learning Objective 14.6 ~ explain how prior period errors arise, and how they are accounted for and disclosed in general purpose financial statements.

.

14.8

Testbank to accompany Company Accounting 10e

22.

Errors can occur for which of the following reasons? a. b. c. *d.

Mistakes in applying accounting policies Misinterpretation of facts Fraud All of the above

Correct answer: d Learning Objective 14.6 ~ explain how prior period errors arise, and how they are accounted for and disclosed in general purpose financial statements.

23.

Correcting the recognition, measurement and disclosure of amounts of financial statement elements as if a prior period error had never occurred is known as: a. *b. c. d.

historical restatement. retrospective restatement. retrospective application. prior period application.

Correct answer: b Learning Objective 14.7 ~ explain the requirements when it is impracticable to make retrospective adjustments for changes in accounting policies or correction of errors.

24.

In determining whether an item is material, consideration must be given to: a. *b. c. d.

its size only. both its size and nature. its nature only. none of the above.

Correct answer: b Learning Objective 14.8 ~ describe the concept of materiality and how material items are identified.

.

14.9

Chapter 14: Disclosure: legal requirements and accounting polices

25.

Which of the following statement is correct? a. b. c. *d.

Extensive guidance is given in accounting standards on the concept of materiality.

The disclosure provisions of accounting standards must always be applied even if the resulting information is immaterial.

Materiality only depends only ever depends on the size of an item.

The disclosure provisions of accounting standards do not need to be applied if the resulting information is immaterial.

Correct answer: d Learning Objective 14.8 ~ describe the concept of materiality and how material items are identified.

26.

According to AASB 108, omissions or misstatements are material if they: a. b. *c. d.

are greater than 50% of the relevant base amount. are as a result of fraud. could influence the economic decisions that users make on the basis of the financial statements. are less than 10% of the relevant base amount.

Correct answer: c Learning Objective 14.8 ~ describe the concept of materiality and how material items are identified.

27.

The financial statements of an entity are authorised for issue on: *a. b. c. d.

the day the directors’ declaration is signed.

30 June each year. the last day of the financial year. the day the auditor’s report is signed.

Correct answer: a Learning Objective 14.9 ~ explain the difference between types of events occurring after the end of the reporting period and how they are to be treated in the financial statements.

.

14.10

Testbank to accompany Company Accounting 10e

28.

Events occurring after the end of the reporting period which provide evidence of conditions that existed at the end of the reporting period are known as: a. b. *c. d.

non-adjusting events. reporting events. adjusting events. disclosing events.

Correct answer: c Learning Objective 14.9 ~ explain the difference between types of events occurring after the end of the reporting period and how they are to be treated in the financial statements.

29.

A company’s workforce went on strike for an indefinite period commencing on 5 August 2014. The strike was expected to cause severe financial conditions for the company. The financial statements for the year ended 30 June 2014 were expected to be finalised by 7 August 2014. In accordance with AASB 110 Events after the Reporting Period, the appropriate treatment regarding this event is: *a. b. c. d.

disclosure as a note to the financial statements, as it is a non-adjusting event. disclosure as a note to the financial statements, as it is an adjusting event. to adjust the financial statements, as it is a non-adjusting event. to adjust the financial statements, as it is an adjusting event.

Correct answer: a Learning Objective 14.9 ~ explain the difference between types of events occurring after the end of the reporting period and how they are to be treated in the financial statements.

30.

Prior to the finalisation of the financial statements for the year ended 30 June 2014, a company experienced a number of material events, including: I II III

on 10 July 2014 the directors decided to close a division of the company at an estimated cost of $1 000 000. on 10 August 2014 a court decision found the company liable to pay damages of $500 000 to a major customer who had commenced legal action in April 2012. an independent valuation of property conducted on 20 July 2014 revealed that the directors’ valuation included in the 30 June 2014 financial statements was overstated by $700 000.

In respect of the events listed above, it will be necessary to adjust the financial statements, by way of general journal entries, for: a. b. c.

I, II and III. II only, and make a note disclosure for I and III. III only, and make a note disclosure for I and II.

.

14.11

Chapter 14: Disclosure: legal requirements and accounting polices

*d.

II and III only, and make a note disclosure for I.

Correct answer: d Learning Objective 14.9 ~ explain the difference between types of events occurring after the end of the reporting period and how they are to be treated in the financial statements.

.

14.12

Testbank to accompany Company Accounting 10e

True/false questions 31.

General purpose financial statements are prepared for users who depend on those reports for information to enable them to make decisions about the allocation of scarce resources.

The statement is true. Examples of such decisions include whether to invest in, lend to, purchase from or sell to the reporting entity.

Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

32.

The financial position of an entity as at reporting date is presented in a statement of comprehensive income.

The statement is false. Information about financial position is largely contained in the statement of financial position.

Learning Objective 14.1 ~ discuss the objectives of general purpose financial statements and the definitions of financial performance and financial position.

33.

A complete set of financial statements will include a report on the entity’s environmental activities.

The statement is false. A complete set of financial statements includes the following documents only: statement of financial position; statement of profit or loss and comprehensive income; statement of changes in equity; and statement of cash flows.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

34.

Attached to the financial statements must be a set of notes providing disclosures required by corporate regulations and accounting standards.

The statement is true. The notes must also contain additional information necessary so that the financial statements and notes for the year provide a true and fair view of the company’s financial position and performance.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

35.

Under the Corporations Act, directors have a choice of providing either a directors’ declaration or a directors’ report to accompany a set of annual financial statements.

The statement is false. Both a directors’ statement and declaration must accompany a set of annual financial statements.

.

14.13

Chapter 14: Disclosure: legal requirements and accounting polices

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

36.

Compliance with AASB accounting standards automatically results in meeting the Corporations Act requirements in relation to presenting a true and fair view in financial reports.

The statement is false. In cases where management is of the opinion that compliance with an accounting standard will not present a true and fair view, departure is allowed, providing adequate note disclosures are made in the financial statements.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

37.

AASB 1048 Interpretation of Standards gives all IFRIC Interpretations the same status as AASB standards.

The statement is true. All IFRIC and AASB Interpretations have the same standing as AASB standards as a result of AASB 1048.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

38.

Comparative information in respect of all previous periods for all amounts reported in the financial statements must be provided.

The statement is false. Comparative information for only the previous financial year must be presented alongside the current year’s information.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

39.

Small proprietary companies are not required to prepare a directors’ report to accompany their financial statements.

The statement if false. The exemption only applies in the case where the shareholders have directed the company to prepare the financial statements, and subsequently waive the requirement for a director’s report.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

40.

When conducting an audit of financial statements, an auditor must give an opinion on the existence of fraud in the company’s financial statements.

.

14.14

Testbank to accompany Company Accounting 10e

The statement is false. The auditor is not required to provide an opinion on the existence of fraud, rather whether the financial report gives a true and fair view.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

41.

In addition to the annual financial statements, companies have the right to choose to prepare and distribute concise financial reports to members.

The statement is true. Companies do not have to prepare a concise financial report, but many choose to do so.

Learning Objective 14.2 ~ discuss the legislative requirements for preparation of a company’s annual reports so as to comply with accounting standards and provide a true and fair view.

42.

Disclosing entities must prepare a half year financial report in accordance with AASB 134 Interim Financial Reporting.

The statement is true. Only disclosing entities are required to prepare half year financial reports.

Learning Objective 14.3 ~ explain the nature of a disclosing entity and the legal requirements for half-year financial reporting.

43.

Companies must always disclose the fact that their financial statements are prepared using the going concern assumption.

The statement is false. Disclosure of the going concern assumption is only required if there is material uncertainty about the company’s ability to continue as a going concern.

Learning Objective 14.4 ~ describe how accounting policies and changes to accounting policies are disclosed in general purpose financial statements.

44.

An entity is not permitted to change its accounting policies.

The statement is false. Changes in accounting policies may be due to either the adoption of a new accounting standard or a voluntary change in accounting policies.

Learning Objective 14.4 ~ describe how accounting policies and changes to accounting policies are disclosed in general purpose financial statements.

45.

If there are difficulties in distinguishing between a change in an accounting estimate and a change in an accounting policy, the change must be treated as a change in an accounting estimate.

The statement is true. This is required under paragraph 35 of AASB 108.

.

14.15

Chapter 14: Disclosure: legal requirements and accounting polices

Learning Objective 14.5 ~ describe how changes in accounting estimates are accounted for and disclosed in general purpose financial statements.

46.

If a mistake in applying an accounting policy is discovered in a subsequent period, that mistake must be corrected retrospectively.

The statement is true. An error, omission or misstatement in the financial statements that is discovered in a subsequent period must be corrected retrospectively by restating the comparative amounts if the error occurred in the previous financial period, or by restating the relevant opening balances for the earliest prior period presented in the financial statements .

Learning Objective 14.6 ~ explain how prior period errors arise, and how they are accounted for and disclosed in general purpose financial statements.

47.

Material prior period errors must be corrected retrospectively, unless it is impracticable to do so.

The statement is true. Where it is impracticable to restate retrospectively, then restatement must be made on a prospective basis.

Learning Objective 14.7 ~ explain the requirements when it is impracticable to make retrospective adjustments for changes in accounting policies or correction of errors.

48.

The assessment of materiality is a matter of judgement in light of the reporting entity’s particular circumstances.

The statement is true. To assess whether items are material, their size and nature are normally considered together, although it is possible for items to be deemed material purely on the basis of either their size or nature.

Learning Objective 14.8 ~ describe the concept of materiality and how material items are identified.

49.

Adjusting events are indicative of conditions that arose after the end of the reporting period.

The statement is false. Adjusting events provide evidence of conditions that existed at the end of the reporting period.

Learning Objective 14.9 ~ explain the difference between types of events occurring after the end of the reporting period and how they are to be treated in the financial statements.

50.

The date at which financial statements are authorised for issue is the date on which the shareholders approve the financial statements at an annual meeting.

.

14.16

Testbank to accompany Company Accounting 10e

The statement is false. The date at which the financial statements are authorised for issue is the day the directors’ declaration is signed.

Learning Objective 14.9 ~ explain the difference between types of events occurring after the end of the reporting period and how they are to be treated in the financial statements.

.

14.17

Testbank to accompany Company Accounting 10e

Chapter 15: Disclosure: presentation of financial statements Multiple-choice questions 1.

The requirements of AASB 101 Presentation of Financial Statements apply to which of the following sets of financial statements? a. b. *c. d.

Condensed interim financial statements All purpose financial statements General purpose financial statements Special purpose financial statements

Correct answer: c Learning Objective 15.1 ~ describe what constitutes a complete set of financial statements.

2.

According to AASB 101 Presentation in Financial Statements, there must be consistency of presentation and classification of items in the financial statements from one period to the next unless: *a. b. c. d.

a change in presentation or classification is required by another accounting standard. there has been a minor change in the entity’s operations. the directors approve the change in presentation or classification. the auditors approve the change in presentation or classification.

Correct answer: a Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

3.

Which of the following is not required to be displayed prominently in the financial statements? a. *b. c. d.

Whether the financial statements cover the individual entity or a group of entities.

The names of the company’s major competitors.

The level of rounding used in the presentation of amounts in the financial statements.

The currency used in the financial statements.

Correct answer: b Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

© John Wiley & Sons Australia, Ltd 2015

15.2

Chapter 15: Disclosure: presentation of financial statements

4.

AASB 101 Presentation of Financial Statements requires that a financial report: a. *b. c. d.

does not need to include the reporting period or date. must include the name of the entity. always be prepared as if the company is not a going concern. be prepared on the cash basis of accounting.

Correct answer: b Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

5.

Assets and liabilities, and income and expenses are not to be offset unless: a. b. *c. d.

they are financial assets and liabilities. they are in respect of borrowing and lending activities such as interest revenue and interest expense. required or permitted by an Australian accounting standard. the auditors approve the offset.

Correct answer: c Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

6.

Asset, liability and equity items are summarised in the: a. b. *c. d.

statement of profit or loss and other comprehensive income. statement of financial performance. statement of financial position. statement of changes in equity.

Correct answer: c Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

7.

Which of the following items are disclosed on the face of a statement of financial position as line items? a. b. c. *d.

Finance costs Cost of sales Interest revenue Biological assets

Correct answer: d Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.3

Testbank to accompany Company Accounting 10e

8.

According to AASB 101 Presentation of Financial Statements, a required format for the presentation of a statement of financial position is: a. *b. c. d.

not prescribed and no guidance is provided in the standard. not prescribed but guidance is provided in the standard for a suitable format. prescribed by the standard. prescribed by the Corporations Act.

Correct answer: b Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

9.

Which of the following is not required to be disclosed in the statement of financial position as a line item? a. b. *c. d.

Property, plant and equipment Provisions Accrued audit fees Deferred tax liabilities

Correct answer: c Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

10.

Which of the following items must be presented as a line item on the face of a statement of financial position? *a. b. c. d.

Trade and other receivables Sales revenue Cost of goods sold Share of profit of subsidiaries

Correct answer: a Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

11.

Which of the following items are not permitted to be disclosed as separate line items on the face of the statement of financial position? a. b. c. *d.

Investment property Cash and cash equivalents Deferred tax assets Share of profit of associates

Correct answer: d Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.4

Chapter 15: Disclosure: presentation of financial statements

12.

An entity is required to classify its assets and liabilities as current or non-current unless it is considered more relevant to present them according to their: a. *b. c. d.

fair value. liquidity. age. function.

Correct answer: b Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

13.

The time between the acquisition of assets for processing and their realisation into cash or cash equivalents is known as the: a. b. *c. d.

acquisition cycle. payment cycle. operating cycle. realisation cycle.

Correct answer: c Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

14.

Which of the following statements is incorrect? a. b. c. *d.

Current assets are those assets that are realised or consumed within an entity’s operating cycle.

For entities with diverse operations, such as retail and banking activities, a mixed basis of presentation may be appropriate.

An entity’s operating cycle is usually 12 months but may be longer than 12 months after the reporting period.

An entity is permitted to classify deferred tax assets as current assets.

Correct answer: d Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.5

Testbank to accompany Company Accounting 10e

15.

The following are normally presented in a statement of financial position as current items: a. *b. c. d.

deferred tax liabilities. accounts payable. deferred tax assets. property, plant and equipment.

Correct answer: b Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

16.

Classes of property, plant and equipment do not include which of the following? a. b. *c. d.

Office equipment Furniture and fittings Inventories Land and buildings

Correct answer: c Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

17.

AASB 101 Presentation of Financial Statements requires disclosure of which of the following for each class of share capital? a. b. c. *d.

Par value per share.

The number of shares authorised.

The rights, preferences and restrictions attached to that class.

All of the above.

Correct answer: d Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

18.

According to AASB 101 Presentation of Financial Statements, a required format for the presentation of the statement of profit or loss and other comprehensive income is: a. b. *c. d.

prescribed by the Corporations Act. not prescribed and no guidance is provided in the standard for a suitable format. not prescribed but guidance is provided in the standard for a suitable format. prescribed by the standard and further details are found in the Corporations Act.

Correct answer: c Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.6

Chapter 15: Disclosure: presentation of financial statements

19.

Profit or loss is the total of income less expenses: a. b. *c. d.

including the items of other comprehensive income. excluding abnormal items. excluding the items of other comprehensive income. excluding extraordinary items.

Correct answer: c Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

20.

AASB 101 Presentation of Financial Statements, requires which of the following items to be disclosed separately on the face of the statement of profit or loss and other comprehensive income?

I II III IV V VI VII

Cost of sales Revenue Finance costs Share of the profit or loss from associates Audit and non-audit fees Total other comprehensive income Profit or loss

a. b. *c. d.

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

Correct answer: c Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

21.

Interest and other costs incurred by an entity in connection with borrowing funds are known as: a. b. *c. d.

extraordinary costs. distribution costs. borrowing costs. repayment costs.

Correct answer: c Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.7

Testbank to accompany Company Accounting 10e

22.

Extraordinary items of income and expense: a. b. c. *d.

must be disclosed in the statement of profit or loss and other comprehensive income. were previously disclosed together with the entity’s normal trading activities. must be disclosed in the notes to the financial statements. are prohibited from being disclosed either in the statement of profit or loss and other comprehensive income or in the notes.

Correct answer: d Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

23.

Which of the following items must be presented as a separate line item on the face of a statement of profit or loss and other comprehensive income? a. *b. c. d.

Cost of sales Share of profit or loss of associates and joint ventures Wages and salaries expense Share of profit or loss of subsidiaries

Correct answer: b Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

24.

Categorising expenses as distribution costs and administration expenses is an example of which classification method? a. *b. c. d.

Nature of expense method Function of expense method Purpose of expense method None of the above

Correct answer: b Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

25.

The term ‘finance costs’ is synonymous with: a. b. c. *d.

advances from lenders. loans payable. non-current liabilities. interest expense.

Correct answer: d Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.8

Chapter 15: Disclosure: presentation of financial statements

26.

Under AASB 101 Presentation of Financial Statements, profit or loss attributable to noncontrolling interests is required to be disclosed in: a. b. *c. d.

an equity statement. a statement of financial position. a statement of profit or loss and other comprehensive income. a statement of cash flows.

Correct answer: c Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

27.

Which of the following items are included in a statement of changes in equity?

I II III IV V

Opening and closing balances.

Total comprehensive income for the period.

Gains or losses not recognised in the statement of profit or loss and other comprehensive income.

New share issues.

Dividends paid.

a. b. c. *d.

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

Correct answer: d Learning Objective 15.5 ~ explain the information to be presented either in the statement of changes in equity or in the notes.

28.

A reporting entity must disclose somewhere in the financial report, which of the following items of information?

I. II. III. IV.

The legal residence and form of the entity.

The name and location of the stock exchange on which the entity’s securities are traded.

The address of the registered office.

The country of incorporation.

a. b. c. *d.

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

Correct answer: d Learning Objective 15.6 ~ list the information required by AASB 101 to be presented in the notes.

© John Wiley & Sons Australia, Ltd 2015

15.9

Testbank to accompany Company Accounting 10e

29.

Which of the following is not an example of an assumption that must be disclosed under AASB 101 Presentation of Financial Statements when future-oriented estimates are necessary to measure the recoverable amount of assets? a. b. c. *d.

Useful lives Future interest rates Future changes in salaries Future bad debts

Correct answer: d Learning Objective 15.6 ~ list the information required by AASB 101 to be presented in the notes.

30.

Which of the following statements is not correct in relation to corporate social responsibility (CSR) reporting? a.

*b. c. d.

Social responsibility is the responsibility of an organisation for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour.

There has been a decline in the number of Australian companies presenting information on socially responsible activities.

Currently there are no accounting standards requiring CSR reporting by Australian companies.

It is likely that CSR reporting will continue to be driven by community concerns with global warming and the impact of company activities on the environment.

Correct answer: b Learning Objective 15.7 ~ explain the future developments in financial reporting, including extensible business reporting language (XBRL) and corporate social responsibility (CSR).

© John Wiley & Sons Australia, Ltd 2015

15.10

Chapter 15: Disclosure: presentation of financial statements

True/false questions 31.

The requirements of AASB 101 Presentation of Financial Statements apply to both general purpose financial statements and condensed interim financial statements.

The statement is false. The structure and content requirements relating to condensed interim financial statements are contained in AASB 134 Interim Financial Statements.

Learning Objective 15.1 ~ describe what constitutes a complete set of financial statements.

32.

According to AASB 101 Presentation of Financial Statements, a complete set of financial statements only comprises a statement of financial position, statement of profit or loss and other comprehensive income and a statement of cash flows.

The statement is false. A complete set of financial statements also includes a statement of changes in equity and notes to the financial statements.

Learning Objective 15.1 ~ describe what constitutes a complete set of financial statements.

33.

A financial report must include a statement of compliance with Australian Accounting Standards.

The statement is true. AASB 1054 requires entities to make an explicit and unreserved statement of compliance with Australian Accounting Standards in the notes to the financial statements.

Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

34.

Recording a trade receivables balance net of an allowance for doubtful debts is an example of offsetting.

The statement is false. This is not an example of offsetting, per paragraph 33 of AASB 101, rather an example of measuring an asset net of a valuation allowance. Offsetting includes gains and losses on the disposal of a non-current asset.

Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

35.

An entity must present a complete set of financial statements at least annually.

The statement is true. In some cases, instead of using a financial year-end of 30 June, entities prefer to report for a 52-week period.

Learning Objective 15.2 ~ describe the eight general features of a complete set of financial statements.

36.

One of the primary objectives of the statement of financial position is to provide information about an entity’s financial position including its assets, liabilities and equity.

© John Wiley & Sons Australia, Ltd 2015

15.11

Testbank to accompany Company Accounting 10e

The statement is true. The statement of financial position is the prime source of information about an entity’s financial position because it summarises the elements directly related to the measurement of financial position: assets, liabilities and equity.

Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

37.

Current assets are those assets that are realised or consumed within an entity’s operating cycle.

The statement is true. The operating cycle is the time between the acquisition of assets for processing and their realisation into cash or cash equivalents.

Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

38.

AASB 101 Presentation of Financial Statements requires entities to use the current/non-current method of classifying assets and liabilities in the statement of financial position.

The statement is false. AASB 101 allows the liquidity format of presentation to be used where this format is appropriate to provide more relevant and reliable information Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

39.

AASB 101 Presentation of Financial Statements requires each class of share capital to be separately disclosed on the face of the statement of financial position.

The statement is false. Entities have the choice of making such disclosures on the face of the statement of financial position, or in the notes to the financial statements.

Learning Objective 15.3 ~ explain the information to be presented either in the statement of financial position or in the notes.

40.

All items of income and expense that arise during a financial period must be included in profit or loss.

The statement is false. There are certain items of income or expense that are required to be reported directly in equity, e.g. changes in a revaluation surplus. These items are not included in the determination of the profit or loss that arose during a financial period. Instead, the balance of equity is directly adjusted.

Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

41.

Revenue arises from a company’s ordinary activities.

© John Wiley & Sons Australia, Ltd 2015

15.12

Chapter 15: Disclosure: presentation of financial statements

The statement is true. Examples of revenue include sales of goods, fees, interest, dividends and royalties.

Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

42.

Items of income and expense can be disclosed as extraordinary items in the notes to the financial statements.

The statement is false. Items of income and expense are prohibited from being disclosed as extraordinary items, either in the statement of profit or loss and other comprehensive income or in the notes.

Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

43.

AASB 101 Presentation of Financial Statements requires a single statement approach be adopted in the preparation of the statement of profit or loss and other comprehensive income.

The statement is false. AASB 101 allows the choice of a single statement or dual statement approach.

Learning Objective 15.4 ~ explain the information to be presented either in the statement of profit or loss and other comprehensive income or in the notes.

44.

A statement of changes in equity provides details of the changes in an entity’s net assets.

The statement is true. A statement of changes in equity provides details of an entity’s total income and expenses plus details of those items recognised directly in equity.

Learning Objective 15.5 ~ explain the information to be presented either in the statement of changes in equity or in the notes.

45.

The amount of dividends recognised as distributions to shareholders must be disclosed in the statement of changes in equity.

The statement is false. Dividends can either be disclosed in the statement of changes in equity or in the notes.

Learning Objective 15.5 ~ explain the information to be presented either in the statement of changes in equity or in the notes.

46.

The notes are an integral part of the financial statements.

The statement is true. Without the notes, a set of financial statements is incomplete. Their objective is to enhance the understandability of the statement of financial position, statement of profit or loss and other comprehensive income, statement of cash flows and statement of changes in equity.

© John Wiley & Sons Australia, Ltd 2015

15.13

Testbank to accompany Company Accounting 10e

Learning Objective 15.6 ~ list the information required by AASB 101 to be presented in the notes.

47.

Auditor remuneration only includes amount paid or payable to the auditor in relation to an audit or review of the entity’s financial statements.

The statement is false. Auditor remuneration includes both audit or review fees and fees paid for all other services performed by the auditor during the reporting period.

Learning Objective 15.6 ~ list the information required by AASB 101 to be presented in the notes.

48.

AASB 101 Presentation of Financial Statements requires entities to disclose within the financial statements a description of the nature of the entity’s operations and principal activities.

The statement is true. Other disclosures required about a company’s basic details include: the legal residence and form of the entity; its country of incorporation; the address of its registered office; and the name of its parent entity and the ultimate parent of the group.

Learning Objective 15.6 ~ list the information required by AASB 101 to be presented in the notes.

49.

The definition of ‘social responsibility’ also refers to government agencies and departments.

The statement is true. The definition has a broad context as it includes not only corporate entities, but other entities such as government agencies and departments at all levels (federal, state and local).

Learning Objective 15.7 ~ explain the future developments in financial reporting, including extensible business reporting language (XBRL) and corporate social responsibility (CSR).

50.

Although currently voluntary, it is likely that Corporate Social Responsibility (CSR) reporting will be regulated by the introduction of an accounting standard in the near future.

The statement is false. It is likely that CSR reporting will continue to be driven by community concerns with global warming and the impact of company activities on the environment rather than by the introduction of an accounting standard on the topic.

Learning Objective 15.7 ~ explain the future developments in financial reporting, including extensible business reporting language (XBRL) and corporate social responsibility (CSR).

© John Wiley & Sons Australia, Ltd 2015

15.14

Testbank to accompany Company Accounting 10e

Chapter 16: Disclosure: statement of cash flows Multiple-choice questions 1.

The statement of cash flows is not used to: a. b. c. *d.

assess the ability of an entity to generate cash. help predict future cash flows. check the accuracy of past assessments of future cash flows. indicate significant changes in asset, liability and equity accounts for the year.

Correct answer: d Learning Objective 16.1 ~ explain the benefits of cash flow information.

2.

All of the following items must be separately disclosed in the Statement of Cash Flows, except: a. b. c. *d.

dividends paid. dividends received. income taxes paid. auditor’s remuneration paid.

Correct answer: d Learning Objective 16.2 ~ describe the presentation format of the statement of cash flows.

3.

According to AASB 107 Statement of Cash Flows, which of the following items does not fall within the definition of cash? *a. b. c. d.

Accounts receivable.

Bank notes and coins.

Deposits on the short-term money market with a term of less than 3 months.

Non-bank bills that are readily convertible to cash.

Correct answer: a Learning Objective 16.3 ~ define the concept of cash that is used in the statement of cash flows.

4.

Which of the following items is classified as part of ‘operating activities’ in the Statement of Cash Flows? a. b. c. *d.

Bad debts expense.

Depreciation of non-current assets.

Proceeds from the sale of non-current assets.

Receipts from customers from the sale of goods.

Correct answer: d © John Wiley & Sons Australia, Ltd 2015

16.2

Chapter 16: Disclosure: statement of cash flows

Learning Objective 16.4 ~ classify inflows and outflows of cash into operating, investing and financing activities.

5.

Which of the following items is classified as part of ‘investing activities’ in the Statement of Cash Flows? a. b. *c. d.

Depreciation of non-current assets.

Income taxes paid.

Acquisition of non-current assets.

Proceeds from an issue of shares.

Correct answer: c Learning Objective 16.4 ~ classify inflows and outflows of cash into operating, investing and financing activities.

6.

Operating activities in a Statement of Cash Flows are generally associated with: a. *b. c. d.

changes in equity of an entity. revenues and expenses of an entity. acquisitions of non-current assets of an entity. movements in non-current liabilities of an entity.

Correct answer: b Learning Objective 16.4 ~ classify inflows and outflows of cash into operating, investing and financing activities.

7.

Items classified as financing activities on an entity’s Statement of Cash Flows are usually associated with: a. b. c. *d.

disposal of non-current assets. purchase of shares by the entity. sales of goods and services by the entity. movements in non-current liabilities and equity.

Correct answer: d Learning Objective 16.4 ~ classify inflows and outflows of cash into operating, investing and financing activities.

8.

Which of the following items is classified as a ‘financing activity’ in the Statement of Cash Flows? *a. b. c. d.

Cash payment on redemption of the company’s debentures.

Cash payment to purchase debentures of another entity.

Cash received from accounts receivable.

Impairment losses.

Correct answer: a © John Wiley & Sons Australia, Ltd 2015

16.3

Testbank to accompany Company Accounting 10e

Learning Objective 16.4 ~ classify inflows and outflows of cash into operating, investing and financing activities.

9.

A comprehensive method that reverses or adjusts the non-cash movements of each statement of financial position account in a spreadsheet is known as the: a. b. c. *d.

cash records approach. cash book approach. reconstruction of accounts approach. statement of financial position approach.

Correct answer: d Learning Objective 16.5 ~ outline the techniques for preparing a statement of cash flows and prepare a statement of cash flows by extracting relevant information from the cash book or cash records.

10.

Which of the following items would be presented in a Statement of Cash Flows? a. *b. c. d.

Refinancing of long-term debt.

Proceeds from the issue of debentures.

Payment of dividends through a share investment scheme.

Acquisition of an investment in a subsidiary for consideration consisting of an exchange of non-current assets and liabilities.

Correct answer: b Learning Objective 16.6 ~ prepare a statement of cash flows by deriving the cash flows from accrual accounting data using the reconstruction approach.

11.

The following information relating to Equipment was extracted from the records of Bright Skies Limited: Opening balance $360 000 Proceeds from sale of equipment $6000 Closing balance $400 000 Cost of equipment sold $40 000 Cost of new equipment $80 000 Carrying amount of equipment sold $ 10 000 The total cash flows from these investing activities is determined as: a. *b. c. d.

$40,000 cash outflow. $74,000 cash outflow. $76,000 cash outflow. $80,000 cash outflow.

Correct answer: b Learning Objective 16.6 ~ prepare a statement of cash flows by deriving the cash flows from accrual accounting data using the reconstruction approach.

© John Wiley & Sons Australia, Ltd 2015

16.4

Chapter 16: Disclosure: statement of cash flows

12.

XYZ Limited has the following ledger account balances: Income tax payable opening balance $47,000; closing balance $29,000. The amount of tax expense accrued at the end of the year was $22,000. The amount that has been paid during the year to the taxation authorities for incomes taxes is: a. b. *c. d.

$54,000. $22,000. $40,000. $98,000.

Correct answer: c Learning Objective 16.6 ~ prepare a statement of cash flows by deriving the cash flows from accrual accounting data using the reconstruction approach.

13.

During the financial year River Gums Limited had sales of $46,000. The opening balance of accounts receivable was $11,000 and the closing balance was $14,600. Bad debts amounting to $800 were written off during the period. The cash receipts from customers during the year amounted to: *a. b. c. d.

$41,600. $49,600. $43,200. $42,400.

Correct answer: a Learning Objective 16.6 ~ prepare a statement of cash flows by deriving the cash flows from accrual accounting data using the reconstruction approach.

14.

During the financial year, Henry Limited has a cost of sales amounting to $305,000.

Opening balances were: inventory $42,000; accounts payable $32,000. Closing balances were: inventory $47,000; accounts payable $24,000. A discount of $2,000 for prompt payment was received. The amount of cash paid for goods purchased during the year was: a. b. *c. d.

$320,000. $300,000. $316,000. $306,000.

Correct answer: c Learning Objective 16.6 ~ prepare a statement of cash flows by deriving the cash flows from accrual accounting data using the reconstruction approach.

15.

When presenting the reconciliation from profit to net cash from operating activities: a. b.

add increases in inventories. deduct increases in accounts payable. © John Wiley & Sons Australia, Ltd 2015

16.5

Testbank to accompany Company Accounting 10e

c. *d.

deduct loss on sale of equipment. add non-cash expenses such as depreciation.

Correct answer: d Learning Objective 16.8 ~ prepare a note disclosure to reconcile profit to net cash flows from operating activities.

16.

Scott Limited had a net profit after tax of $650,000 for the financial year. Included in this profit was: Depreciation expense $80 000 Gain on sale of investments $30 000 Decrease in inventories $15 000 Increase in Accounts receivable $35 000 The cash flow from operating activities during the year was: a. b. *c. d.

$580,000. $620,000. $680,000. $720,000.

Correct answer: c Learning Objective 16.8 ~ prepare a note disclosure to reconcile profit to net cash flows from operating activities.

17.

Howard Limited had profit of $33,000 during the financial year. Included in profit was a depreciation expense of $14,000. Across the year accounts receivable increased by $11,000 and accounts payable increased by $5,000. The amount of cash flow from operating activities is: a. b. *c. d.

$12,000. $30,000. $42,000. $60,000.

Correct answer: c Learning Objective 16.8 ~ prepare a note disclosure to reconcile profit to net cash flows from operating activities.

18.

Sunshine Limited had a profit after tax of $55,000 for the financial year. Included in this profit was a depreciation expense of $7,000 and a gain on sale of investments of $1,500. Accounts receivable increased by $2,800; inventories increased by $900 and accounts payable increased by $6,300. The cash flow from operating activities amounted to: *a. b. c.

$63,100. $57,900. $55,300. © John Wiley & Sons Australia, Ltd 2015

16.6

Chapter 16: Disclosure: statement of cash flows

d.

$46,900.

Correct answer: a Learning Objective 16.8 ~ prepare a note disclosure to reconcile profit to net cash flows from operating activities.

19.

The following information is required to be disclosed in a note to the statement of cash flows, except: a. *b. c. d.

details of the aggregate cash flows arising from the acquisition or disposal of businesses. details of the cash flows arising from the acquisition or disposal of non-current assets. details of non-cash transactions in relation to investing and financing activities if not disclosed elsewhere. an explanation of the composition of cash and cash equivalents including identification of any balances that are not available for use.

Correct answer: b Learning Objective 16.9 ~ prepare other required notes to the statement of cash flows.

20.

All of the following are limitations of the statement of cash flows, except: *a. financial ratios based on cash flow data are better at predicting financial distress for companies than other ratios that rely solely on accrual accounting balances. b. it provides past cash flow data, which may not be a good predictor of future cash flows. c. the direct method of determining cash flows from operating activities is more costly to apply than the indirect method. d. non-cash transactions and events while relevant to the financial affairs of the entity are excluded from the statement of cash flows.

Correct answer: a Learning Objective 16.11 ~ identify the limitations of the information contained in the statement of cash flows.

© John Wiley & Sons Australia, Ltd 2015

16.7

Chapter 17: Disclosure: translation of financial statements into a presentation currency

Chapter 17: Disclosure: translation of financial statements into a presentation currency Multiple-choice questions 1.

Which of the following statements is incorrect? a. b.

*c. d.

The relevant accounting standard applied in translating financial statements into another currency is AASB 121 The Effects of Changes in Foreign Exchange Rates.

The financial statements of an entity may be recorded in a foreign currency and translated into Australian dollars for the purpose of combining those statements with the financial statements of a related Australian company.

Not many companies in Australia have operations in both Australia and overseas locations.

The financial statements of an Australian company may be prepared in Australian dollars and translated into a foreign currency for presentation purposes.

Correct answer: c Learning Objective 17.1 ~ explain the purpose of translating the financial statements from one currency to another.

2.

The currency of the country in which the foreign operation is based is referred to as the: *a. b. c. d.

local currency. presentation currency. operational currency. functional currency.

Correct answer: a Learning Objective 17.2 ~ explain what a functional currency is, the rationale for choosing an entity’s functional currency and the factors used to determine an entity’s functional currency.

.

17.2

Testbank to accompany Company Accounting 10e

3.

The presentation currency is: a. b. c. *d.

the currency of the primary economic environment in which the foreign entity operates. a currency other than the entity’s functional currency . the currency of the country in which the foreign operation is based. the currency in which the financial statements are presented by the reporting entity.

Correct answer: d Learning Objective 17.2 ~ explain what a functional currency is, the rationale for choosing an entity’s functional currency and the factors used to determine an entity’s functional currency.

4.

According to AASB 121 The Effects of Changes in Foreign Exchange Rates, the key economic factor to consider in determining an entity’s functional currency is: a. b. *c. d.

which economic environment has the higher exchange rate. in which economic environment does the company incur the highest proportion of its production costs. which economic environment an entity primarily generates and spends cash. none of the above.

Correct answer: c Learning Objective 17.2 ~ explain what a functional currency is, the rationale for choosing an entity’s functional currency and the factors used to determine an entity’s functional currency.

5.

Indicators pointing towards the reporting entity’s currency as the functional currency include that which of the following? a. *b. c. d.

There are active local markets, although there may be significant amounts of exports.

Sales are mostly in the country of the reporting entity.

Prices are not primarily responsive in the short term to exchange rate changes.

Production costs and operating expenses are determined primarily by local conditions.

Correct answer: b Learning Objective 17.2 ~ explain what a functional currency is, the rationale for choosing an entity’s functional currency and the factors used to determine an entity’s functional currency.

.

17.3

Chapter 17: Disclosure: translation of financial statements into a presentation currency

6.

Which of the following is an additional question to be asked in determining whether a foreign entity’s functional currency is the same as that of the reporting entity? a. b. c. *d.

Are the transactions with the reporting entity a high or low proportion of the foreign operation’s activities?

Are the foreign operation’s activities carried out as an extension of the reporting entity, rather than being carried out with a significant degree of autonomy?

Do the cash flows from the foreign operation’s activities directly affect the reporting entity’s cash flows?

All of the above.

Correct answer: d Learning Objective 17.2 ~ explain what a functional currency is, the rationale for choosing an entity’s functional currency and the factors used to determine an entity’s functional currency.

7.

Where profits generated by the foreign operation are retained in the foreign entity and used for its expansion: a. *b. c. d.

the foreign operation’s currency is likely to be the presentation currency. the foreign operation’s currency is likely to be the functional currency. the reporting entity’s currency is likely to be the functional currency. the reporting entity’s currency is likely to be the presentation currency.

Correct answer: b Learning Objective 17.2 ~ explain what a functional currency is, the rationale for choosing an entity’s functional currency and the factors used to determine an entity’s functional currency.

8.

The method used to translate financial statements prepared in the functional currency into the presentation currency is known as the: a. b. *c. d.

temporal method. functional method. current rate method. presentation method.

Correct answer: c Learning Objective 17.3 ~ explain the two possible translation processes and the differences between the temporal method and the current rate method of translation.

.

17.4

Testbank to accompany Company Accounting 10e

9.

Assets and liabilities to be received or paid in a fixed or determinable number of units of money are referred to as: *a. b. c. d.

monetary items. fixed items. non-monetary items. fixed units.

Correct answer: a Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

10.

When translating into the functional currency, foreign currency denominated non-monetary assets measured at historical cost must be translated using the: a. b. *c. d.

spot rate at end of reporting period. average rate for the reporting period. exchange rate when the historical cost was determined. exchange rate when the historical cost was revalued to fair value.

Correct answer: c Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

.

17.5

Chapter 17: Disclosure: translation of financial statements into a presentation currency

11.

Aussie Ltd acquired 100% of Sing Sing Ltd (Sing Sing) on 1 July 20X0. The balance sheet of Sing Sing as at 30 June 20X1 was as follows.

Balance Sheet as at 30 June 20X1 S$ 300 000 400 000 500 000 600 000

Machinery- carrying value Investment property Receivables Cash

Share capital General Reserve Retained earnings Accounts payable Income tax payable

1 800 000

•

S$ 400 000 200 000 1 000 000 170 000 30 000 1 800 000

Relevant exchange rates are as follows.

A$ 1.00 1.00 1.00

1 July 20X0 30 June 20X1 Average 20X0-X1

= = =

S$ 1.15 1.25 1.22

If the local currency of Sing Sing is Singapore dollars and the functional currency is Australian dollars, the total assets of S$1 800,000 would translate into Australian dollars as: a. *b. c. d.

$1 565 217. $1 488 696. $1 440 000. $1 475 410.

Correct answer: b Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

12.

According to the temporal method, monetary assets are translated at the: a. *b. c. d.

average exchange rate for the reporting period. current rate existing at the end of the reporting period. exchange rate at the date the monetary assets were first recognised. exchange rate existing at the start of the reporting period.

Correct answer: b Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

.

17.6

Testbank to accompany Company Accounting 10e

13.

Post acquisition date retained earnings that are denominated in a foreign currency are: a. b. c. *d.

translated into the functional currency using the rate current at the latest end of reporting period. translated into the functional currency using the average rate since acquisition date. translated into the functional currency using the rates at the end of each year since acquisition date. balances carried forward from translation of previous statement of comprehensive income and do not need to be translated.

Correct answer: d Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

14.

When translating into the functional currency, monetary liabilities are translated using the: a. b. c. *d.

exchange rate current at the date the item was first recorded. exchange rate prevailing at the end of the last reporting period. average exchange rate for the reporting period. current exchange rate at the end of the reporting period.

Correct answer: d Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

15.

When translating foreign currency denominated financial statements into the functional currency, the exchange differences are recognised: *a. b. c. d.

in profit or loss in the period in which they arise. directly in the retained earnings account. as a deferred asset or liability and amortised over a period of 10 years. as a separate component of equity.

Correct answer: a Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

.

17.7

Chapter 17: Disclosure: translation of financial statements into a presentation currency

16.

If foreign currency denominated non-monetary assets are measured using the fair value method, they must be translated into the functional currency using the: *a. b. c. d.

exchange rate at the date when the assets were revalued. exchange rate current at the end of the reporting period. average exchange rate for the financial year. exchange rate at the original purchase date of the asset.

Correct answer: a Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

17.

Which exchange rate should be used when translating revenue and expense items in the statement of profit or loss and other comprehensive income into the functional currency? a. b. *c. d.

Current as at the end of the financial year.

Calculated as the average between the rates at the start and end of the year.

Current at the dates the applicable transaction occurred.

None of the above.

Correct answer: c Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

18.

By applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates, which of the following items will be regarded as a monetary item? a. b. c. *d.

Motor vehicles Inventory Machinery Cash

Correct answer: d Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

.

17.8

Testbank to accompany Company Accounting 10e

19.

The general rule for translating liabilities denominated in a foreign currency into the functional currency is to: a. b. *c. d.

translate all liabilities using the current rate existing at the end of the reporting period. first classify the liabilities into current or non-current. first classify the liabilities as monetary or non-monetary. translate all liabilities using the rate applicable when the original transaction was recorded.

Correct answer: c Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

20.

The exchange rate at a point of time for immediate delivery of the currency in an exchange is known as the: *a. b. c. d.

spot rate. point rate. immediate rate. temporal rate.

Correct answer: a Learning Objective 17.4 ~ translate a set of financial statements from local currency into the functional currency using the temporal method.

21.

When translating into the presentation currency, all assets and liabilities are translated using the: a. b. *c. d.

average exchange rate for the financial period. exchange rate applicable when the original transaction was recorded. exchange rate current at the date of the statement of financial position. exchange rate as at the start of the reporting period.

Correct answer: c Learning Objective 17.5 ~ translate financial statements from the functional currency into the presentation currency using the current rate method.

.

17.9

Chapter 17: Disclosure: translation of financial statements into a presentation currency

22.

Dividends declared are translated into the presentation currency at the: a. average exchange rate for the reporting period. *b. rates current when the dividends are declared. c. rates current when the dividends are paid to the shareholders. d. rates current when the shareholders approve the dividend at the company’s annual general meeting.

Correct answer: b Learning Objective 17.5 ~ translate financial statements from the functional currency into the presentation currency using the current rate method.

23.

Gairdner Limited has the following items in its statement of profit or loss and other comprehensive income for the year ended 30 June 20X4: Revenue FC120 000, Cost of goods sold FC50 000, Other expenses FC16 000, Income tax expense FC20 000.

All items were earned and incurred evenly across the year. The following exchange rates applied: End of reporting period FC1 = $0.1.45 Average rate for year FC1 = $0.1.40 The net profit after tax translated into the presentation currency is: *a. b. c. d.

$47 600. $24 286. $23 448. $49 300.

Correct answer: a Learning Objective 17.5 ~ translate financial statements from the functional currency into the presentation currency using the current rate method.

.

17.10

Testbank to accompany Company Accounting 10e

24.

When translating from the functional currency into the presentation currency, exchange differences arise because of which of the following? a. b. *c. d.

Opening net assets are translated at a closing rate different from the previous closing rate Income and expense items are translated at rates different from the closing rate used for all assets and liabilities Both a and b None of the above

Correct answer: c Learning Objective 17.5 ~ translate financial statements from the functional currency into the presentation currency using the current rate method.

25.

Exchange differences arising when translating from the functional currency into the presentation currency are recognised in other comprehensive income and: a. b. *c. d.

recorded as a deferred asset and amortised over the expected useful life. recognised in profit or loss. accumulated in equity using a ‘foreign currency translation reserve’. accumulated in equity using retained earnings.

Correct answer: c Learning Objective 17.5 ~ translate financial statements from the functional currency into the presentation currency using the current rate method.

26.

Translating from the functional currency to the presentation currency involves which of the following procedures? a. b. c. *d.

Recognise exchange differences in other comprehensive income.

Translate the income and expenses at the exchange rates at the dates of the transactions.

Translate the assets and liabilities at the closing rate at the date of the statement of financial position.

All of the above.

Correct answer: d Learning Objective 17.5 ~ translate financial statements from the functional currency into the presentation currency using the current rate method.

.

17.11

Chapter 17: Disclosure: translation of financial statements into a presentation currency

27.

If a reporting entity establishes a foreign operation, the equity used to form the foreign operation is the: *a. b. c. d.

pre-acquisition equity. foreign equity. reporting equity. post-acquisition equity.

Correct answer: a Learning Objective 17.6 ~ prepare the disclosures required by AASB 121 The Effects of Changes in Foreign Exchange Rates.

28.

Which of the following statements is incorrect? a. b. *c. d.

Movements in the foreign currency translation reserve must be disclosed.

Exchanges differences included in profit or loss must be disclosed.

There is no need to disclose if the presentation currency is different from the functional currency.

AASB 121 The Effects of Changes in Foreign Exchange Rates requires disclosures about the translation of financial statements into other currencies.

Correct answer: c Learning Objective 17.6 ~ prepare the disclosures required by AASB 121 The Effects of Changes in Foreign Exchange Rates.

29.

Which of the following must be disclosed when the presentation currency of the parent entity is different from the functional currency? a. b. c. *d.

The reason for using a different presentation currency The fact they are different The functional currency All of the above

Correct answer: d Learning Objective 17.6 ~ prepare the disclosures required by AASB 121 The Effects of Changes in Foreign Exchange Rates.

.

17.12

Testbank to accompany Company Accounting 10e

30.

Under AASB 121 The Effects of Changes in Foreign Exchange Rates, an entity must disclose which of the following items in particular?

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. a. b. *c. d.

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

Correct answer: c Learning Objective 17.6 ~ prepare the disclosures required by AASB 121 The Effects of Changes in Foreign Exchange Rates.

.

17.13

Testbank to accompany Company Accounting 10e

Chapter 18: Consolidation: controlled entities Multiple-choice questions 1.

The entity that is represented by a single set of consolidated financial statements is: *a. b. c. d.

an economic entity. a parent entity. a subsidiary entity. a consolidated entity.

Correct answer: a Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

2.

AASB 10 Consolidated Financial Statements defines a ‘parent’ and a ‘subsidiary’ as which of the following?

Parent a.

An entity which is controlled by another entity. b. An entity which owns more than 20% of the voting shares of another entity. c.

An entity that has one or more subsidiaries. *d. An entity that controls one or more entities.

Subsidiary An entity that controls one or more entities.

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.

Correct answer: d Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

3.

A single set of financial statements that combines the separate sets of financial statements for all entities within an economic entity, is known as: a. b. c. *d.

a concise financial report. a condensed financial report. combined financial statements. consolidated financial statements.

Correct answer: d Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

© John Wiley & Sons Australia, Ltd 2015

18.2

Chapter 18: Consolidation: controlled entities

4.

A group of entities comprised of Kerri Limited (parent entity), Georgia Limited (subsidiary entity) and Emily Limited (subsidiary entity) have the following inventory balances.

- Kerri Limited $41 000 - Georgia Limited $14 000 - Emily Limited $12 000 Which of the following amounts is shown as the consolidated inventory balance in the consolidated financial statements? a. b. c. *d.

$12 000 $14 000 $26 000 $67 000

Correct answer: d Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

5.

The process of preparing consolidated financial statements requires that: *a. b. c. d.

no adjustments be made to the individual financial statements or ledger accounts of the entities in the group. adjusting journal entries be recorded in the ledger accounts of the subsidiaries only. accruals of expenses and revenues be recorded directly into the retained earnings account of the parent entity. adjusting journal entries be recorded in the ledger accounts of the parent only.

Correct answer: a Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

6.

When one entity controls another entity, the business combination results in which of the following types of relationship? *a. b. c. d.

Parent–subsidiary Investor–investee Investor–associate Parent–child

Correct answer: a Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

© John Wiley & Sons Australia, Ltd 2015

18.3

Testbank to accompany Company Accounting 10e

7.

The process of preparing the combined financial statements of a group of entities is known as: a. b. c. *d.

aggregation. combination. accumulation. consolidation.

Correct answer: d Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

8.

The reasons for the preparation of consolidated financial statements include which of the following? a. b. c. *d.

Reporting of risks and benefits Comparable information Supply of relevant information All of the above

Correct answer: d Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

9.

For the purposes of consolidated financial reporting, a group is: a. *b. c. d.

an investor and its investees. a parent entity and all its subsidiaries. an entity that has one or more subsidiaries. an entity that is controlled by a parent.

Correct answer: b Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

10.

A subsidiary is an entity that: a. b. c. *d.

has significant influence over a parent entity. exercises control over a parent entity. has the power to control a parent entity. is controlled by another entity.

Correct answer: d Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

© John Wiley & Sons Australia, Ltd 2015

18.4

Chapter 18: Consolidation: controlled entities

11.

The key characteristic that determines when consolidated financial statements should be prepared is: a. *b. c. d.

the existence of transactions between the entities. control. substance over form. significant influence.

Correct answer: b Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

12.

In a consolidated group of entities, control over the subsidiaries in the group: *a. b. c. d.

may not be shared control. can be shared with other entities. requires 100% ownership of the subsidiaries’ shares. can exist where the rights are purely protective rights.

Correct answer: a Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

13.

According to AASB 10 Consolidated Financial Statements, which of the following factors indicate the existence of control?

I.

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 have significant influence over the operating policies of an entity so as to obtain benefits.

Ownership of more than 50% of the voting rights in the subsidiary.

a. *b. c. d.

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

II. III.

Correct answer: b Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

© John Wiley & Sons Australia, Ltd 2015

18.5

Testbank to accompany Company Accounting 10e

14.

The equity in a subsidiary not attributable to a parent is known as a/an: *a. b. c. d.

non-controlling interest. attributable interest. non-parent interest. external interest.

Correct answer: a Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

15.

Which of the following is not one of the three elements of control according to AASB 10 Consolidated Financial Statements? a. *b. c. d.

The ability to use power over the investee to affect the amount of the investor’s returns.

Dominating the decision making of the investee.

Power over the investee.

Exposure, or rights, to variable returns from involvement with the investee.

Correct answer: b Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

16.

In the context of control, which of the following is correct regarding rights? a. b. c. *d.

They must be protective rights.

They must arise from a legal contract.

They must arise as a result of future events.

They must be substantive rights.

Correct answer: d Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

17.

Rights to variable returns from an investee include: a. b. c. *d.

from economies of scale. remuneration from provision of services. returns from denying or regulating access to a subsidiary’s assets. all of the above.

Correct answer: d Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

© John Wiley & Sons Australia, Ltd 2015

18.6

Chapter 18: Consolidation: controlled entities

18.

At balance date, Company A has 40% of the voting rights in Company B. In addition Company A holds potential voting rights in Company B amounting to 6% that are currently exercisable, and a further 9% of voting rights in Company B that can be exercised in two years’ time. Which of the following statements is correct? a. *b. c. d.

Consolidated financial statements must be prepared for Company A and B in the current year.

Consolidated financial statements need not be prepared for Company A and B for the current year.

Consolidated financial statements must be prepared as Company A controls Company B at balance date.

Consolidated financial statements must be prepared as Company A has more than half of the voting rights in Company B at balance date.

Correct answer: b Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

19.

Eastpac Bank has lent Alexandra Ltd $500 000. Part of the loan contract prevents Alexandra from borrowing money in the future from other banks without the permission of Eastpac. As a result of this relationship: a. b. *c. d.

Eastpac Bank is regarded as a parent entity of Alexandra Limited.

Alexandra Limited is regarded as a subsidiary of Eastpac Bank. a parent–subsidiary relationship does not exist between these two parties. a parent–subsidiary relationship is regarded as existing between these two parties as Eastpac Bank is able to direct the relevant activities of Alexandra Limited.

Correct answer: c Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

20.

When deciding whether or not one entity controls another entity: a. *b. c. d.

the controlling entity must have exercised its power to control. it is sufficient that the controlling entity has the capacity to control. the controlling entity must be actively involved in the decision making of the other entity. the controlling entity must have exerted its control over the financing policies of the other entity.

Correct answer: b Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

© John Wiley & Sons Australia, Ltd 2015

18.7

Testbank to accompany Company Accounting 10e

21.

According to AASB 10 Consolidated Financial Statements, all parent entities are required to present consolidated statements unless which of the following conditions apply to them?

I II III IV

a. b. *c. d.

The parent is a wholly owned subsidiary.

The parent is a partly owned subsidiary and its other owners do not object to the non-presentation of consolidated financial statements.

The parent’s debt or equity securities are traded in a public market.

The parent is not in the process of applying to issue any securities in a public market.

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

Correct answer: c Learning Objective 18.3 ~ discuss which entities should prepare consolidated financial statements.

22.

Juliet Ltd is a listed public company and has an 60% controlling interest in Marley Pty Ltd. Marley Pty Ltd is the parent of Butterscotch Pty Ltd. In which of the following situations will Marley Pty Ltd not be required to prepare consolidated financial statements? a. *b. c. d.

If Marley Pty Ltd prepares separate financial statements that comply with IFRS. If the other owners of Marley Pty Ltd have consented to the non-preparation of consolidated financial statements.

Where it is likely that there are external users dependant on the information.

Marley Pty Ltd would never be required to prepare consolidated financial statements.

Correct answer: b Learning Objective 18.3 ~ discuss which entities should prepare consolidated financial statements.

© John Wiley & Sons Australia, Ltd 2015

18.8

Chapter 18: Consolidation: controlled entities

23.

Kowloon Limited is an entity listed in Hong Kong. Kowloon Limited holds a 100% investment in Aussie Pty Ltd, an Australian based company, who in turn holds a 90% interest in Skippy Pty Ltd. Aussie Pty Ltd and the Aussie group (comprising Aussie and Skippy) are both non-reporting entities. Which of the following statements is correct? a. *b. c. d.

Aussie Pty Ltd will be required to prepare consolidated financial statements as the ultimate Australian parent.

Aussie Pty Ltd will not be required to prepare consolidated financial statements as they are a non-reporting entity.

Aussie Pty Ltd will be required to prepare consolidated financial statements only if directed to do so by ASIC. Aussie Pty Ltd will not be required to prepare consolidated financial statements as Kowloon is a listed foreign entity.

Correct answer: b Learning Objective 18.3 ~ discuss which entities should prepare consolidated financial statements.

24.

Which of the following is not included in the definition of an investment entity as per IFRS 10 Consolidated Financial Statements? *a.

Measures and evaluates the performance of substantially all of its investments on a cost basis. b.

Measures and evaluates the performance of substantially all of its investments on a fair value basis. c.

Commits to its investors that its business purpose is to invest funds solely for returns from capital appreciation or investment income. d.

Obtains funds from one or more investors for the purpose of providing those investors with investment management services.

Correct answer: a Learning Objective 18.4 ~ explain the nature of an investment entity.

25.

Which of the following statements is correct? a. b. c. *d.

The legal acquirer under AASB 3 and the accounting acquirer under AASB 10 do not have to be the same entity.

The entity identified under AASB 10 as the parent will be the acquirer under AASB 3.

The legal acquirer is determined under AASB 3 as the entity that issues the equity instruments.

The accounting acquirer is the entity that becomes the controlling entity.

Correct answer: d Learning Objective 18.5 ~ outline the relationship between a parent and an acquirer in a business combination.

© John Wiley & Sons Australia, Ltd 2015

18.9

Testbank to accompany Company Accounting 10e

26.

Two entities A Limited and B Limited together form a third entity, C Limited. C Limited acquires A Limited and B Limited. In this situation, AASB 3 Business Combinations, adjudges that: a. b. c. *d.

A Limited and B Limited cease to exist and C Limited is the acquirer. the combined A Limited and B Limited, is the acquirer of C Limited.

C Limited is considered to be the acquirer.

C Limited is not to be considered to be the acquirer.

Correct answer: d Learning Objective 18.5 ~ outline the relationship between a parent and an acquirer in a business combination.

27.

Which of the following is not one of the factors in AASB 3 Business Combinations that guide the identification of the acquirer where 2 companies combine to form a new company? *a. The entity that has the smaller fair value. b.

The entity that has a significantly greater fair value. c.

The entity whose management is able to dominate the business combination. d.

The entity that gives up the cash or other assets where equity instruments are exchanged for cash or other assets.

Correct answer: a Learning Objective 18.5 ~ outline the relationship between a parent and an acquirer in a business combination.

28.

Where an entity controls another entity but holds less than half of the other entity’s voting rights, AASB 12 Disclosure of Interests in Other Entities, requires which of the following disclosures be made? a. b. *c. d.

The reasons why the ownership of the investee does not constitute control.

The nature of the relationship between the investor and investee.

The significant judgements and assumptions it has made in determining the nature of the interest in the other entity.

The amount of any repayments of borrowings between the investor and investee during the period.

Correct answer: c Learning Objective 18.6 ~ explain the differences in disclosure requirements between single entities and consolidated entities.

© John Wiley & Sons Australia, Ltd 2015

18.10

Chapter 18: Consolidation: controlled entities

29.

According to AASB 12 Disclosure of Interests in Other Entities, an entity that has been designed so that voting or similar rights are not the dominant factor in deciding who controls the entity is known as a: a. *b. c. d.

controlling entity. structured entity. dominant entity. rights entity.

Correct answer: b Learning Objective 18.6 ~ explain the differences in disclosure requirements between single entities and consolidated entities.

30.

Where a non-controlling interest exists in a subsidiary, AASB 12 Disclosure of Interests in Other Parties requires parent entities to disclose which of the following for each such subsidiary?

I II III IV

Summarised financial information about each subsidiary.

The proportion of ownership interests held by non-controlling interests.

If the subsidiary is not wholly owned, the names of all other members.

The country of incorporation of subsidiaries.

*a. b. c. d.

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

Correct answer: a Learning Objective 18.6 ~ explain the differences in disclosure requirements between single entities and consolidated entities.

© John Wiley & Sons Australia, Ltd 2015

18.11

Testbank to accompany Company Accounting 10e

True/false questions 31.

A subsidiary is defined in AASB 10 Consolidated Financial Statements as a company that is controlled by another entity.

The statement is false. A subsidiary does not need to be a company, but can take another entity form, such as an unincorporated partnership.

Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

32.

The financial statements of a group are referred to as consolidated financial statements.

The statement is true. The combined financial statements of a parent and its subsidiaries (referred to as a group) are referred to as consolidated financial statements.

Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

33.

The consolidation process involves making adjustments to the individual financial statements and ledger accounts of the entities within the group.

The statement is false. Consolidation adjustments are not made to the individual financial statements, but are made on a worksheet or spreadsheet for the purpose of preparing the consolidated financial statements.

Learning Objective 18.1 ~ explain the meaning of consolidated financial statements.

34.

Control is the criterion for determining whether a parent-subsidiary relationship exists.

The statement is true. A subsidiary is defined as an entity that is controlled by another entity.

Therefore in order to determine whether an entity is a subsidiary of another entity, it must be determined whether control exists.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

35.

Control is defined within AASB 10 Consolidated Financial Statements as the ability to govern the financial and operating policies of an entity so as to obtain benefits from its activities.

The statement is false. This is the old definition of control prior to the issuing of AASB 10 in 2011. According to Appendix A of AASB 10, control is now defined as ‘….when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.’

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

36.

Entities can only classify investments in other entities as subsidiaries if they actually exercise control over the financial and operating policies of an entity.

The statement is false. An entity only needs to have the capacity to control, but does not have to be actively exercising such control.

© John Wiley & Sons Australia, Ltd 2015

18.12

Chapter 18: Consolidation: controlled entities

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

37.

Where an entity directly holds more than 50% of the voting rights of another entity, they are presumed to have power in accordance with AASB 10 Consolidated Financial Statements.

The statement is true. In the absence of other evidence, where an investor holds a majority of the voting shares in another entity, that investor is considered to have power over the investee.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

38.

AASB 10 Consolidated Financial Statements requires that control be non-shared.

The statement is true. If two or more entities join together to direct the activities of the investee, neither investor controls the investee. The decision-making ability cannot be shared.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

39.

An entity can control another entity with an ownership interest of less than 50%, but only if there is a legally-binding contract in place between all investors that passes control to the entity.

The statement is false. The existence of contracts is only one of the indicative factors that may indicate the existence of control where an entity holds less then 50% of the shares in another entity. Other factors include the geographical dispersion of other shareholders and attendance at annual general meetings.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

40.

One of the major problems with control where an investor owns less than a majority of the investee’s voting shares is the issue of temporary control.

The statement is true. Where control is held with a non-majority ownership interest, the factors which gave rise to control may change over time, resulting in the parent losing control. The ability of an entity to control another entity may also be affected by changes in relationships with other entities.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

41.

Potential voting rights that cannot be exercised or converted until a future date or until the occurrence of a future event are not taken into account when determining an entity’s capacity to control another entity.

The statement is true. Such voting rights are not considered in the assessment of control. To be considered, the investor must have a current ability to exercise the potential voting rights.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

© John Wiley & Sons Australia, Ltd 2015

18.13

Testbank to accompany Company Accounting 10e

42.

Power is defined in AASB 10 Consolidated Financial Statements as the current ability to direct the relevant activities of an investee.

The statement is true. This is defined in Appendix A of AASB 10.

Learning Objective 18.2 ~ discuss the meaning and application of the criterion of control.

43.

The preparation of consolidated financial statements for a group relieves subsidiaries within the group from preparing individual financial statements.

The statement is false. The individual entities in a group will continue to prepare financial statements, and the consolidated financial statements for the group will be prepared by the parent in addition to those individual financial statements.

Learning Objective 18.3 ~ discuss which entities should prepare consolidated financial statements.

44.

Unless the parent trades any debt or equity instruments on a securities exchange, the parent is relieved from the requirement to prepare consolidated financial statements.

The statement is false. Paragraph 4(a) of AASB 10 includes a number of exemptions from the requirements to prepare consolidated financial statements, of which not trading on a securities exchange is one. The other exemptions are: if the parent is a wholly-owned subsidiary or a partially-owned subsidiary and all other owners do not object to the parent not preparing consolidated financial statements; if the parent has not filed its financial statements with a regulatory organisation for the purpose of issuing instruments in a public market; and if the parent’s ultimate parent entity produces consolidated financial statements.

Learning Objective 18.3 ~ discuss which entities should prepare consolidated financial statements.

45.

Where there is a substantial non-controlling interest and the non-controlling shareholders do not object, AASB 10 Consolidated Financial Statements allows such subsidiaries to be excluded from consolidation.

The statement is false. AASB 10 does not allow a parent to exclude any subsidiary from the consolidated financial statements.

Learning Objective 18.3 ~ discuss which entities should prepare consolidated financial statements.

46.

Typical characteristics of an investment entity in accordance with IFRS 10 Consolidated Financial Statements include that it has more than one investment.

The statement is true. Other typical characteristics of an investment entity are that: it has more than one investor; it has investors that are not related parties of the entity; and it has ownership interests in the form of equity or similar interests.

Learning Objective 18.4 ~ explain the nature of an investment entity.

© John Wiley & Sons Australia, Ltd 2015

18.14

Chapter 18: Consolidation: controlled entities

47.

When a business combination is formed by the creation of a parent-subsidiary relationship, the parent will always be identified as the acquirer.

The statement is false. There are a number of situations where a parent entity is not the acquiring entity. An example of such a situation is where there is a distinction between the legal acquirer/acquire and the accounting acquirer/acquire.

Learning Objective 18.5 ~ outline the relationship between a parent and an acquirer in a business combination.

48.

The formation of a new entity to acquire the shares of two (or more) other entities is an example of a business combination in accordance with AASB 3 Business Combinations.

The statement is true. Under this business combination option, the shareholders in the two existing entities receive shares in the newly created entity.

Learning Objective 18.5 ~ outline the relationship between a parent and an acquirer in a business combination.

49.

There are no disclosures specified by AASB 10 Consolidated Financial Statements.

The statement is true. All disclosures relating to consolidated financial statements are contained within AASB 12 Disclosure of Interests in Other Entities.

Learning Objective 18.6 ~ explain the differences in disclosure requirements between single entities and consolidated entities.

50.

Where a parent is exempted from preparing consolidated financial statement under AASB 10 Consolidated Financial Statements, they are still required to present separate financial statements under AASB 127 Separate Financial Statements.

The statement is true. In such cases, the investment in the subsidiary is accounted for in the separate financial statement at cost or in accordance with AASB 9 Financial Instruments.

Learning Objective 18.6 ~ explain the differences in disclosure requirements between single entities and consolidated entities.

© John Wiley & Sons Australia, Ltd 2015

18.15

Testbank to accompany Company Accounting 10e

Chapter 19: Consolidation: wholly owned subsidiaries Multiple-choice questions 1.

The preparation of consolidated financial statements involves: a. b. *c. d.

adding together the financial statements of the investor and the associate. adjusting entries in the accounting records of the subsidiary. adding together the financial statements of the parent and the subsidiaries. adjusting entries in the accounting records of the parent.

Correct answer: c Learning Objective 19.1~ discuss the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet.

2.

If a subsidiary’s reporting date does not coincide with the parent entity’s reporting date, adjustments must be made for the effects of significant transactions that occur between the two reporting dates provided the reporting dates differ by no more than: a. *b. c. d.

nine months. three months. one month. six months.

Correct answer: b Learning Objective 19.1~ discuss the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet.

3.

Kerri Limited has two subsidiary entities, Emily Limited and Georgia Limited. Kerri Limited owns 100% of the shares in both entities. Details of the issued share capital are: - Kerri Limited $200 000 - Emily Limited $60 000 - Georgia Limited $30 000 The consolidated share capital amount of the Kerri Emily Georgia group is: a. b. *c. d.

$230 000. $90 000. $200 000. $290 000.

Correct answer: c Learning Objective 19.2 ~ explain how a consolidation worksheet is used.

© John Wiley & Sons Australia, Ltd 2015

19.2

Chapter 19: Consolidation: wholly owned subsidiaries

4.

Which of the following statements is incorrect? a.

*b. c. d.

Where consolidated financial statements are prepared over a number of years, consolidation entries need to be made every time a consolidation worksheet is prepared.

Consolidation adjusting entries affect the ledger accounts of the parent and subsidiaries.

A consolidation worksheet is used to help the process of adding together the financial statements of the parent and its subsidiaries.

There are no consolidated ledger accounts.

Correct answer: b Learning Objective 19.2 ~ explain how a consolidation worksheet is used.

5.

If the consideration transferred is greater than the acquired interest in the net fair value of the identifiable assets, liabilities and contingent liabilities of the acquiree: a. *b. c. d.

a gain on bargain purchase results. goodwill has been purchased and must be recognised on consolidation. the difference is treated as a special equity reserve in the acquirer’s accounting records. the difference is immediately charged to profit or loss in the period in which the business combination occurred.

Correct answer: b Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

6.

Which of the following statements is incorrect? *a. b. c. d.

The business combination valuation reserve is an account recorded in the subsidiary’s records.

The acquisition analysis may include the recognition of assets and liabilities not recognised in the subsidiary’s records.

The acquisition analysis will determine whether any goodwill or gain on bargain purchase has arisen as a part of the business combination.

An acquisition analysis is prepared at acquisition date to identify the identifiable assets and liabilities of the subsidiary at fair value.

Correct answer: a Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

© John Wiley & Sons Australia, Ltd 2015

19.3

Testbank to accompany Company Accounting 10e

7.

Unity Limited acquired 100% of the share capital of Bellvista Limited. Bellvista had issued share capital of $200 000. The book values of Bellvista Limited’s assets were: buildings $100 000, machinery $120 000. The fair values of these assets were: buildings $180 000, machinery $140 000. The tax rate is 30%. The fair value of the identifiable net assets is: *a. b. c. d.

$270 000. $220 000. $320 000. $200 000.

Correct answer: a Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

8.

The pre-acquisition entry is necessary to: a. b. *c. d.

avoid overstating the equity and net assets of the parent. record the ‘Shares in subsidiary’ account in the parents records. avoid overstating the equity and net assets of the group. avoid understating the equity and net assets of the group.

Correct answer: c Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

9.

Sippy Ltd acquired 100% of the share capital of Downs Ltd when the carrying value of Downs Ltd’s plant and machinery was $100 000. The fair value of the plant on acquisition date was $150 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that must be recognised on consolidation? a. *b. c. d.

$15 000 $35 000 $50 000 $150 000

Correct answer: b Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

© John Wiley & Sons Australia, Ltd 2015

19.4

Chapter 19: Consolidation: wholly owned subsidiaries

10.

Water Limited acquired Boy Limited for a purchase consideration of $110 000. At acquisition date the fair value of the Boy Limited’s Land asset was $80 000 and the carrying amount was $60 000. 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? a. *b. c. d.

DR CR DR CR

Deferred tax liability Deferred tax liability Deferred tax asset Deferred tax asset

$6 000 $6 000 $6 000 $6 000

Correct answer: b Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

11.

On 1 July 2014, Peter Limited acquired all the issued shares of Kerri Limited for $100 000 when the equity of Kerri Limited consisted of: Share capital Retained earnings

$70 000 30 000

The pre-acquisition entry at 1 July 2014 is: a.

*b.

c.

d.

Shares in Kerri Limited Retained earnings Share capital

Dr Cr Cr

100 000

Retained earnings Share capital Shares in Kerri Limited

Dr Dr Cr

30 000 70 000

Retained earnings Share capital Shares in Kerri Limited

Dr Dr Cr

70 000 30 000

Goodwill Share capital Shares in Kerri Limited

Dr Dr Cr

30 000 70 000

30 000 70 000

100 000

100 000

100 000

Correct answer: b Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

© John Wiley & Sons Australia, Ltd 2015

19.5

Testbank to accompany Company Accounting 10e

12.

At the date of acquisition, a subsidiary had recorded a dividend payable of $100 000.

Assuming that the shares were acquired on a cum. div basis, the consolidation adjustment needed at the date of acquisition to eliminate the dividend is: *a.

b.

c.

d.

DR

$100 000

CR

Dividend payable Dividend receivable

$100 000

CR

Dividend revenue Dividend declared Shares in subsidiary Dividend receivable

$100 000

CR

$100 000

CR

Dividend receivable Dividend payable

DR

DR

DR

$100 000

$100 000

$100 000

$100 000

Correct answer: a Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

13.

On 1 July 2014 Good Ltd acquired a 100% interest in Life Ltd. At that time Life Ltd had goodwill of $10 000 recorded in its statement of financial position as a result of a previous business combination. The total goodwill arising on Good’s acquisition of Life was $24 000. The goodwill to be recognised on consolidation as a result of Good’s acquisition of Life is: a. b. *c. d.

nil. $10 000. $14 000. $24 000.

Correct answer: c Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

14.

Susan Limited has two subsidiary entities, Rachel Limited and Rebecca Limited. Susan Limited owns 100% of the shares in both entities. Details of the cash accounts of each company are: Susan Limited $200 000, Lemon Limited $60 000, Juice Limited $30 000.

The balance of the consolidated cash account of the Susan Limited group is: *a. b. c. d.

$290 000. $200 000. $260 000. $230 000.

Correct answer: a Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

© John Wiley & Sons Australia, Ltd 2015

19.6

Chapter 19: Consolidation: wholly owned subsidiaries

15.

When Wayne Ltd acquired 100% of the share capital of Carol Ltd, the carrying amount of Carol Ltd’s machinery was $200 000. The fair value of the machinery on acquisition date was $160 000. The company tax rate was 30%. What is the amount of the business combination valuation reserve that will be recognised on consolidation? a. b. *c. d.

$40 000 $12 000 $28 000 $160 000

Correct answer: c Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

16.

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: a. *b. c. d.

decrease the carrying amount of goodwill. increase the carrying amount of goodwill. decrease the profit on consolidation. increase the profit on consolidation.

Correct answer: b Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

17.

The effect of the pre-acquisition entry is to eliminate the ‘Shares in subsidiary’ asset and the: *a. b. c. d.

equity of the subsidiary at the acquisition date. equity of the parent at the acquisition date. net assets of the subsidiary at the acquisition date. net assets of the parent at the acquisition date.

Correct answer: a Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

© John Wiley & Sons Australia, Ltd 2015

19.7

Testbank to accompany Company Accounting 10e

18.

If a revaluation of the subsidiary’s assets is performed on consolidation, the subsidiary’s assets are carried into the consolidated statement of financial position at: a. b. c. *d.

net present value. current replacement cost. historical cost. fair value.

Correct answer: d Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

19.

Easts Limited acquired 100% of the shares in Tigers Limited on a cum div. basis for $200 000. At acquisition date, the subsidiary had a declared dividend of $10 000. The pre-acquisition entry must include the following line: a. b. *c. d.

DR Shares in subsidiary $190 000 CR Shares in subsidiary $200 000 CR Shares in subsidiary $190 000 CR Shares in subsidiary $10 000

Correct answer: c Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

20.

Hungry Limited acquired 100% of the share capital of Jane Limited for a purchase consideration of $320 000. At acquisition date, the net fair value of Jane Ltd’s assets, liabilities and contingent liabilities was $250 000 including goodwill with a carrying amount of $20 000. The company tax rate is 30%. The unrecorded amount of goodwill that must be recognised on the consolidation worksheet is: a. *b. c. d.

$50 000. $70 000. $90 000. $15 000.

Correct answer: b Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

© John Wiley & Sons Australia, Ltd 2015

19.8

Chapter 19: Consolidation: wholly owned subsidiaries

21.

Where the consideration transferred is less than the fair value of the identifiable net assets and contingent liabilities acquired, the item must be recognised in the consolidation worksheet as: a. b. c. *d.

a transfer to the business combination valuation reserve. goodwill. an increase in the ‘Shares in subsidiary’ asset. a gain on bargain purchase.

Correct answer: d Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

22.

One year after acquisition date, the goodwill acquired was regarded as having become impaired by $40 000. The appropriate consolidation adjustment in relation to the impairment will include the following line: a. b. c. *d.

DR CR CR CR

Goodwill Impairment expense Business combination valuation reserve Accumulated impairment losses

$40 000 $40 000 $40 000 $40 000

Correct answer: d Learning Objective 19.5 ~ 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.

23.

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 to post-acquisition retained earnings.

II Depreciation on non-current assets.

III Transfers from pre-acquisition retained earnings.

IV Bonus dividends paid from pre-acquisition equity. a. b. c. *d.

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

Correct answer: d Learning Objective 19.5 ~ 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.

© John Wiley & Sons Australia, Ltd 2015

19.9

Testbank to accompany Company Accounting 10e

24.

Titans Ltd acquired 100% of Taylor Ltd on 1 July 2014. At acquisition date, Taylor Ltd had the following equity items: - Retained earnings $48 000 - Share capital $66 000 - Business combination revaluation reserve $20 000 In the year following the acquisition, Taylor Ltd paid a bonus share dividend of $28 000 out of pre-acquisition retained earnings. The following consolidation adjustment is needed in the consolidation worksheet for 30 June 2015: *a.

b.

c.

d.

DR

$28 000

CR

Share capital Bonus dividend paid Shares in subsidiary Share capital

$28 000

CR

$28 000

CR

Bonus dividend paid Share capital

$28 000

CR

Retained earnings Share capital

DR

DR

DR

$28 000

$28 000

$28 000

$28 000

Correct answer: a Learning Objective 19.5 ~ 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.

25.

At acquisition date, a wholly owned subsidiary had the following equity items: - Retained earnings $28 000 - Share capital $60 000 - Business combination revaluation reserve $12 000 In the year following the acquisition, the subsidiary transferred $20 000 from preacquisition retained earnings to a general reserve account. At the reporting date following the reserve transfer, the following consolidation adjustment is needed: a.

b.

c.

*d.

DR

$20 000

CR

Retained earnings General reserve

$20 000

CR

General reserve Shares in subsidiary Shares in subsidiary Retained earnings

$20 000

CR

$20 000

CR

General reserve Retained earnings

DR

DR

DR

$20 000

$20 000

$20 000

$20 000

Correct answer: d

© John Wiley & Sons Australia, Ltd 2015

19.10

Chapter 19: Consolidation: wholly owned subsidiaries

Learning Objective 19.5 ~ 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.

26.

On 1 January 2012, Cowboys Ltd acquired all the issued shares in Tate Ltd. At that date, the inventory of Tate Ltd had a fair value of $10 000 more than its carrying amount. By 30 June 2013, 75% of the inventory was sold to an entity outside of the group. The business combination valuation consolidation adjustment against inventory in relation to the transaction as at 30 June 2013 will be: a. b. c. *d.

a debit of $7500. a credit of $5000. a debit of $5000. a debit of $2500.

Correct answer: d Learning Objective 19.5 ~ 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.

27.

Which of the following statements is correct? a. b. *c. d.

AASB 3 Business Combinations requires that any revaluations of a subsidiary’s assets at acquisition date must be done in the consolidation worksheet.

The revaluation of non-current assets in the subsidiary’s records means that the subsidiary has adopted the cost model of accounting for those assets.

Revaluations of assets such as goodwill and inventory are not permitted in the accounting records of the subsidiary.

Inventory can be revalued to an amount greater than its cost in the records of the subsidiary.

Correct answer: c Learning Objective 19.6 ~ prepare the worksheet entries where the subsidiary revalues its assets at acquisition date.

28.

Which of the following assets cannot be revalued above their cost in the accounting records of the subsidiary? a. b. c. *d.

Inventory Plant and equipment Goodwill Both a and c

Correct answer: d Learning Objective 19.6 ~ prepare the worksheet entries where the subsidiary revalues its assets at acquisition date.

© John Wiley & Sons Australia, Ltd 2015

19.11

Testbank to accompany Company Accounting 10e

29.

According to AASB 3 Business Combinations, the key principle relating to the disclosure of information about business combinations is to disclose information that: *a. b. c. d.

enables financial statement users to evaluate the nature and financial effect of business combinations that occurred during the reporting period. enables the preparation of the consolidated financial statements in the most costeffective manner. does not give an advantage to the competitors of a consolidated group. provides financial statement users with information about the parent entity only.

Correct answer: a Learning Objective 19.7 ~ prepare the disclosures required by AASB 3 and AASB 12.

30.

In the case of a reverse acquisition, the subsidiary effectively becomes the acquirer and: a. its assets and liabilities are measured at cost. b. the parent’s assets and liabilities are measured at fair value. *c. its assets and liabilities are measured at fair value. d. none of the above.

Correct answer: c Learning Objective 19.8 ~ explain the consolidation procedures for a reverse acquisition.

© John Wiley & Sons Australia, Ltd 2015

19.12

Chapter 19: Consolidation: wholly owned subsidiaries

True/false questions 31.

Consolidated financial statements must be prepared using uniform accounting policies for like transactions and other events in similar circumstances.

The statement is true. Where different policies are used, adjustments are made so that like transactions are accounted for under a uniform policy in the consolidated financial statements.

Learning Objective 19.1~ discuss the nature of the group covered in this chapter, and the initial adjustments required in the consolidation worksheet.

32.

In preparing the consolidated financial statements, no adjustments are made in the accounting records of the individual entities that comprise the group.

The statement is true. The adjusting entries recorded in the columns of the consolidation worksheet do not affect the ledger accounts of the individual entities.

Learning Objective 19.2 ~ explain how a consolidation worksheet is used.

33.

An acquisition analysis is prepared at acquisition date to identify the fair values of the identifiable assets and liabilities of the parent.

The statement is false. An acquisition analysis is prepared to identify the fair values of the subsidiary’s identifiable assets and liabilities.

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

34.

The acquisition analysis may result in the recognition of assets and liabilities that are not recognised in the subsidiary’s accounting records.

The statement is true. For example, the business combination may give rise to intangibles that could not be recognised by the subsidiary such as internally generated brands.

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

35.

Where at acquisition date the parent holds shares in the subsidiary that it has previously acquired, this investment must be revalued to fair value at acquisition date.

The statement is true. Any resulting gain or loss must be recognised in profit or loss or other comprehensive income.

Learning Objective 19.3 ~ prepare an acquisition analysis for the parent’s acquisition in a subsidiary.

36. The main purpose of the pre-acquisition entry is to ensure no double counting of group net assets and equity.

© John Wiley & Sons Australia, Ltd 2015

19.13

Testbank to accompany Company Accounting 10e

The statement is true. The pre-acquisition entry eliminates the carrying amount of the parent’s investment in each subsidiary, along with the parent’s share of the pre-acquisition equity in each subsidiary.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

37.

Business combination valuation adjustment entries record only the parent’s share of fair value adjustments relating to a subsidiary’s assets, liabilities and contingent liabilities.

The statement is false. Business combination valuation adjustment entries record the full amount of fair value adjustments relating to a subsidiary’s assets, liabilities and contingent liabilities, not just the parent’s share.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

38.

When preparing the business combination valuation entries, there is no recognition of a deferred tax liability for goodwill.

The statement is true. The prohibition from recognition of a deferred tax liability is set out in paragraph 21 of AASB 112 Income Taxes. This is due to the fact that goodwill is a residual and the recognition of a deferred tax liability would increase its carrying amount.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

39. Where a subsidiary has goodwill already recorded in their books at the date of acquisition, such goodwill should be eliminated in full and then recognised on consolidation.

The statement is false. Where a subsidiary has recorded goodwill at the acquisition date, the incremental goodwill is the amount recognised on consolidation.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

40. Where an investment in a subsidiary is acquired on an ex.div basis, the fair value of the consideration paid should exclude the amount of the dividend.

The statement is false. The term ex.div denotes that the shares are being sold excluding any entitlement to dividends declared but not yet paid. In such cases no adjustment is required.

Where an investment in a subsidiary is acquired on a cum.div basis the fair value of the consideration paid should exclude the amount of the dividend receivable.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

© John Wiley & Sons Australia, Ltd 2015

19.14

Chapter 19: Consolidation: wholly owned subsidiaries

41.

Where the carrying amount of a non-current asset is more than its fair value at the date of acquisition, the difference is reflected in the deferred tax liability in the business combination valuation entries.

The statement is false. Such fair value adjustments result in deductible temporary differences, which in turn result in deferred tax assets.

Learning Objective 19.4 ~ prepare the worksheet entries at the acquisition date, being the business combination valuation entries and the pre-acquisition entries.

42.

If the fair value of a depreciable asset is greater than the carrying amount, in the years subsequent to the acquisition date the depreciation expense recorded in the books of the subsidiary will be greater than that for the group.

The statement is false. If the fair value is higher than the carrying amount, the group’s depreciation expense will be greater than that recorded in the subsidiary’s books.

Learning Objective 19.5 ~ 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.

43.

A post acquisition transfer between retained earnings and a general reserve will result in a corresponding change to the pre-acquisition entry.

The statement is false. Only transfers of pre-acquisition balances result in a change to the preacquisition entry.

Learning Objective 19.5 ~ 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.

44.

When inventory that has been subject to a fair value adjustment is sold, the effect on the business combination valuation adjustment in the year of sale includes a debit to cost of sales.

The statement is true. The debit originally made against inventory is transferred to the cost of sales account to reflect the sale of the inventory in the current year.

Learning Objective 19.5 ~ 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.

45.

The ‘Transfer from business combination valuation reserve’ is an appropriation item that is closed to retained earnings at the end of each year.

The statement is true. This item is used to transfer amounts from the reserve account to retained earnings on the sale/realisation of assets and liabilities that were subject to fair value adjustments on acquisition.

© John Wiley & Sons Australia, Ltd 2015

19.15

Testbank to accompany Company Accounting 10e

Learning Objective 19.5 ~ 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.

46.

The effect of a transfer of pre-acquisition retained earnings to a general reserve on the pre-acquisition entry is to reduce the debit adjustment against retained earnings.

The statement is true. A transfer out of retained earnings reduces retained earnings, hence reducing the amount to be eliminated against this account balance.

Learning Objective 19.5 ~ 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.

47. According to AASB 127 Separate Financial Statements, all dividends paid or payable by the subsidiary to a parent are recognised as revenue in the profit or loss of the parent.

The statement is true. In relation to dividends, there is no need to classify the equity of the subsidiary into pre-acquisition and post-acquisition equity.

Learning Objective 19.5 ~ 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.

48. AASB 3Business Combinations prohibits the revaluation of the assets of the subsidiary at acquisition date in the records of the subsidiary.

The statement is false. AASB 3 does not discuss whether the valuation of the assets of the subsidiary at acquisition date should be done in the consolidation worksheet or in the records of the subsidiary.

Learning Objective 19.6 ~ prepare the worksheet entries where the subsidiary revalues its assets at acquisition date.

49. AASB 12 Disclosure of Interests in Other Entities establishes the disclosures relating to a parent’s interests in subsidiaries The statement is true. AASB 10 Consolidated Financial Statements does not specify any disclosure requirements.

Learning Objective 19.7 ~ prepare the disclosures required by AASB 3 and AASB 12.

50. A reverse acquisition occurs when the legal subsidiary in a business combination obtains control over the legal parent.

The statement is true. The usual circumstances creating a reverse acquisition is where the legal parent obtains ownership of the legal subsidiary’s equity but, as part of the exchange transaction, it issues enough voting equity as consideration for control of the combined entity to pass to the owners of the legal subsidiary.

© John Wiley & Sons Australia, Ltd 2015

19.16

Chapter 19: Consolidation: wholly owned subsidiaries

Learning Objective 19.8 ~ explain the consolidation procedures for a reverse acquisition.

© John Wiley & Sons Australia, Ltd 2015

19.17

Testbank to accompany Company Accounting 10e

Chapter 20: Consolidation: intragroup transactions Multiple-choice questions 1.

AASB 10 Consolidated Financial Statements requires that intragroup transactions be: a. b. c. *d.

eliminated on consolidation to the extent of the parent’s interest in the subsidiary. eliminated in the books of the parent and subsidiary to the extent of the parent’s interest in the subsidiary. eliminated in full in the books of the parent and subsidiary. eliminated in full on consolidation.

Correct answer: d Learning Objective 20.1 ~ explain the need for making adjustments for intragroup transactions.

2.

Which of the following intragroup transactions do not affect the carrying amounts of assets and liabilities? *a. b. c. d.

Management fees paid Sale of plant at a profit Sale of land for an amount greater than its carrying amount Sale of inventory at a loss

Correct answer: a Learning Objective 20.1 ~ explain the need for making adjustments for intragroup transactions.

3.

A subsidiary sold a quantity of inventory to its parent entity at a before-tax profit of $12 000. The original cost of the inventory to the subsidiary was $41 000. At the end of the year all of the inventory was still on hand. The consolidation adjustment entry to eliminate this transaction will include which of the following line items? *a. b. c. d.

Cr Cr Cr Cr

Inventory Inventory Inventory Inventory

$12 000 $53 000 $41 000 $29 000

Correct answer: a Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

4.

A parent sold some inventory to its subsidiary for $55 000. The goods had originally cost the parent $40 000. At the end of the year all of the inventory was still on hand. The consolidation adjustment entry to eliminate this transaction will include the following

© John Wiley & Sons Australia, Ltd 2015

20.2

Chapter 20: Consolidation: intragroup transactions

line items? a. *b. c. d.

Cr Cr Cr Cr

Cost of sales Cost of sales Cost of sales Cost of sales

$15 000 $40 000 $95 000 $55 000

Correct answer: b Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

5.

A subsidiary entity sold goods to its parent entity for $100 000. The inventory originally cost the subsidiary $125 000. At reporting date, the parent still held all of the inventory.

Which of the following adjustments must be included as part of the consolidation entry to eliminate this transaction? *a. b. c. d.

Cr Cr Dr Dr

Inventory Inventory Inventory Inventory

$100 000 $125 000 $25 000 $225 000

Correct answer: a Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

6.

In May 2014, a parent sold inventory to a subsidiary entity for $60 000. The inventory had previously cost the parent entity $48 000. The entire inventory is still held by the subsidiary at reporting date, 30 June 2014. Ignoring tax effects, which of the following is the adjustment entry in the consolidation worksheet at reporting date? a.

b.

c.

*d.

Cash Sales revenue Cost of sales Inventory

Dr Cr Dr Cr

48 000

Sales revenue Cash Inventory Cost of sales

Dr Cr Dr Cr

48 000

Cost of sales Sales revenue Inventory

Dr Cr Cr

60 000

Sales revenue Cost of sales Inventory

Dr Cr Cr

60 000

© John Wiley & Sons Australia, Ltd 2015

48 000 48 000 48 000

48 000 48 000 48 000

12 000 48 000

48 000 12 000

20.3

Testbank to accompany Company Accounting 10e

Correct answer: d Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

7.

A subsidiary sold inventory to its parent for $60 000. The inventory had previously cost the subsidiary $48 000. By reporting date, the parent had sold 75% of the inventory to a party outside the group. The company tax rate is 30%. Which of the following are the adjustment entries in the consolidation worksheet at reporting date? a.

*b.

c.

d.

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

60 000

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

60 000

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

45 000

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

15 000

48 000 12 000 3 600 3 600

57 000 3 000 900 900

36000 9 000 2 700 2 700

12 000 3 000 900 900

Correct answer: b Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

8.

Thurston Limited sold inventory to its parent entity, Cowboys Ltd, at a before-tax profit of $8000. The inventory originally cost Thurston Limited $32 000. At balance sheet date, Cowboys Limited had sold 90% of the inventory to an external party. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to: *a. b. c. d.

$800. $7200. $3200. $24 000.

Correct answer: a

© John Wiley & Sons Australia, Ltd 2015

20.4

Chapter 20: Consolidation: intragroup transactions

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

9.

During the year ended 30 June 2014, a subsidiary sold inventory to its parent at a beforetax profit of $20 000. The inventory originally cost the subsidiary $87 000. At 30 June 2014 all the inventory was still on hand and it was sold to an external party in July 2014.

Ignoring tax effects, the consolidation adjustment entry to eliminate this transaction during the year ended 30 June 2015 would include which of the following line items? a. *b. c. d.

Dr Cr Dr Cr

Cost of sales Cost of sales Cost of sales Cost of sales

$20 000 $20 000 $87 000 $87 000

Correct answer: b Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

10.

During the year ended 30 June 2014, a subsidiary sold inventory to a parent for $90 000. The inventory had previously cost the subsidiary entity $72 000. By 30 June 2014 the parent had sold 75% of the inventory to a party outside the group. The remaining inventory was sold externally in July 2014. The company tax rate is 30%.

Which of the following is the adjustment entry in the consolidation worksheet at 30 June 2015? a.

Sales revenue Cost of sales Inventory Deferred tax asset Income tax expense

Dr Cr Cr Dr Cr

90 000

Retained earnings Income tax expense Cost of sales

Dr Dr Cr

4 200 1 800

*c. Retained earnings Income tax expense Cost of sales

Dr Dr Cr

3 150 1 350

d.

Dr Cr Dr Cr

4 500

b.

Retained earnings Inventory Deferred tax asset Retained earnings

85 500 4 500 1 350 1 350

6 000

4 500

4 500 1 350 1 350

Correct answer: c Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

© John Wiley & Sons Australia, Ltd 2015

20.5

Testbank to accompany Company Accounting 10e

11.

Unrealised profit in the opening inventory of a financial period is adjusted in the consolidation worksheet by a: *a. b. c. d.

debit to retained earnings. credit to retained earnings. credit to inventory. debit to inventory.

Correct answer: a Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

12.

A subsidiary sold inventory to its parent for $50 000. The inventory originally cost the subsidiary $38 000. At balance sheet date, the parent had sold 50% of the inventory to an external party. The company tax rate is 30%. Which of the following is the deferred tax item that is recognised on consolidation? a. b. c. *d.

Cr Deferred tax liability $3600 Cr Deferred tax liability $1800 Dr Deferred tax asset $3600 Dr Deferred tax asset $1800

Correct answer: d Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

13.

A subsidiary sold inventory to its parent in year 1 at a before-tax profit of $15 000. At balance sheet date, the parent had not sold the inventory to an external party. The company tax rate is 30%. The year 1 consolidation worksheet will contain which of the following adjustment entries for inventory? a. b. *c. d.

Dr Inventory $15 000 Dr Inventory $10 500 Cr Inventory $15 000 Cr Inventory $10 500

Correct answer: c Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

14.

A subsidiary sold inventory to its parent for $40 000. The inventory originally cost the subsidiary $32 000. At balance sheet date, the parent had 20% of the inventory still on hand. The consolidation adjustment entry (excluding tax effects) will eliminate unrealised profit amounting to: a. *b.

$6400. $1600.

© John Wiley & Sons Australia, Ltd 2015

20.6

Chapter 20: Consolidation: intragroup transactions

c. d.

$8000. $9600.

Correct answer: b Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

15.

Knights Ltd purchased inventory from its subsidiary, Gidley Ltd, for $20 000. The goods originally cost Gidley Ltd $12 000. The company tax rate is 30%. Assuming that all of the inventory was still on hand at the end of the year, which of the following consolidation adjustment entries is required? a. b. *c. d.

Dr Tax expense $2400; Cr Deferred tax liability $2400 Dr Tax expense $2400; Cr Deferred tax asset $2400 Dr Deferred tax asset $2400; Cr Tax expense $2400 Dr Deferred tax liability $2400; Cr Tax expense $2400

Correct answer: c Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

16.

When an entity sells a non-current asset at a profit to another entity within the same group, which of the following adjustments is necessary on consolidation? a.

Dr

Asset Cr Cash

b.

Dr

Cash Cr Asset

*c.

Dr

Gain on sale Cr Asset

d.

Dr

Asset Cr Gain on sale

Correct answer: c Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

17.

Sky Limited, a subsidiary entity, sold a non-current asset at a profit to its parent entity, Dive Limited. The adjustment necessary on consolidation to reflect the tax effect of this transaction will result in a(n): *a. b.

increase in deferred tax assets. increase in deferred tax liabilities.

© John Wiley & Sons Australia, Ltd 2015

20.7

Testbank to accompany Company Accounting 10e

c. d.

increase in income tax expense. decrease in deferred tax assets.

Correct answer: a Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

18.

Adam Ltd sold an item of plant to its subsidiary Eve Ltd on 1 January 2017 for $50 000. The asset had cost Adam Ltd $60 000 when acquired on 1 January 2015. At that time, the remaining useful life of the plant was assessed at 5 years. The adjustment necessary on consolidation to reflect the tax effect of the depreciation adjustment for the year ended 30 June 2017 will result in a decrease in: *a. b. c. d.

deferred tax assets. deferred tax liabilities. income tax expense. current tax liability.

Correct answer: a Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

19.

Ali Ltd sold an item of plant to its subsidiary Baba Ltd on 1 January 2017 for $100 000.

The asset had cost Ali Ltd $120 000 when acquired on 1 January 2015. At that time the remaining useful life of the plant was assessed at 5 years. The adjustment necessary on consolidation as at 30 June 2018 in relation to the sale of plant will result in: a. *b. c. d.

an increase in retained earnings and a decrease in current year profit. a decrease in retained earnings and an increase in current year profit. an increase in retained earnings and an increase in current year profit. a decrease in retained earnings and a decrease in current year profit.

Correct answer: b Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

20.

Abra Ltd sold an item of plant to its subsidiary Cadabra Ltd on 1 January 2017 for $50 000. The asset had cost Abra Ltd $60 000 when acquired on 1 January 2015. At that time the useful life of the plant was assessed at 6 years. Rounded to the nearest dollar, the consolidation elimination entries at 30 June 2017 in relation to the sale of plant are which of the following? *a. Plant Gain on sale

Dr Dr

© John Wiley & Sons Australia, Ltd 2015

10 000 10 000

20.8

Chapter 20: Consolidation: intragroup transactions

b.

c.

d.

Accumulated depreciation Deferred tax asset Income tax expense Accumulated depreciation Depreciation expense Income tax expense Deferred tax asset

Cr Dr Cr Dr Cr Dr Cr

20 000

Accumulated depreciation Gain on sale Plant Deferred tax asset Income tax expense Accumulated depreciation Depreciation expense Income tax expense Deferred tax asset

Dr Dr Cr Dr Cr Dr Cr Dr Cr

10 000 10 000

Plant Gain on sale Accumulated depreciation Deferred tax asset Income tax expense Accumulated depreciation Depreciation expense Income tax expense Deferred tax asset

Dr Dr Cr Dr Cr Dr Cr Dr Cr

10 000 5 000

Accumulated depreciation Gain on sale Plant Deferred tax asset Income tax expense Accumulated depreciation Depreciation expense Income tax expense Deferred tax asset

Dr Dr Cr Dr Cr Dr Cr Dr Cr

15 000 5 000

3 000 3 000 1 250 1 250 375 375

20 000 3 000 3 000 1 250 1 250 375 375

15 000 1 500 1 500 1 250 1 250 375 375

20 000 1 500 1 500 1 250 1 250 375 375

Correct answer: a Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

21.

A parent entity sold a depreciable non-current asset to a subsidiary entity for $5600. The asset originally cost $6000 and at the date of sale accumulated depreciation was $1000.

The amount of the unrealised gain on sale to be eliminated is: a. b.

$5600. $1000.

© John Wiley & Sons Australia, Ltd 2015

20.9

Testbank to accompany Company Accounting 10e

*c. d.

$600. $400.

Correct answer: c Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

22.

When an entity sells a non-current asset at a profit to another entity within the same group, which of the following adjustments is necessary on consolidation? *a. b. c. d.

Dr Gain on sale, CR Asset Dr Asset, CR Cash Dr Gain on sale, CR Cash Dr Asset, DR Gain on sale

Correct answer: a Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

23.

If an entity sells a non-current asset at a profit to another entity within the same group, which of the following consolidation adjustments is necessary to reflect the tax effect? *a. b. c. d.

Dr Deferred tax asset Dr Deferred tax liability Dr Tax expense Cr Deferred tax asset

Correct answer: a Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

24.

On 16 May 2014, Zebra Ltd sold equipment to its subsidiary Nando Ltd for $100 000, this asset having a carrying amount at time of sale of $80 000. The equipment was regarded by Zebra Ltd as a depreciable non-current asset, being depreciated at 10% p.a. on cost, whereas Nando Ltd records the machinery as inventory. The asset was sold by Nando Ltd before 30 June 2014. The worksheet entry for the year ended 30 June 2014 would include which of the following adjustments? a. *b. c. d.

Dr Cost of sales 20 000 Cr Cost of sales 20 000 Dr Inventory 20 000 Cr Inventory 20 000

Correct answer: b

© John Wiley & Sons Australia, Ltd 2015

20.10

Chapter 20: Consolidation: intragroup transactions

Learning Objective 20.4 ~ prepare worksheet entries for intragroup transactions involving transfers from inventory to property, plant and equipment and from property, plant and equipment to inventory.

25.

During the year ended 30 June 2017, a parent entity rents a warehouse from a subsidiary entity for $200 000. The company tax rate is 30%. Which of the following is the consolidation adjustment entry needed at reporting date to eliminate the transaction? *a. Rent revenue Rent expense

Dr Cr

200 000

b.

Rent revenue Rent expense Income tax expense Deferred tax liability

Dr Cr Dr Cr

200 000

Rent revenue Rent expense Deferred tax asset Income tax expense

Dr Cr Dr Cr

200 000

Rent expense Rent revenue

Dr Cr

200 000

c.

d.

200 000

200 000 60 000 60 000

200 000 60 000 60 000

200 000

Correct answer: a Learning Objective 20.5 ~ prepare worksheet entries for intragroup services such as management fees.

26.

Which of the following items is an example of an intragroup service? a. b. c. *d.

A subsidiary sells inventory to its parent entity.

An intragroup transfer of non-current assets results in an unrealised profit.

One entity in a group acquires a depreciable asset from another entity in the same group.

One entity in a group rents a building to another entity in the group.

Correct answer: d Learning Objective 20.5 ~ prepare worksheet entries for intragroup services such as management fees.

27.

If an interim dividend is paid by a subsidiary to its parent, the consolidation entry to eliminate the transaction is which of the following? a. *b. c. d.

Dr Interim dividend paid; Cr Dividend revenue Dr Dividend revenue; Cr Interim dividend paid Dr Dividend revenue; Cr Dividend payable Dr Interim dividend paid; Cr Cash

© John Wiley & Sons Australia, Ltd 2015

20.11

Testbank to accompany Company Accounting 10e

Correct answer: b Learning Objective 20.6 ~ prepare worksheet entries for intragroup dividends.

28.

Chancellor Limited provided a loan of $1 500 000 to its subsidiary Park Limited. On consolidation, which of the following adjustments is needed in relation to this intragroup loan? a.

No adjustment needed

b.

Dr

*c.

d.

Cr

Loan receivable from subsidiaries $1 500 000 Loan payable to parent

$1 500 000

Cr

Loan payable from parent $1 500 000 Loan receivable from subsidiaries

$1 500 000

Cr

Loan payable to parent Cash

$1 500 000

Dr

Dr

$1 500 000

Correct answer: c Learning Objective 20.7 ~ prepare worksheet entries for intragroup borrowings.

29.

Unite Ltd provided a loan of $1 000 000 to its subsidiary Inspire Ltd. Interest of $100 000 was charged during the year ended 30 June 2018. On consolidation, which of the following adjustments is needed at 30 June 2018 in relation to the interest charged? a.

No adjustment needed

*b.

Dr

c.

d.

Interest revenue Interest expense

$100 000

Cr

$100 000

Cr

Interest expense Interest revenue Retained earnings Cash

$100 000

Cr

Dr

Dr

$100 000

$100 000

$100 000

Correct answer: b Learning Objective 20.7 ~ prepare worksheet entries for intragroup borrowings.

30.

A consolidation worksheet adjustment to eliminate the effect of interest revenue and interest expense relating to intragroup loans has which of the following tax effects? *a. b. c. d.

No tax effect Increase in current tax liability Increase in deferred tax liability Decrease in deferred tax asset

© John Wiley & Sons Australia, Ltd 2015

20.12

Chapter 20: Consolidation: intragroup transactions

Correct answer: a Learning Objective 20.7 ~ prepare worksheet entries for intragroup borrowings.

© John Wiley & Sons Australia, Ltd 2015

20.13

Testbank to accompany Company Accounting 10e

True/false questions 31.

The elimination of the full effects of intragroup transactions is required in the preparation of consolidated financial statements.

The statement is true. The full effects of transactions must be eliminated, regardless of the ownership interest.

Learning Objective 20.1 ~ explain the need for making adjustments for intragroup transactions.

32.

The effect of an intragroup sale of inventory at a profit where the inventory is still on hand at the end of the reporting period is that both profit and the inventory asset are overstated.

The statement is true. The profit is overstated in the selling entity’s books (sales – cost of sales) as there has been no external transaction, and the inventory is overstated in the purchasing entity’s books, as the inventory is now recorded at a carrying amount higher than the cost of the inventory to the group.

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

33.

The effect of an intragroup sale of inventory at a profit, where the inventory has been sold to external parties prior to the end of the reporting period, is that both profit and the inventory asset are overstated.

The statement is false. Once the inventory is sold to a party external to the group, the inventory is no longer on hand and the profit has become realised.

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

34.

Where there is an intragroup sale of inventory and the inventory has been sold to external parties prior to the end of the reporting period, no adjustment is required on consolidation.

The statement is false. Although the profit has been realised, the amount of sales and cost of sales are overstated and so the total sales revenue generated by intragroup sales must still be eliminated.

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

35.

The effect of an intragroup sale of inventory in a prior period, where the inventory is still on hand at the end of that prior period, is that a debit consolidation adjustment is made to opening retained earnings.

© John Wiley & Sons Australia, Ltd 2015

20.14

Chapter 20: Consolidation: intragroup transactions

The statement is true. The adjustment made to sales and cost of sales in the year of the intragroup sale is carried forward as an adjustment to opening retained earnings in the subsequent year.

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

36.

The effect of an intragroup sale of inventory in a prior period, where the inventory is still on hand at the end of the prior period but is sold in the current period, is that a credit adjustment is made to income tax expense in the subsequent period.

The statement is false. The adjustment made to income tax expense in the subsequent year is a debit adjustment. This is due to there also being a credit to cost of sales which increases the group profit. Therefore, there needs to be an increase (ie debit) to income tax expense.

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

37.

The effect of an intragroup sale of inventory in a prior period, where the inventory is still on hand at the end of the current period, is that a credit adjustment is made to inventory in the current period.

The statement is true. As long as the inventory is still on hand, a credit adjustment continues to be made against the inventory account to reduce the carrying amount of the inventory back to the cost of that inventory to the group.

Learning Objective 20.2 ~ prepare worksheet entries for intragroup transactions involving profits and losses in beginning and ending inventory.

38.

When a non-depreciable non-current asset such as land is sold between entities within a group, the adjustment in relation to any gain or loss recognised on the transfer is carried forward until the asset is disposed of to an external party.

The statement is true. The treatment for non-depreciable non-current assets is the same as that for inventory. In future periods, there is an adjustment to retained earnings for adjustments to revenue or expense accounts in the year of the intragroup sale.

Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

39.

When a depreciable non-current asset is sold between entities within a group, any gain recognised on the sale is eliminated and realised through future use of the asset by the group.

The statement is true. The gain is gradually realised over the remaining useful life of the asset to the group through a reduction in depreciation expenses.

Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

© John Wiley & Sons Australia, Ltd 2015

20.15

Testbank to accompany Company Accounting 10e

40.

When a depreciable non-current asset is sold between entities within a group, any gain recognised on the sale is eliminated and realised through consolidation adjustments which result in increased depreciation expenses in future periods.

The statement is false. The gain is gradually realised over the remaining useful life of the asset to the group through a reduction in depreciation expenses.

Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

41.

When a depreciable non-current asset is sold between entities within a group, any gain recognised on the sale is eliminated and realised through the future use of the asset by the group. This results in reduced depreciation and income tax expenses in future periods.

The statement is false. The gain is gradually realised over the remaining useful life of the asset to the group through a reduction in depreciation expenses, which in turn results in an increase in income tax expense.

Learning Objective 20.3 ~ prepare worksheet entries for intragroup transactions involving profits and losses on the transfer of property, plant and equipment in both the current and previous periods.

42.

Where an intragroup sale of an asset has been made and the asset was classified as inventory in the selling entity’s books, but subsequently classified as plant in the buying entity’s books, all depreciation recognised in the buying entity’s books must be eliminated on consolidation.

The statement is false. From the viewpoint of the group, the asset has been reclassified and therefore should be depreciated. However, it should be depreciated based on the original cost to the group. Assuming that a gain was made on the sale of the asset, a reduction is required to the depreciation expense (not an elimination of the depreciation expense in full).

Learning Objective 20.4 ~ prepare worksheet entries for intragroup transactions involving transfers from inventory to property, plant and equipment and from property, plant and equipment to inventory.

43.

Where an intragroup sale of an asset at a profit has been made and the asset was classified as plant in the selling entity’s books, but subsequently classified as inventory in the buying entity’s books, a credit adjustment is required against cost of sales in the year of sale.

The statement is true. From the viewpoint of the group, the asset has been reclassified from plant to inventory, so no adjustment is required in the balance sheet. However, an adjustment is required to remove the effects of the transactions from the profit and loss. These are a debit to the gain on sale of plant and a credit to the cost of sales.

© John Wiley & Sons Australia, Ltd 2015

20.16

Chapter 20: Consolidation: intragroup transactions

Learning Objective 20.4 ~ prepare worksheet entries for intragroup transactions involving transfers from inventory to property, plant and equipment and from property, plant and equipment to inventory.

44.

Tax effect consolidation entries are not required when intragroup services are provided to entities within a group.

The statement is true. As there is no effect on the carrying amounts of assets or liabilities as a result of such transactions, no tax effects entires are required.

Learning Objective 20.5 ~ prepare worksheet entries for intragroup services such as management fees.

45.

Elimination consolidation entries relating to intragroup services do not need to be carried forward to future periods.

The statement is true. This is because there is no net effect on net profit and therefore, there is no net effect on retained earnings in future periods.

Learning Objective 20.5 ~ prepare worksheet entries for intragroup services such as management fees.

46.

Pre-acquisition dividends are accounted for in the parent’s books as a reduction in the investment in the subsidiary.

The statement is false. All dividends received by the parent from the subsidiary are accounted for by the parent as revenue, regardless of whether the dividends are paid from pre- or postacquisition profits.

Learning Objective 20.6 ~ prepare worksheet entries for intragroup dividends.

47.

Where a dividend is declared in a prior period and paid in a current period, the credit in the consolidation elimination entry is made against the dividend declared/paid account.

The statement is false. In such cases, the credit is made against retained earnings. It is the date of declaration, not payment which determines the period in which the dividend is first recognised by the parent. As it was declared in the prior period, the dividend would have first been eliminated in the prior period.

Learning Objective 20.6 ~ prepare worksheet entries for intragroup dividends.

48.

When a dividend is declared, but unpaid at the end of a financial year, credit consolidation adjustments are required against both the dividend declared and dividend receivable account.

The statement is true. The corresponding debits are made against the dividend revenue and dividend payable accounts.

Learning Objective 20.6 ~ prepare worksheet entries for intragroup dividends.

© John Wiley & Sons Australia, Ltd 2015

20.17

Testbank to accompany Company Accounting 10e

49.

When an interest bearing loan is advanced by a parent to a subsidiary, a credit is required on consolidation against the loan payable and interest revenue accounts.

The statement is false. A debit (not a credit) is required against the loan payable and interest revenue accounts.

Learning Objective 20.7 ~ prepare worksheet entries for intragroup borrowings.

50.

When an interest bearing loan is advanced by a parent to a subsidiary, there is no tax effect consolidation entry required as assets and liabilities are reduced equally.

The statement is true. Tax effect adjustments are only required when there are changes in profit and net assets, which does not occur in this case.

Learning Objective 20.7 ~ prepare worksheet entries for intragroup borrowings.

© John Wiley & Sons Australia, Ltd 2015

20.18

Testbank to accompany Company Accounting 10e

Chapter 21: Consolidation: non-controlling interest Multiple-choice questions 1.

Ownership interests in a subsidiary entity that do not belong to the parent entity are known as: a. *b. c. d.

unowned interests. non-controlling interests. external equity interests. non-parent interests.

Correct answer: b Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

2.

According to AASB 10 Consolidated Financial Statements, the term ‘non-controlling interest’ is defined as: a. b. c. *d.

equity in a parent that is owned, directly or indirectly, by a subsidiary. the equity in the parent entity other than the portion owned by the subsidiary entity. the equity in the economic entity other than that which can be attributed to the subsidiary entity. equity in a subsidiary not attributable, directly or indirectly, to a parent.

Correct answer: d Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

3.

According to AASB 10 Consolidated Financial Statements, a non-controlling interest is classified as: a. *b. c. d.

part of the parent entity’s equity. part of the group’s equity. a liability of the parent entity. an asset of the group.

Correct answer: b Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

4.

A consolidated statement of comprehensive income discloses the non-controlling interest as: a. b. c.

a separate component of revenue. a separate component of profit before tax and a separate component of tax expense. a separate component of each line item of revenue and expense.

© John Wiley & Sons Australia, Ltd 2015

21.2

Chapter 21: Consolidation: non-controlling interest

*d.

a separate portion of profit or loss attributable to the non-controlling interest.

Correct answer: d Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

5.

If a subsidiary is not wholly owned by the parent there are two ownership interests which are known as the: a. b. *c. d.

parent and non-parent interest. parent and non-group interest. parent and non-controlling interest. group and non-group interest.

Correct answer: c Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

6.

AASB 12 Disclosure of Interests in Other Entities requires disclosure of which of the following for each subsidiary that has a non-controlling interest? a. b. c. *d.

Accumulated non-controlling interests of the subsidiary at the end of the reporting period.

The proportion of ownership interests held by non-controlling interests.

The subsidiary’s principal place of business.

All of the options are correct.

Correct answer: d Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

7.

A non-controlling interest is entitled to a share of which of the following items?

I II III IV

Equity of the group entity at acquisition date Current period profit or loss of the subsidiary entity Changes in equity of the subsidiary between acquisition date and the beginning of the financial period Equity of the subsidiary at acquisition date

a. b. *c. d.

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

Correct answer: c Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

8.

When presenting a consolidated statement of financial position, the non-controlling interest is:

© John Wiley & Sons Australia, Ltd 2015

21.3

Testbank to accompany Company Accounting 10e

a. b. *c. d.

not separately disclosed. presented as a separate component of total assets and total liabilities. presented separately within the equity section. shown as a separate portion of net assets.

Correct answer: c Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

9.

Under the conceptual framework for international financial reporting a non-controlling interest fits the definition of: a. *b. c. d.

a liability. an equity item. an asset. an expense.

Correct answer: b Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

10.

Which of the following statements is incorrect? *a. b. c. d.

The calculation of the NCI is not affected by profits or losses relating to intragroup transactions.

The NCI is entitled to a share of the group’s consolidated equity.

The NCI is a contributor of equity to the consolidated group.

The NCI is entitled to a share of the subsidiary’s equity adjusted for the effects of profits or losses made on intra-group transactions.

Correct answer: a Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

11.

When presenting a consolidated statement of comprehensive income, the noncontrolling interest is shown as: a. *b. c. d.

a separate component of each individual line item. a separate portion of profit or loss attributable to the non-controlling interest. part of the total revenue of the group. part of the total expenses of the group.

Correct answer: b Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

12.

Wendy Limited paid $120 000 for 75% of Yum Limited. At the date of acquisition Yum Limited had equity as follows: • share capital of $100 000

© John Wiley & Sons Australia, Ltd 2015

21.4

Chapter 21: Consolidation: non-controlling interest

• retained earnings of $50 000 • other reserves of $30 000.

All of Yum Limited’s assets and liabilities were recorded at fair value. The fair value of identifiable net assets acquired by Wendy Limited amounted to: a. b. *c. d.

$90 000. $120 000. $135 000. $180 000.

Correct answer: c Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

13.

King Limited paid $220 000 for 70% of Prince Limited. At the date of acquisition Prince Limited had share capital of $200 000 and retained earnings of $100 000 and all of Prince Limited’s assets and liabilities were r ecorded at fair value. The fair value of identifiable net assets acquired by King Limited amounted to: a. *b. c. d.

$154 000. $210 000. $300 000. $220 000.

Correct answer: b Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

14.

Fisher Limited acquired 75% of the share capital and reserves of Man Limited for $150 000. The equity of Man Limited consisted of share capital of $100 000 and reserves of $60 000. All assets and liabilities were recorded at fair value except plant and equipment which were recorded at $10 000 below fair value. The company tax rate was 30%. The partial goodwill method is adopted by the group. The amount of goodwill acquired by Fisher Limited in this business combination was: a. *b. c. d.

$17 000. $24 750. $30 000. $112 500.

Correct answer: b Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

15.

Jack Limited acquired 80% of the share capital and reserves of Jill Limited for $300 000. Share capital was $200 000 and reserves amounted to $100 000. All assets and liabilities were recorded at fair value except buildings which was recorded at $20 000 below fair value. The fair value of the NCI at the date of Jack’s acquisition was $70 000 and the full goodwill method is adopted by the group. If the company tax rate was 30%, the total goodwill in relation to this business combination amounts to:

© John Wiley & Sons Australia, Ltd 2015

21.5

Testbank to accompany Company Accounting 10e

a. b. c. *d.

$44 800. $48 800. $11 200. $56 000.

Correct answer: d Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

16.

Mooloolaba Limited owns 90% of the share capital of Maroochydore Limited.

Maroochydore Limited paid a dividend of $40 000 during the financial period. The adjustment entries in the consolidation worksheet for the dividend include which of the following? *a. b. c. d.

DR DR DR DR

Dividend revenue Dividend revenue Dividend payable Dividend receivable

$36 000 $40 000 $36 000 $40 000

Correct answer: a Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

17.

The non-controlling interest columns on a consolidation worksheet are used to: a. b. c. *d.

adjust the amounts that have been recorded for intragroup revenue transactions. adjust the amounts that have been recorded for intragroup services. eliminate the recorded amounts of the non-controlling investment in the subsidiary. compile the amounts of non-controlling interest and parent share of particular line items.

Correct answer: d Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

18.

Where the NCI is measured at fair value at acquisition date, which of the following methods is being used? a. b. *c. d.

Partial goodwill method Fair value method Full goodwill method NCI goodwill method

Correct answer: c Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

19.

Which of the following statements is incorrect?

© John Wiley & Sons Australia, Ltd 2015

21.6

Chapter 21: Consolidation: non-controlling interest

*a. b. c. d.

Under the partial goodwill method, the NCI is measured at fair value at acquisition date.

Under the partial goodwill method, the NCI is measured as a proportion of the net fair value of the subsidiary’s identifiable assets and liabilities at acquisition date.

Extra columns are added to the consolidation worksheet to divide the group’s equity into the NCI share and the parent’s share.

The adjustments for intragroup transactions are the same whether the subsidiary is wholly owned or whether there is an NCI in the subsidiary.

Correct answer: a Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

20.

Alexandra Limited acquired 80% of the share capital and reserves of Heads Limited for $300 000. Share capital was $200 000 and reserves amounted to $100 000. All assets and liabilities were recorded at fair value except buildings which was recorded at $20 000 below fair value. 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: a. *b. c. d.

$48 800. $62 800. $64 000. $60 000.

Correct answer: b Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

21.

Beach Limited is a subsidiary of Golden Limited. When Golden acquired its 70% interest in Beach, the retained earnings of Beach Limited were $40 000. At the beginning of the current period, Beach Limited’s retained earnings had increased to $100 000. Beach also earned profit of $20 000 during the current period. The NCI’s share of the equity of Beach Limited at reporting date is: *a. b. c. d.

$36 000. $30 000. $6000. $84 000.

Correct answer: a Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

22.

During the current year, a partly owned subsidiary has made a transfer from a general reserve to retained earnings. Which of the following lines would appear in the NCI consolidation entry relating to the current year transfer? a. b.

CR NCI CR Retained earnings

© John Wiley & Sons Australia, Ltd 2015

21.7

Testbank to accompany Company Accounting 10e

c. *d.

DR General reserve DR Transfer from general reserve

Correct answer: d Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

23.

Which of the following is not one of the 3 steps in calculating the NCI’s share of the recorded equity of the subsidiary? a. b. c. *d.

Determine NCI share of the changes in equity in the current period.

Determine the NCI share of equity of the subsidiary at acquisition date.

Determine the NCI share of the subsidiary’s equity between the date of acquisition and the beginning of the current period.

Determine the NCI share of the subsidiary’s equity prior to the date of acquisition.

Correct answer: d Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

24.

A non-controlling interest in the net assets of a subsidiary consists of the noncontrolling interest’s share at the date of the business combination: a. b. *c. d.

less 100% of any post-acquisition dividends paid. less the parent’s share of any post-acquisition dividends paid or declared. plus a share of the changes in the subsidiary’s equity since the business combination. less the non-controlling proportionate share of changes since the combination.

Correct answer: c Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

25.

Which of the following statements is correct? a. *b. c. d.

The entry to reflect the NCI share of equity at acquisition date changes every year that consolidated financial statements are prepared.

The NCI is entitled to a share of consolidated equity.

To calculate the NCI share of equity, the subsidiary’s equity at the end of the reporting period is divided into five parts.

The NCI is not entitled to a share of consolidated equity.

Correct answer: b Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

26.

Moffatt Ltd holds a 60% interest in Beach Ltd. Beach Ltd sells inventory to Moffatt Ltd during the year for $20 000. The inventory originally cost $14 000. At the end of the

© John Wiley & Sons Australia, Ltd 2015

21.8

Chapter 21: Consolidation: non-controlling interest

year 80% of the inventory is still on hand. The tax rate is 30%. The NCI adjustment required in relation to this transaction includes which of the following? *a. b. c. d.

DR NCI $1344 DR NCI share of profit/(loss) $1344 DR NCI $1920 CR NCI $1344

Correct answer: a Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

27.

Currimundi Ltd holds a 60% interest in Beach Ltd. Beach Ltd purchases inventory from Currimundi Ltd during the year for $30 000. The inventory originally cost $21 000. At the end of the year 80% of the inventory is still on hand. The tax rate is 30%. The NCI adjustment required in relation to this transaction includes a debit of which of the following? *a. b. c. d.

Nil $2016 $504 $5040

Correct answer: a Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

28.

Happy Ltd holds a 60% interest in Valley Ltd. On 1 July 2018 Valley Ltd sold a depreciable non-current asset to Happy Ltd at a profit before tax of $10 000. The remaining useful life of the asset at the date of sale 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 2019 is: a. b. c. *d.

debit $2800. credit $2800. debit $2100. credit $2100.

Correct answer: d Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

29.

When preparing consolidated financial statements, any profit or loss that arises in relation to the intragroup transfer of services is regarded as: a. *b. c.

immaterial and does not get adjusted on a consolidation worksheet. immediately realised. unrealised.

© John Wiley & Sons Australia, Ltd 2015

21.9

Testbank to accompany Company Accounting 10e

d.

having no impact on the non-controlling interest, and so ignored for consolidation reporting.

Correct answer: b Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

30.

Which of the following statements is incorrect? a. *b. c. d.

The NCI is unaffected by the existence of any gain on bargain purchase.

The NCI share of equity at acquisition date is adjusted for its share of any gain on bargain purchase.

Any gain on bargain purchase is recognised in the pre-acquisition entry.

The pre-acquisition entry only adjusts for the parent’s share of the pre-acquisition equity.

Correct answer: b Learning Objective 21.5 ~ explain how the NCI is affected by the existence of a gain on bargain purchase.

© John Wiley & Sons Australia, Ltd 2015

21.10

Chapter 21: Consolidation: non-controlling interest

True/false questions 31.

The NCI is a contributor of equity to the group.

The statement is true. There are two equity holders in the group – the parent shareholders and the NCI. Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

32.

The NCI is entitled to a share of the consolidated equity of the group.

The statement is true. The NCI is entitled to a share of the equity of the subsidiary adjusted for the effects of profits and losses made on intragroup transactions – this is referred to as consolidated equity.

Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

33.

The consolidated statement of comprehensive income must separately disclose the consolidated profit for the period attributable to equity holders of the parent and the NCI.

The statement is true. This is required under paragraph 81B of AASB 101 Presentation of Financial Statements.

Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

34.

The NCI share of different categories of equity is required to be separately disclosed on the face of the consolidated statement of financial position.

The statement is false. Only the total NCI share of equity is required to be disclosed on the face of the statement of financial position, with the different categories shown in the statement of changes in equity.

Learning Objective 21.1 ~ discuss the nature of the non-controlling interest.

35.

Where a subsidiary is partly owned by a parent and an NCI, any goodwill arising in the acquisition analysis is required to be allocated between that attributable to the parent and that attributable to the NCI.

The statement is false. This will be the case where the group elects to use the full goodwill method. If the partial goodwill method is applied, then the only goodwill arising in an acquisition analysis is the goodwill attributable to the parent’s investment in the subsidiary.

Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

36.

Where a subsidiary is partly owned by a parent and an NCI, both the BCVR entries and the pre-acquisition entries are adjusted to reflect only the parent’s share of the subsidiary’s equity balances.

© John Wiley & Sons Australia, Ltd 2015

21.11

Testbank to accompany Company Accounting 10e

The statement is false. The BCVR entries are not affected by the existence of a NCI. Only the pre-acquisition entries are adjusted to reflect the parent’s share of the subsidiaries equity balances.

Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

37.

The full effects of transactions between entities within a group are eliminated on consolidation, regardless of the existence of an NCI.

The statement is true. Such adjustments are not affected by the ownership interest in the subsidiary.

Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

38.

Where a partly owned subsidiary has a dividend declared but not yet paid at balance date, the NCI share of equity is reduced by the NCI share of the dividend and the dividend payable to the NCI is eliminated.

The statement is false. The NCI share of equity is reduced by the NCI share of the dividend but the dividend payable to the NCI remains in the consolidated statement of financial position.

Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

39.

Because it is necessary to distinguish between the parent’s share and the NCI share of equity in the consolidated financial statements, extra columns are added in the consolidation worksheet to divide the group equity into the NCI share and the parent’s share.

The statement is true.

Learning Objective 21.2 ~ explain the effects of the NCI on the consolidation process.

40.

Non-controlling interests in the equity of a subsidiary at the date of acquisition are reflected in Step 1 of the NCI allocation process.

The statement is true. The purpose of the entry in Step 1 of the NCI allocation process is to allocate a share of the equity balances in the subsidiary at the date of acquisition to the NCI. Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

41.

The NCI is not allocated a share of any BCVR balances where business combination valuation entries are recorded on consolidation, rather than in the subsidiary’s books.

The statement is false. It makes no difference to the calculation of the NCI share of any BCVR balances whether the entries are made in the books of the subsidiary or on consolidation.

Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

42.

The calculation of the NCI share of equity at a point in time is done in three steps.

© John Wiley & Sons Australia, Ltd 2015

21.12

Chapter 21: Consolidation: non-controlling interest

The statement is true. The three steps are: (1) the NCI share of the subsidiary’s equity at acquisition date; (2) the NCI share of the change in the subsidiary’s equity between the acquisition date and the beginning of the current period for which the consolidated financial statements are being prepared; and (3) the NCI share of the changes in the subsidiary’s equity in the current period.

Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

43.

Consequential depreciation adjustments in relation to assets that were the subject of an upward business combination valuation adjustment must be taken into account when calculating the NCI share of post-acquisition movements in the subsidiary’s equity.

The statement is true. Such adjustments will result in a reduction in the NCI share of retained earnings and current year profits in Steps 2 & 3 of the NCI allocation process.

Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

44.

A current year transfer by a partly owned subsidiary of a pre-acquisition balance from the general reserve to retained earnings is ignored when preparing the NCI journals as there has been no change in total equity.

The statement is false. Even though there has been no change in the total equity of the subsidiary, a consolidation adjustment is required to debit the transfer from general reserve appropriation account and credit the transfer to retained earnings appropriation account for the NCI share of the transfer.

Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

45.

The entry to reflect the NCI share of acquisition date never changes.

The statement is true. Any changes in equity are reflected in the year in which the changes are made.

Learning Objective 21.3 ~ explain how to calculate the NCI share of equity.

46.

The effect on consolidated current year profit of all intragroup transactions involving a partly owned subsidiary must be reflected in Step 3 of the NCI allocation process.

The statement is false. Only transactions where the unrealised profit affects the subsidiary’s equity need to be taken into account.

Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

47.

For transactions involving intragroup services, it is assumed that the profit is realised by the group immediately on payment within the group. Therefore, no NCI adjustments are made on consolidation in relation to such transactions.

© John Wiley & Sons Australia, Ltd 2015

21.13

Testbank to accompany Company Accounting 10e

The statement is true. Only unrealised profits and losses relating to assets are required to be considered as part of the NCI allocation process.

Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

48.

Where a subsidiary records a gain on the intragroup sale of a non-current depreciable asset to another entity within the group, NCI adjustments are required in relation to both the gain on sale as well as the consequential depreciation adjustments resulting from the group’s continued use of the asset.

The statement is true. Even though the depreciation expense on an ongoing basis will be recorded in the purchasing entity’s books, the consolidation adjustments relating to depreciation have an impact on the NCI share of equity.

Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

49.

A gain recorded by a subsidiary on the sale of a non-current asset to another entity within the group will result in a debit adjustment to the NCI share of current year profit.

The statement is false. The adjustment to the NCI share of current year profit will be a credit, not a debit.

Learning Objective 21.4 ~ explain how the calculation of the NCI is affected by the existence of intragroup transactions.

50.

The NCI is unaffected by the existence of any gain on bargain purchase.

The statement is true. The gain arises by virtue of the parent’s ownership interest in the subsidiary and is not related to the existence of the NCI. Learning Objective 21.5 ~ explain how the NCI is affected by the existence of a gain on bargain purchase.

© John Wiley & Sons Australia, Ltd 2015

21.14

Chapter 22: Consolidation: other issues

Chapter 22: Consolidation: Other issues Multiple-choice questions 1.

Consider the following economic entity structure: P Ltd 90%

A Ltd 60% B Ltd

The direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI) are as follows.

DNCI in A Ltd 10% 10% 40% 40%

*a. b. c. d.

INCI in A Ltd Nil 14% Nil Nil

DNCI in B Ltd 40% 40% 10% 10%

INCI in B Ltd 6% 6% 6% 54%

Correct answer: a Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

2.

Kerri Limited has a 60% ownership interest in Emily Limited. Emily Limited has an 80% ownership interest in Georgia Limited. As a result of these ownership interests, there is an indirect NCI in Georgia Limited of: a. b. c. *d.

48%.

12%.

8%.

32%.

.

22.2

Testbank to accompany Company Accounting 10e

Correct answer: d Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

3.

Consider the following economic entity structure.

P Ltd

70%

A Ltd

20%

B Ltd

60%

The direct non-controlling interests (DNCI) and indirect non-controlling interests (INCI) are: DNCI in A Ltd 30% 30% 30% 30%

a. b. c. *d.

INCI in A Ltd Nil 12% Nil Nil

DNCI in B Ltd 80% 40% 12% 20%

INCI in B Ltd 18% 18% 18% 18%

Correct answer: d Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

4.

Consider the following economic entity structure.

80%

A Ltd

P Ltd

30%

60%

B Ltd

The indirect NCI in B Ltd is the same group of shareholders as the: a. b. *c. d.

direct NCI in B Ltd. indirect NCI in A Ltd. direct NCI in A Ltd. shareholders in P Ltd.

.

22.3

Chapter 22: Consolidation: other issues

Correct answer: c Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

5.

Nambour Limited has a direct ownership interest of 70% in Noosa Limited. Liao Limited has a direct ownership interest of 60% in Mudjimba Limited. The indirect non-controlling interest in Mudjimba Limited is: a. b. c. *d.

28%.

40%.

30%.

18%.

Correct answer: d Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

6.

Caloundra Limited has an 85% ownership interest in Minchinton Limited. Minchinton Limited has a 55% ownership interest in Moreton Limited. As a result of these ownership interests, there is a direct ownership interest in Moreton Limited amounting to: a. b. *c. d.

15%.

8%.

45%.

85%.

Correct answer: c Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

7.

An ownership structure in which Orange Limited acquires shares in Pear Limited before Pear Limited acquires shares in Quince Limited is known as: a. *b. c. d.

an aggregate acquisition. a sequential acquisition. a multiple acquisition. a consequential acquisition.

Correct answer: b Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

.

22.4

Testbank to accompany Company Accounting 10e

8.

In a situation where a parent acquires shares in a subsidiary, and the subsidiary later acquires a controlling interest in another entity, the ownership structure is: *a. b. c. d.

sequential. non-sequential. ordered. random.

Correct answer: a Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

9.

In a group that has a multiple subsidiary structure, the indirect non-controlling interest is entitled to: *a. b. c. d.

a proportionate share of post-acquisition equity only. a proportionate share of pre-acquisition equity only. no share of post acquisition equity. no share of either pre acquisition or post acquisition equity.

Correct answer: a Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

10.

In a group that has a multiple subsidiary structure, the direct non-controlling interest is entitled to: a. b. *c. d.

a proportionate share of post-acquisition equity only. a proportionate share of pre-acquisition equity only. a proportionate share of both pre-acquisition and post-acquisition equity. no share of post-acquisition equity.

Correct answer: c Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

11.

The pre-acquisition entry for the Baxter group in order to consolidate a 60% interest in a subsidiary contained the following debits. Retained earnings $6000, share capital $12 000, general reserve $2400, BCVR $1200. The direct non-controlling interest’s share of the subsidiary’s equity at the date of acquisition is: a. *b. c. d.

$8640. $14 400. $12 960. $21 600.

.

22.5

Chapter 22: Consolidation: other issues

Correct answer: b Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

12. When calculating the direct non-controlling interest share of equity, consolidation adjustments are needed to: *a. b. c. d.

remove unrealised profits or losses from intragroup transactions. recognise profits made on intragroup services. eliminate intragroup advances. partially eliminate profits on intragroup services.

Correct answer: a Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

13.

In order to consolidate an 80% interest in a subsidiary, the Eassie group prepared the following pre-acquisition entry.

DR Retained earnings $4 000 DR Share capital $30 000 DR General reserve $6 000 CR Investment in subsidiary

$40 000

The interest in equity attributable to the direct non-controlling interest is: *a. b. c. d.

$10 000. $32 000. $8000. $40 000.

Correct answer: a Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

14.

Waratah Ltd acquired a 60% ownership interest in Bottle Brush Ltd on 30 June 20X5. On the same day, Bottle Brush Ltd acquired a 70% ownership interest in Honeydew Ltd. The following interentity transactions have taken place between the entities in the group during the years ended 30 June 20X6 and 30 June 20X7.

On 1 July 20X5 Bottle Brush sold an item of plant to Honeydew for a profit of $20 000.

The remaining useful life of the plant at the date of transfer was 4 years.

• On 1 September 20X5, Honeydew paid a dividend of $70 000 from profits earned since 30 June 20X5.

• Waratah lent $50 000 to Bottle Brush on 1 January 20X6. Interest charged on the loan for the year ended 30 June 20X6 was $2000 and for the year ended 30 June 20X7 was $4000.

.

22.6

Testbank to accompany Company Accounting 10e

On 31 May 20X6 Waratah sold inventory to Honeydew for $15 000. Profit earned on the sale was $5000. Honeydew sold the inventory to external parties on 1 August 20X6.

Details of profits earned by entities within the group for the years ended 30 June 20X6 and 30 June 20X7 are: 30 June 20X6 30 June 20X7 Waratah 100 000 125 000 Bottle Brush 85 000 70 000 Honeydew 20 000 35 000 The tax rate is 30%.

The NCI share of profit in Bottle Brush for the year ended 30 June 20X6 is: a. *b. c. d.

$11 600. $13 000. $13 800. $29 800.

Correct answer: b Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

15.

Waratah Ltd acquired a 60% ownership interest in Bottle Brush Ltd on 30 June 20X5. On the same day, Bottle Brush Ltd acquired a 70% ownership interest in Honeydew Ltd. The following interentity transactions have taken place between the entities in the group during the years ended 30 June 20X6 and 30 June 20X7.

On 1 July 20X5 Bottle Brush sold an item of plant to Honeydew for a profit of $20 000.

The remaining useful life of the plant at the date of transfer was 4 years.

• On 1 September 20X5, Honeydew paid a dividend of $70 000 from profits earned since 30 June 20X5.

• Waratah lent $50 000 to Bottle Brush on 1 January 20X6. Interest charged on the loan for the year ended 30 June 20X6 was $2000 and for the year ended 30 June 20X7 was $4000.

On 31 May 20X6 Waratah sold inventory to Honeydew for $15 000. Profit earned on the sale was $5000. Honeydew sold the inventory to external parties on 1 August 20X6.

Details of profits earned by entities within the group for the years ended 30 June 20X6 and 30 June 20X7 are: 30 June 20X6 30 June 20X7 Waratah 100 000 125 000 Bottle Brush 85 000 70 000 Honeydew 20 000 35 000 The tax rate is 30%.

The NCI share of profit in Honeydew for the year ended 30 June 20X7 is: a. b.

$9800. $10 500.

.

22.7

Chapter 22: Consolidation: other issues

*c. d.

$20 300. $22 330.

Correct answer: c Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

16.

Waratah Ltd acquired a 60% ownership interest in Bottle Brush Ltd on 30 June 20X5. On the same day, Bottle Brush Ltd acquired a 70% ownership interest in Honeydew Ltd. The following interentity transactions have taken place between the entities in the group during the years ended 30 June 20X6 and 30 June 20X7.

On 1 July 20X5 Bottle Brush sold an item of plant to Honeydew for a profit of $20 000.

The remaining useful life of the plant at the date of transfer was 4 years.

• On 1 September 20X5, Honeydew paid a dividend of $70 000 from profits earned since 30 June 20X5.

• Waratah lent $50 000 to Bottle Brush on 1 January 20X6. Interest charged on the loan for the year ended 30 June 20X6 was $2000 and for the year ended 30 June 20X7 was $4000.

On 31 May 20X6 Waratah sold inventory to Honeydew for $15 000. Profit earned on the sale was $5000. Honeydew sold the inventory to external parties on 1 August 20X6.

Details of profits earned by entities within the group for the years ended 30 June 20X6 and 30 June 20X7 are: 30 June 20X6 30 June 20X7 Waratah 100 000 125 000 Bottle Brush 85 000 70 000 Honeydew 20 000 35 000 The tax rate is 30%.

The effect of the interest paid by Bottle Brush to Waratah on the NCI of Bottle Brush for the year ended 30 June 20X7 is: *a. b. c. d.

nil. an increase in MI of $1120. an increase in MI of $1600. an increase in MI of $2800.

Correct answer: a Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

17. When calculating the direct non-controlling interest share of equity, consolidation adjustments are needed to: a. b. *c.

eliminate any realised profits or losses from inventory transfers. recognise any unrealised profits or losses from intragroup service transfers. fully eliminate any unrealised profits or losses from intragroup transactions.

.

22.8

Testbank to accompany Company Accounting 10e

d.

partially eliminate any unrealised profits from inventory transfers.

Correct answer: c Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

18.

An indirect non-controlling interest arises: a. b. c. *d.

only when a wholly owned subsidiary owns shares in another subsidiary. when a partly owned subsidiary owns shares in the parent entity. when a wholly owned subsidiary owns shares in the parent entity. only when a partly owned subsidiary holds shares in another subsidiary.

Correct answer: d Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

19.

Jacaranda Limited acquired a 75% ownership interest in Frangipani Limited on 30 June 20X5. On the same day, Frangipani Limited acquired a 60% ownership interest in Gardener Limited. The following interentity transactions have taken place between the entities in the group during the years ended 30 June 20X6 and 30 June 20X7: On 1 July 20X5 Gardener sold an item of plant to Jacaranda for a profit of $25 000. The remaining useful life of the plant at the date of transfer was 2 years.

On 1 September 20X5, Gardener paid a dividend of $100 000 from profits earned prior to 30 June 20X5.

Jacaranda lent $500 000 to Gardener on 1 January 20X6. Interest charged on the loan for the year ended 30 June 20X6 was $20 000 and for the year ended 30 June 20X7 was $40 000.

On 31 May 20X6 Frangipani sold inventory to Gardener for $15 000. Profit earned on the sale was $1500. Gardener sold the inventory to external parties on 1 August 20X6.

Details of profits earned by entities within the group for the years ended 30 June 20X6 and 30 June 20X7 are: 30 June 20X6 30 June 20X7 Jacaranda 100 000 125 000 Frangipani 45 000 70 000 Gardener 20 000 35 000 The tax rate is 30%.

The effect of the dividend paid by Gardener to Frangipani on the NCI of Gardener for the year ended 30 June 20X6 is: a. b. *c. d.

nil. $15 000. $40 000. $55 000.

.

22.9

Chapter 22: Consolidation: other issues

Correct answer: c Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

20.

Jacaranda Limited acquired a 75% ownership interest in Frangipani Limited on 30 June 20X5. On the same day, Frangipani Limited acquired a 60% ownership interest in Gardener Limited. The following interentity transactions have taken place between the entities in the group during the years ended 30 June 20X6 and 30 June 20X7: On 1 July 20X5 Gardener sold an item of plant to Jacaranda for a profit of $25 000. The remaining useful life of the plant at the date of transfer was 2 years.

On 1 September 20X5, Gardener paid a dividend of $100 000 from profits earned prior to 30 June 20X5.

Jacaranda lent $500 000 to Gardener on 1 January 20X6. Interest charged on the loan for the year ended 30 June 20X6 was $20 000 and for the year ended 30 June 20X7 was $40 000.

On 31 May 20X6 Frangipani sold inventory to Gardener for $15 000. Profit earned on the sale was $1500. Gardener sold the inventory to external parties on 1 August 20X6.

Details of profits earned by entities within the group for the years ended 30 June 20X6 and 30 June 20X7 are: 30 June 20X6 30 June 20X7 Jacaranda 100 000 125 000 Frangipani 45 000 70 000 Gardener 20 000 35 000 The tax rate is 30%.

The NCI share of profit in the Frangipani group for the year ended 30 June 20X6 is: a. b. *c. d.

$14 812.50. $15 487.50. $17 175.00. $21 987.50.

Correct answer: c Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

21.

Caloundra Limited has an ownership interest of 60% in a subsidiary Aroona Limited.

Aroona owns 70% of Bribie Limited. Since acquisition date the retained earnings of Bribie Limited have increased from $100 000 to $150 000. The direct non-controlling interest in the retained earnings of Bribie is: a. b. c. *d.

$0. $105 000. $60 000. $45 000.

.

22.10

Testbank to accompany Company Accounting 10e

Correct answer: d Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

22.

Peter Limited has an ownership interest of 80% in a subsidiary John Limited. John Limited owns 60% of Joseph Limited. At acquisition date the retained earnings of Joseph Limited were $200 000. At consolidation date, the retained earnings of Joseph Limited were $440 000. The indirect non-controlling interest in the retained earnings of Joseph Limited is calculated as: a. b. *c. d.

$0. $24 000. $28 800. $52 800.

Correct answer: c Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

23.

Realty Group had the following debits in the pre-acquisition entry used to consolidate a 60% direct ownership interest in a subsidiary: Retained earnings $60 000, Share capital $120 000, General Reserve $24 000, BCVR $12 000. The amount attributable to the direct non-controlling interest is: a. *b. c. d.

$129 600. $144 000. $86 400. $216 000.

Correct answer: b Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

24.

In a multiple subsidiary structure, the indirect non-controlling interest is entitled to a proportionate share of: a. *b. c. d.

pre-acquisition equity. post-acquisition equity only. both pre- and post-acquisition equity. neither pre- nor post-acquisition equity.

Correct answer: b Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

.

22.11

Chapter 22: Consolidation: other issues

25.

When preparing consolidation adjustment entries to effect a consolidation of a multiple subsidiary structure, intragroup transactions: a. b. c. *d.

are not eliminated. are partially eliminated to the extent of the ownership interest of the parent entity to each transaction. are ignored as it is impractical to attempt to determine the size of the ownership interest relating to each transaction. are eliminated in full.

Correct answer: d Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

26.

In a multiple subsidiary structure, the direct non-controlling interest is entitled to a proportionate share of: a. *b. c. d.

pre-acquisition equity only. pre- and post-acquisition amounts of equity. post-acquisition amounts of equity only. post-acquisition balance of retained earnings only.

Correct answer: b Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

27.

Alpha Limited acquired shares in Bravo Limited. At the time of this acquisition Bravo Limited already held shares in Charlie Limited. This form of acquisition of an indirect ownership interest, by Alpha Limited in Charlie Limited, is known as a/an: a. b. *c. d.

inconsequential acquisition. indirect acquisition. non-sequential acquisition. unorthodox acquisition.

Correct answer: c Learning Objective 22.3 ~ explain the effects on the consolidation process where the acquisition is non-sequential.

28.

Reciprocal shareholdings exist when: a. b. c. *d.

a parent owns shares in a subsidiary. a subsidiary owns shares in a parent only. a parent owns shares in a subsidiary and in a joint venture. a parent and a subsidiary own shares in each other.

.

22.12

Testbank to accompany Company Accounting 10e

Correct answer: d Learning Objective 22.4 ~ explain the nature of reciprocal ownership between subsidiaries.

29.

Which of the following can result in a loss of control by a parent over a subsidiary? a. b. c. *d.

The parent sells some of the shares in the subsidiary.

There is a change in the dispersion in the holding of shares by entities comprising the NCI. There may be a change in a contractual arrangement.

All of the above.

Correct answer: d Learning Objective 22.5 ~ explain how to account for changes in ownership interests.

30.

Where a change in ownership interest results in the loss of control of a subsidiary: a. *b. c. d.

the gain or loss in the parent’s records will equal the consolidated gain or loss. the remaining investment will be recorded at fair value in accordance with AASB 9 Financial Instruments. the remaining investment will be accounted for in accordance with AASB 127 Separate Financial Statements. the gain or loss will be recorded in other comprehensive income.

Correct answer: b Learning Objective 22.5 ~ explain how to account for changes in ownership interests.

.

22.13

Chapter 22: Consolidation: other issues

True/false questions 31.

An indirect NCI can exist in an entity only where there is a direct NCI in the immediate parent of that entity.

The statement is true. Indirect NCI only arise in certain multiple subsidiary structures.

Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

32.

An indirect NCI arises only where a partly owned subsidiary holds shares in another partly owned subsidiary.

The statement is true. The indirect NCI in lower level subsidiaries arises only because of the existence of a direct NCI in higher level partly owned subsidiaries.

Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

33.

If A Ltd owns 70% of B Ltd and B Ltd owns 60% of C Ltd, the indirect NCI in C Ltd is 18%.

The statement is true. This is calculated as the direct NCI in B Ltd (30%) times B Ltd’s ownership interest in C Ltd (60%).

Learning Objective 22.1 ~ explain the difference between direct non-controlling interest (DNCI) and indirect non-controlling interest (INCI).

34.

The calculation of the direct NCI share of equity is the same as that for the indirect NCI share of equity.

The statement is false. The direct NCI receives a share of both the subsidiary’s pre- and postacquisition equity, whereas the indirect NCI only receives a share of the subsidiary’s postacquisition equity.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

35.

The pre-acquisition entry is prepared based on the immediate parent’s interest in a subsidiary.

The statement is true. Both the acquisition analysis and pre-acquisition entry are prepared based on the immediate parent’s interest in a subsidiary.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

.

22.14

Testbank to accompany Company Accounting 10e

36.

The accounting treatment for a group with multiple subsidiaries is not affected by the sequence in which acquisitions of subsidiaries occur.

The statement is false. The accounting treatment is affected by the sequence in which acquisitions of subsidiaries occur.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

37.

The accounting for intragroup transactions is not affected by the existence of multiple subsidiaries.

The statement is true. All intragroup transactions are eliminated in full regardless of ownership interests.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

38.

The direct NCI receives a proportionate share of both pre and post-acquisition equity of the subsidiary.

The statement is true. The direct NCI receives a proportionate share of all equity of the subsidiary.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

39.

The indirect NCI receives a proportionate share of both pre and post-acquisition equity of the subsidiary.

The statement is false. The indirect NCI receives a proportionate share of only the postacquisition equity of the subsidiary.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

40.

The NCI share of equity is calculated on the recorded equity of the subsidiary.

The statement is false. The NCI share of equity is calculated on consolidated equity, not recorded equity.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

41.

The indirect NCI is entitled to a share of any movements in the business combination valuation reserves that occur subsequent to the acquisition of a subsidiary.

The statement is false. As balances in BCVR accounts represent pre-acquisition equity subsequent movements, they have no effect on the calculation of the indirect NCI. Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

.

22.15

Chapter 22: Consolidation: other issues

42.

The indirect NCI is entitled to a share of all movements in reserve accounts.

The statement is false. The indirect NCI is entitled only to a share of post-acquisition movements in reserves.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

43.

The indirect NCI share of contributed equity is not affected by the payment of a dividend by a subsidiary.

The statement is true. Only the direct NCI is allocated a share of dividends paid by subsidiaries.

Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

44.

When a partly owned subsidiary receives a dividend from an entity that they have an interest in, an adjustment must be made to the current year profit prior to calculation of the direct NCI share of profit.

The statement is true. Current year profit must be reduced by the amount of the dividend revenue that has been eliminated prior to allocation of profit to the direct NCI. Learning Objective 22.2 ~ calculate the NCI share of equity in a sequential acquisition situation.

45.

In non-sequential acquisitions, one of the assets of the acquired subsidiary for which the carrying amount may differ from fair value is its investments in its subsidiaries.

The statement is true. It is this issue which results in a change to the consolidation process where acquisitions are non-sequential.

Learning Objective 22.3 ~ explain the effects on the consolidation process where the acquisition is non-sequential.

46.

The process of consolidation is not affected by the fact that acquisitions of subsidiaries may be non-sequential.

The statement is false. In non-sequential acquisitions, one of the assets of the acquired subsidiary for which the carrying amount may differ from fair value is its investments in its subsidiaries. It is this issue which results in a change to the consolidation process where acquisitions are non-sequential.

Learning Objective 22.3 ~ explain the effects on the consolidation process where the acquisition is non-sequential.

.

22.16

Testbank to accompany Company Accounting 10e

47.

Investments in subsidiaries by another partly owned subsidiary where the acquisition is non-sequential require adjustments to be made to the fair value of the investments.

The statement is true. Such fair value adjustments will result in corresponding adjustments to the pre-acquisition elimination entries.

Learning Objective 22.3 ~ explain the effects on the consolidation process where the acquisition is non-sequential.

48.

Reciprocal shareholdings exist when a parent and a subsidiary own shares in each other.

The statement is true. Such shareholdings are also referred to as mutual holdings or cross holdings.

Learning Objective 22.4 ~ explain the nature of reciprocal ownership between subsidiaries.

49.

It is possible for an entity to lose control over its investment in another entity without a change in their ownership interest.

The statement is true. This could occur due to a change in the dispersion in the holding of shares by entities comprising the NCI or because of a change in a contractual arrangement.

Learning Objective 22.5 ~ explain how to account for changes in ownership interests.

50.

When a parent acquires an additional interest in a subsidiary, the change in ownership interest in account for as an adjustment against goodwill.

The statement is false. Such changes are accounted for as equity transactions.

Learning Objective 22.5 ~ explain how to account for changes in ownership interests.

.

22.17

Chapter 23: Associates and joint ventures

Chapter 23: Associates and joint ventures Multiple-choice questions 1.

For the purposes of equity accounting, it is presumed that the investor has significant influence over the other entity where the investor holds: a. b. *c. d.

100% of the voting power of the investee. between 5% and 10% of the voting power of the investee.

20% or more of the voting power of the investee.

75% or more of the voting power of the investee.

Correct answer: c Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

2.

Which of the following are regarded as factors indicating the existence of significant influence over another entity? ➢ ➢ ➢ ➢

Representation on the board of directors Participation in decisions about dividends Provision of essential technical information Ability to control the investee’s operating policies a. b. c. *d.

I Yes No No No

II III Yes Yes Yes Yes No No Yes No

IV Yes Yes Yes No

I II III IV

Correct answer: d Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

3.

Which of the following is not one of the three levels of control that one entity can exercise over another? *a. b. c. d.

Controlling influence Significant influence Control Joint control

Correct answer: a Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

.

23.2

Testbank to accompany Company Accounting 10e

4.

The contractually agreed sharing of control of an arrangement which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control is referred to as: *a. b. c. d.

joint control. contractual control. unanimous control. shared control.

Correct answer: a Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

5.

Which of the following statements is incorrect? a. b. *c. d.

Significant influence requires the investor to have the power or capacity to participate in the investee’s financial and operating policy decision.

The key criterion for identifying a joint arrangement is that the joint venturers have joint control over the joint venture.

Significant influence requires the investor to actually exercise its power over the investee.

The assessment of the existence of significant influence requires judgement on the part of the accountants.

Correct answer: c Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

6.

Where which of the following conditions exist, is the equity method not applied to associates?

I. II. III. IV.

a. b. c. *d.

The entity is a wholly owned subsidiary or a partly owned subsidiary and its owners do not object to the entity not applying the equity method.

The entity’s debt or equity securities are not traded in a public market.

The entity has not filed financial statements with a regulatory organisation for the purpose of issuing any class of securities in a public market.

The ultimate parent of the entity publishes consolidated financial statements that comply with IFRS. I and IV only II and III only I, II and III only I, II, III and IV

Correct answer: d

.

23.3

Chapter 23: Associates and joint ventures

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

7.

For the purposes of equity accounting, significant influence is defined as the power of an investor to: a. *b. c. d.

control the financial and operating policies of an associate. participate in the financial and operating policy decisions of an investee. participate in the day-to-day management of a joint venture interest. dominate the financing decisions of an entity.

Correct answer: b Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

8.

The accounting method applied to investments in associates, known as the equity method, is also known as the: a. b. c. *d.

entity method of consolidation. significant influence method. multi-line consolidation method. one-line consolidation method.

Correct answer: d Learning Objective 23.2 ~ explain the rationale for the equity method and its application.

9.

Where the investor is not a parent, the investor applies: a. b. c. *d.

the cost method to its associates in its own accounting records. the equity method to its associates and subsidiaries in the consolidated financial statements. the fair value method to its associates in its own accounting records. the equity method to its associates in its own accounting records.

Correct answer: d Learning Objective 23.2 ~ explain the rationale for the equity method and its application.

10.

Warriors Limited acquired a 20% share in Tomkins Limited for $36 000. Warriors Limited has no other investments. At the date on which it became an associate, Tomkins Limited had the following equity: - share capital $100 000 - retained earnings $80 000.

.

23.4

Testbank to accompany Company Accounting 10e

At the end of the financial year following the investment, Tomkins Limited generated a profit after tax of $12 000. After applying the equity method of accounting, Warriors Limited will have which of the following carrying amounts for the investment? *a. b. c. d.

$38 400 $36 000 $33 600 $18 400

Correct answer: a Learning Objective 23.3 ~ explain the basic principles of the equity method.

11.

Broncos Limited acquired a 30% interest in Bennett Limited for $54 000. Broncos holds other equity investments but does not prepare consolidated financial statements. Bennett Limited revalued its buildings upwards by $20 000 during the current financial period.

The balance of the investment in associate account at the end of the current financial period is: a. b. c. *d.

$22 200. $36 200. $54 000. $60 000.

Correct answer: d Learning Objective 23.3 ~ explain the basic principles of the equity method.

12.

The equity method of accounting for an investment in an associate includes which of the following steps?

Recognise the initial investment at cost Recognise the initial investment at fair value Reduce the carrying amount by any dividends Adjust the carrying amount by the investor’s share of the associate’s profit or loss

I II III IV Yes Yes No No Yes No Yes No No Yes No Yes No

Yes Yes

No

a. I *b. II c. III d. IV Correct answer: b Learning Objective 23.3 ~ explain the basic principles of the equity method.

.

23.5

Chapter 23: Associates and joint ventures

13.

Cozza Limited acquired a 40% investment in Hodgo Limited for $1 000 000. Hodgo declared and paid a dividend of $20 000 during the current year. Cozza Limited does not prepare consolidated financial statements. Which of the following is the appropriate entry for Cozza to record this dividend? *a. b. c. d.

DR Cash $8000 CR Investment in associate $8000 DR Dividends payable $8000 CR Cash $8000 DR Cash $8000 CR Dividend revenue $8000 DR Investment in associate $8000 CR Dividend revenue $8000

Correct answer: a Learning Objective 23.3 ~ explain the basic principles of the equity method.

14.

When goodwill in an associate is acquired by an investor, the amortisation of goodwill is: a. *b. c. d.

spread evenly across the useful life of the investment. not permitted. included in the determination of the investor’s share of the associate’s profit or loss. included in the revaluation of the investment.

Correct answer: b Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

15.

Adjustments made for the purpose of calculating the incremental adjustment to the share of profit of an associate are: a. b. *c. d.

recognised in the books of the investor. recognised in the books of the investee. notional adjustments and not included in the books of the investee. relate to realised transactions and so are recognised directly by the investee.

Correct answer: c Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

16.

On 1 July 2016 Titans Ltd acquired a 25% share of Taylor Ltd. At that date, the following assets had carrying amounts different to their fair values in Taylor’s books.

Asset

Carrying

.

Fair value

23.6

Testbank to accompany Company Accounting 10e

amount Inventory $24 000 Machinery $48 000

$30 000 $60 000

All inventory was sold to third parties by 30 June 2017. On 1 July 2016, the machinery had a remaining useful life of 3 years.

The tax rate is 30%.

The adjustment required to the investment in associate account at 30 June 2017 in relation to the above assets is: *a. b. c. d.

$1750. $2500. $7000. $10 000.

Correct answer: a Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

17.

On 1 July 2016 Titans Ltd acquired a 25% share of Taylor Ltd. At that date, the following assets had carrying amounts different to their fair values in Taylor’s books.

Asset

Carrying amount Inventory $24 000 Machinery $48 000

Fair value $30 000 $60 000

All inventory was sold to third parties by 30 June 2017. On 1 July 2016, the machinery had a remaining useful life of 3 years.

The tax rate is 30%.

The adjustment required to the investment in associate account at 30 June 2018 in relation to the above assets is: a. *b. c. d.

$1000. $2450. $2800. $3500.

Correct answer: b Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

.

23.7

Chapter 23: Associates and joint ventures

18.

Goodwill acquired in associate is: a. b. c. *d.

amortised across its useful life. written off immediately against the carrying amount of the investment. carried as a separate asset in the accounting records of the investor. not subject to amortisation.

Correct answer: d Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

19.

Factor Limited acquired a 25% investment in Red Limited for $31 000. Red Limited declared and paid a dividend of $10 000. Factor Limited does not prepare consolidated financial statements. Which of the following is the appropriate entry for Factor Limited to record this dividend? a. *b. c. d.

DR Investment in associate $2500 CR Dividend revenue DR Cash $2500 CR Investment in associate DR Dividends received $2500 CR Cash DR Cash $2500 CR Dividend revenue

$2500 $2500 $2500 $2500

Correct answer: b Learning Objective 23.5 ~ adjust for movements in equity from dividends and reserves, and the effects of dissimilar accounting policies and different reporting dates, and account where the investment in the associate/joint venture is acquired in stages.

20.

Voyager Ltd acquired a 40% interest in Sea Ltd for $60 000. Voyager Ltd is part of a consolidated group. In the financial period immediately following the date on which it became an associate, Sea Ltd generated profits after tax of $32 000 and paid a dividend of $6000.

After equity accounting has been applied, the balance in the investor’s account ‘shares in associate’ is: a. *b. c. d.

$72 800. $70 400. $60 000. $86 000.

Correct answer: b

.

23.8

Testbank to accompany Company Accounting 10e

Learning Objective 23.5 ~ adjust for movements in equity from dividends and reserves, and the effects of dissimilar accounting policies and different reporting dates, and account where the investment in the associate/joint venture is acquired in stages.

21.

Kanga Limited acquired a 35% investment in Roo Limited for $20 000. Kanga Limited also owns two subsidiaries and prepares consolidated financial statements. Roo Limited declared and paid a dividend of $5000 during the current financial year. The appropriate consolidation adjustment to record this transaction will include which of the following? a. b. *c. d.

DR Investment in associate DR Cash DR Dividend revenue DR Share of profit of associate

Correct answer: c Learning Objective 23.5 ~ adjust for movements in equity from dividends and reserves, and the effects of dissimilar accounting policies and different reporting dates, and account where the investment in the associate/joint venture is acquired in stages.

22.

Where there are transactions between the investor and associate that result in an unrealised profit, the investor’s share of the associate’s profit is: a. b. c. *d.

not adjusted at all regardless of whether the transaction is an upstream or downstream one. adjusted only if the transaction is an upstream one. adjusted only if the transaction is a downstream one. adjusted regardless of whether the transaction is an upstream or downstream one.

Correct answer: d Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

23.

Where an investor sells inventory to an associate and the inventory is still on hand at the end of the year, the investor’s share of the associate’s profit is: a. b. c. *d.

not affected as unrealised profits are only considered to arise in a parent-subsidiary relationship. not affected as the unrealised profit is in the books of the investor, not the associate. increased by the investor’s share of the unrealised profit. decreased by the investor’s share of the unrealised profit.

Correct answer: d Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

.

23.9

Chapter 23: Associates and joint ventures

24.

Where an investor sells inventory to an associate in a prior year and the inventory is sold by the associate during the current year, the investment in associate account is: *a. b. c. d.

not adjusted as the profit has been realised. decreased by the investor’s share of the realised profit. increased by the investor’s share of the realised profit. increased by the full amount of the realised profit.

Correct answer: a Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

25.

Lady Ltd owns 25% of Gaga Ltd. Gaga’s profit after tax for the year ended 30 June 2014 is $60 000. The tax rate is 30%. During the year ended 30 June 2014, Lady sold $10 000 worth of inventory to Gaga. These items had previously cost Lady $6000. All the items remain unsold by Gaga at 30 June 2014. Lady’s share of Gaga’s profit for the year ended 30 June 2014 is: a. b. *c. d.

$11 000. $12 500. $14 300. $14 000.

Correct answer: c Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

26.

On 1 July 2004 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000. At that date the equity of Spice Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows.

Year ended 30 June 2005 2006 2007 2008 2009

Profit/(Loss) $ 40 000 (400 000) (500 000) 32 000 40 000

There have been no dividends paid or movements in reserves since the date of acquisition.

At 30 June 2006 the equity accounted balance of the investment in Spice was: a. *b.

$100 000. $110 000.

.

23.10

Testbank to accompany Company Accounting 10e

c. d.

$200 000. $210 000.

Correct answer: b Learning Objective 23.7 ~ account for losses recorded by the associate or joint venture.

27.

On 1 July 2004 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000. At that date the equity of Spice Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows.

Year ended 30 June 2005 2006 2007 2008 2009

Profit/(Loss) $ 40 000 (400 000) (500 000) 32 000 40 000

There have been no dividends paid or movements in reserves since the date of acquisition.

At 30 June 2008 the equity accounted balance of the investment in Spice was: *a. b. c. d.

nil. ($7000). $8000. $32 000.

Correct answer: a Learning Objective 23.7 ~ account for losses recorded by the associate or joint venture.

28.

On 1 July 2004 Girls Ltd acquired 25% of the shares of Spice Ltd for $200 000. At that date the equity of Spice Ltd was $800 000, with all identifiable assets and liabilities being measured at fair value. Profits/(losses) made since the date of acquisition are as follows.

Year ended 30 June 2005 2006 2007 2008 2009

Profit/(Loss) $ 40 000 (400 000) (500 000) 32 000 40 000

There have been no dividends paid or movements in reserves since the date of acquisition.

.

23.11

Chapter 23: Associates and joint ventures

At 30 June 2009 the equity accounted balance of the investment in Spice was: a. *b. c. d.

nil. $3000. $10 000. $40 000.

Correct answer: b Learning Objective 23.7 ~ account for losses recorded by the associate or joint venture.

29.

When disclosing information about investments in associates, AASB 128 Investments in Associates, requires separate disclosure of which of the following?

I II III IV

*a. b. c. d.

Shares in associates, in the statement of financial position.

Share of profit or loss of associates, in the statement of profit or loss and other comprehensive income.

Share of any discontinuing operations, in the statement of changes in equity.

Shares of changes recognised directly in the associate’s equity, in the statement of changes in equity.

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

Correct answer: a Learning Objective 23.8 ~ prepare the disclosures required in relation to associates and joint ventures.

30.

Where an investor has discontinued the use of the equity method because the associate has incurred losses, it must disclose the: *a. b. c. d.

unrecognised share of current period and cumulative losses of the associate. reason why it has discontinued the method. accounting policy it has adopted in place of the equity method. effect on the statement of changes in equity if it had continued to use the method.

Correct answer: a Learning Objective 23.8 ~ prepare the disclosures required in relation to associates and joint ventures.

.

23.12

Testbank to accompany Company Accounting 10e

True/false questions 31.

An associate is defined in AASB 128 Investments in Associates as an entity over which the investor has control.

The statement is false. An associate is an entity over which the investor has significance, not control.

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

32.

A joint arrangement is defined in AASB 128 Investments in Associates as an arrangement between two or more entities whereby the entities have joint control of another entity.

The statement is true. The key feature of a joint arrangement is that of joint control, The most obvious example of joint control is where two entities each hold 50% of the shares of a third entity.

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

33. The classification of an investment as an associate relies on the existence of significant influence.

The statement is true. The definition of an associate contained in paragraph 2 of AASB 128 specifically refers to an investor having significant influence over an associate.

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

34.

Significant influence is defined as the power to participate in the financing or operating policy decisions of the investee.

The statement is true. This is the definition of significant influence in AASB 128 and it excludes control or joint control of the policy decisions.

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

35.

Significant influence automatically arises where the investor holds 20% or more of the shares in the investee.

The statement is false. Where the investor holds 20% or more of the voting power of an investee, significant influence is presumed to exist. However this is a rebuttable assumption, in that if the investor can demonstrate that significant influence does not exist, then the investment will not be classified as an associate.

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

36.

It is possible for more than one entity to exercise significant influence over an entity.

.

23.13

Chapter 23: Associates and joint ventures

The statement is true. For example, if two parties each hold a 30% interest, they may both exercise significant influence.

Learning Objective 23.1 ~ explain the nature of associates and joint ventures.

37.

Where an investor has significant influence over an associate, the method of accounting used to account for such interests is referred to as the partial consolidation method.

The statement is false. The method used to account for investments in associates is referred to as the equity method.

Learning Objective 23.2 ~ explain the rationale for the equity method and its application.

38.

Where an entity prepares consolidated financial statements and has an investment in an associate, they have a choice of applying the equity method on consolidation or directly in their own books.

The statement is false. In such cases the equity method must be applied on the consolidation worksheet.

Learning Objective 23.2 ~ explain the rationale for the equity method and its application.

39.

The basic premise under the equity method is that the investor is entitled to a share of the post-acquisition movements in the net assets of the associate.

The statement is true. This is accounted for by recognising the investor’s share of postacquisition profits/(losses), dividends and movements in reserves.

Learning Objective 23.3 ~ explain the basic principles of the equity method.

40.

Fair value and goodwill adjustments arising on the acquisition of an associate are recognised separately in the books of the investor.

The statement is false. Such amounts are reflected in the carrying amount of the investment in the associate which is a characteristic of the equity method.

Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

41.

Where the carrying amount of an associate’s depreciable assets is lower than their fair values at the date of acquisition, an adjustment is required to be made to restate the assets to their fair values.

The statement is false. Such adjustments are not required under the equity method as the investor’s share of the associate’s net assets is reflected in a single line in the statement of financial position.

.

23.14

Testbank to accompany Company Accounting 10e

Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

42.

Any excess of the investor’s share of the net fair value of an associate’s identifiable assets and liabilities over the cost of the investment is recognised as income in the determination of the investor’s share of the associate’s profit or loss in the period in which the investment is acquired.

The statement is true. This is a requirement of paragraph 32(b) of AASB 128.

Learning Objective 23.4 ~ adjust for goodwill and fair value differences at acquisition date.

43.

Where the investor does not prepare consolidated financial statements and a dividend is received from an associate, the entry in the investor’s books on receipt of the dividend involves a credit adjustment against dividend revenue.

The statement is false. In such cases, the credit adjustment would be made against the “Investment in Associate” account.

Learning Objective 23.5 ~ adjust for movements in equity from dividends and reserves, and the effects of dissimilar accounting policies and different reporting dates, and account where the investment in the associate/joint venture is acquired in stages.

44.

Where the investor prepares consolidated financial statements and a dividend is received from an associate, the entry in the investor’s books on receipt of the dividend involves a credit adjustment against dividend revenue.

The statement is true. In such cases, an adjustment would be made on the consolidation worksheet to transfer the amount from the dividend revenue account to the “Investment in Associate” account.

Learning Objective 23.5 ~ adjust for movements in equity from dividends and reserves, and the effects of dissimilar accounting policies and different reporting dates, and account where the investment in the associate/joint venture is acquired in stages.

45.

Where an investment in an associate is made in a number of separate acquisitions, the equity method is applied from the date that significant influence is obtained.

The statement is true. The equity method is not retrospectively applied when an investor obtains significant influence over an existing investment.

Learning Objective 23.5 ~ adjust for movements in equity from dividends and reserves, and the effects of dissimilar accounting policies and different reporting dates, and account where the investment in the associate/joint venture is acquired in stages.

46.

Only upstream transactions are adjusted for when making notional adjustment to postacquisition profits of an associate prior to calculating the investor’s share..

.

23.15

Chapter 23: Associates and joint ventures

The statement is false. Both upstream and downstream transactions are adjusted for prior to calculating the investor’s share of the associate’s post-acquisition profits.

Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

47.

Equity adjustments must be made for transactions between the associate and the investor that give rise to unrealised profits or losses.

The statement is true. Items that give rise to unrealised profit or losses must be reflected in the calculation of the investor’s share of the associate’s post-acquisition profits.

Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

48.

The holding of debentures by an investor in an associate, and the payment of interest on those debentures, requires adjustment under equity accounting.

The statement is false. Unlike consolidation, there is no need to adjust for all transactions between the investor and the associate; only the transactions where profit is affected require adjustment.

Learning Objective 23.6 ~ adjust for the effects of inter-entity transactions.

49.

The investor recognises its shares of an associate’s losses only to the point where the carrying amount of the investment reaches zero.

The statement is true. The investor discontinues the use of the equity method when the share of losses equals or exceeds the investment’s carrying amount.

Learning Objective 23.7 ~ account for losses recorded by the associate or joint venture.

50.

The investor’s share of current period profits is disclosed as a separate line item in the statement of profit or loss and other comprehensive income.

The statement is true. One of the key characteristics of the equity method is the use of a single account in the statement of profit or loss and other comprehensive income.

Learning Objective 23.8 ~ prepare the disclosures required in relation to associates and joint ventures.

.

23.16

Chapter 24: Investments in joint arrangements

Chapter 24: Investments in joint arrangements Multiple-choice questions 1.

Which of the following statements is incorrect? a. b. *c. d.

Joint arrangements can be classified into joint operations and joint ventures.

A joint arrangement has two main characteristics.

Joint arrangements are always structured as companies.

The key feature of a joint arrangement is that the parties involved have joint control over the decision making in relation to the joint arrangement.

Correct answer: c Learning Objective 24.1 ~ explain the nature of a joint arrangement and how to classify joint arrangements into joint ventures and joint operations.

2.

The particular relationship between parties that signifies the existence of a joint arrangement is: a. b. c. *d.

dominating influence by one party over the other party. control over the operating policies of one party by another party. shared influence by two parties over the activities of another party. joint control by the parties over the activities of an arrangement.

Correct answer: d Learning Objective 24.1 ~ explain the nature of a joint arrangement and how to classify joint arrangements into joint ventures and joint operations.

3.

The assessment of the rights and obligations in an arrangement requires the analysis of which of the following factors? ➢ ➢ ➢ ➢

I Legal form of the arrangement Yes Other relevant factors and circumstances Yes Structure of the arrangement No Terms agreed to by the parties in the contract No

a. b. *c. d.

I II III IV

II Yes Yes Yes No

III IV Yes Yes Yes No Yes Yes Yes No

Correct answer: c Learning Objective 24.1 ~ explain the nature of a joint arrangement and how to classify joint arrangements into joint ventures and joint operations. .

24.1

Testbank to accompany Company Accounting 10e

4.

According to AASB 11 Joint Arrangements, joint control exists where: *a. b. c. d.

no single party is in a position to control the activity unilaterally. the decisions in areas essential to the goals of the joint arrangement do not require the consent of the parties. no one party may be appointed as the manager of the joint arrangement. one party alone has power to control the strategic operating decisions of the joint arrangement.

Correct answer: a Learning Objective 24.1 ~ explain the nature of a joint arrangement and how to classify joint arrangements into joint ventures and joint operations.

5.

If the joint arrangement is not structured through a separate vehicle, the arrangement is classified as a: a. b. *c. d.

joint venture. joint vehicle. joint operation. joint structure.

Correct answer: c Learning Objective 24.1 ~ explain the nature of a joint arrangement and how to classify joint arrangements into joint ventures and joint operations.

6.

Which of the following statements is not correct in relation to joint control? *a. b. c. d.

Joint control can exist without the existence of a contractual arrangement.

Joint control exists only where there is contractually agreed sharing of control.

Entities over which a party has joint control are accounted for in accordance with AASB 11 Joint Arrangements.

Joint control requires the unanimous consent of the parties sharing control.

Correct answer: a Learning Objective 24.1 ~ explain the nature of a joint arrangement and how to classify joint arrangements into joint ventures and joint operations.

7.

Ying Limited and Yang Limited agreed to form a joint operation to offer health services. To start the operation the joint operators agreed to contribute cash of $500 000 each. The joint operation will record which of the following entries to recognise this event? a. b.

DR Joint operator contributions CR Cash DR Cash CR Joint operator revenue .

$1 000 000 $1 000 000 $1 000 000 $1 000 000 24.2

Chapter 24: Investments in joint arrangements

c.

*d.

DR Venturer’s equity — Ying Limited $500 000 DR Venturer’s equity — Yang Limited $500 000 CR Cash $1 000 000 DR Cash $1 000 000 CR Joint operation contribution — Ying $500 000 CR Joint operation contribution — Yang $500 000

Correct answer: d Learning Objective 24.2 ~ explain the accounting undertaken by the joint operation itself.

8.

Cash contributed to a joint operation was used to purchase Equipment ($250 000) and raw materials ($100 000). The entry by the joint operation to record of these transactions is which of the following? *a. DR Equipment $250 000 DR Raw materials $ 100 000 CR Cash b. DR Work in progress $350 000 CR Joint operation capital c. DR Cash $350 000 CR Contribution to joint operation d. DR Cash $350 000 CR Equipment CR Raw materials

$350 000 $350 000 $350 000 $250 000 $100 000

Correct answer: a Learning Objective 24.2 ~ explain the accounting undertaken by the joint operation itself.

9.

Three joint operators are involved in a joint operation that manufactures mining equipment.

At the beginning of the year the joint operation held $100 000 in cash. During the year, the joint operation paid wages of $40 000. Additionally, creditors amounting to $80 000 were paid and the joint operators contributed $30 000 cash each to the joint operation. The balance of cash held by the joint operation at the end of the year is: a. $10 000. b. $50 000. *c. $70 000. d. $150 000.

Correct answer: c Learning Objective 24.2 ~ explain the accounting undertaken by the joint operation itself.

10.

Accounting for a joint venture is done by application of the: *a. b.

equity method. fair value method. .

24.3

Testbank to accompany Company Accounting 10e

c. d.

consolidation method. present value method.

Correct answer: a Learning Objective 24.2 ~ explain the accounting undertaken by the joint operation itself.

11.

Which of the following statements is incorrect? a. *b. c. d.

Accounting records do not need to be prepared for the joint operation itself.

Accounting for a joint venture is the same from that of a joint operation.

AASB 11 Joint Arrangements do not provide standards on accounting for the joint operation itself.

The statement of financial position is the joint operation’s main financial statement.

Correct answer: b Learning Objective 24.2 ~ explain the accounting undertaken by the joint operation itself.

12.

Alfie Limited and Benny Limited formed a joint operation and share in the output of the joint operation 60:40. The joint operation paid a management fee of $40 000 to Alfie Limited during the current period. The cost to Alfie Limited of supplying the management service was $28 000. Alfie Limited records the management fee revenue as follows: *a. b. c. d.

DR CR DR CR DR CR DR CR

Cash

$40 000 Fee revenue Cash $28 000 Fee revenue Cash $ 24 000 Fee revenue Cash $16 000 Fee revenue

$40 000 $28 000 $24 000 $16 000

Correct answer: a Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

13.

Each joint operator must recognise in its own accounts: a. b. c. *d.

its expenses incurred in construction of a joint product. its share of any jointly held liabilities. its share of any expenses incurred by the joint operation. all of the above.

Correct answer: d Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation. .

24.4

Chapter 24: Investments in joint arrangements

14.

A 50:50 joint operation was commenced between two participants. Ronan Ltd contributed cash of $100 000, and Keating Ltd contributed a Building with a fair value of $100 000 and a carrying amount of $80 000. Using the line-by-line method of accounting, Keating Ltd would record which of the following entries? a. DR

Building in JO $80 000 CR Building b. DR Building in JO $100 000 CR Building CR Gain on sale of building c. DR Investment in joint operation $100 000 CR Building CR Gain on sale of building *d. DR Cash in JO $50 000 DR Building in JO $50 000 CR Building CR Gain on sale of building

$80 000 $80 000 $20 000 $80 000 $20 000

$80 000 $20 000

Correct answer: d Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

15.

A joint operation holds equipment with a carrying amount of $1 200 000. The two joint operators participating in this arrangement share control equally. They also depreciate equipment using the straight-line method. The equipment has a useful life of 5 years. At reporting date, each joint operator must recognise which of the following entries in its records in relation to depreciation? a. *b. c. d.

DR DR DR DR

Depreciation expense Depreciation expense Investment in joint operation Assets in joint operation

$240 000 $120 000 $240 000 $120 000

Correct answer: b Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

16.

In relation to the supply of a service to a joint operation by one of the joint operators, which of the following statements is correct? a. b. *c.

A joint operator can recognise 100% of the earned through the supply of services to the joint operation.

A joint operator is entitled to recognise a profit from the supply of services to itself.

A joint operator cannot earn a profit on supplying services to itself. .

24.5

Testbank to accompany Company Accounting 10e

d.

It is uncommon for a joint operator to act in a management position for the joint operation.

Correct answer: c Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

17.

Pelican Limited and Waters Limited formed a joint operation and share equally in the output of the joint operation. The joint operation paid a management fee of $60 000 to Pelican Limited during the current period. The cost to Pelican Limited of supplying the management service was $42 000. Pelican Limited records the costs of supplying the management services as which of the following entries? *a. b. c. d.

DR Cost of supplying services $42 000 CR Cash DR Cost of supplying services $18 000 CR Cash DR Cash $ 42 000 CR Costs of supplying services DR Fee revenue $ 60 000 CR Cash

$42 000 $18 000 $ 42 000 $ 60 000

Correct answer: a Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

18.

Crazy Limited and Frog Limited formed a joint operation and share in the output of the joint operation 60:40. The joint operation paid a management fee of $40 000 to Crazy Limited during the current period. The cost to Crazy Limited of supplying the management service was $28 000. The amount of profit that Crazy Limited will recognise in relation to the provision of the management fee to the joint operation is: a. *b. c. d.

nil. $4800. $7200. $12 000.

Correct answer: b Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

19.

Three joint operators agree to an arrangement in which they have an equal share in an manufacturing joint operation. The work undertaken in setting up the joint operation cost $600 000 and each operator contributed in cash. Each operator will need to recognise which of the following accounting entries? .

24.6

Chapter 24: Investments in joint arrangements

a. b. c. *d.

DR Work in progress in JO CR Cash DR Inventory in JO CR Cash DR Cash in JO CR Cash DR Cash in JO CR Cash

$600 000 $600 000 $200 000 $200 000 $600 000 $600 000 $200 000 $200 000

Correct answer: d Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

20.

A 50:50 joint operation was commenced between Suncorp Ltd and Stadium Ltd. Suncorp Ltd contributed cash of $200 000, and Stadium Ltd contributed a building with a fair value of $200 000. Using the line-by-line method of accounting, Suncorp Ltd would record which of the following entries? a. b. c. *d.

DR Building in JO CR Cash DR Cash in JO CR Cash DR Investment in joint operation CR Cash DR Cash in JO DR Building in JO CR Cash

$200 000 $200 000 $200 000 $200 000 $200 000 $200 000 $100 000 $100 000 $200 000

Correct answer: d Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

21.

Which of the following statements is incorrect? a.

A joint operator contributing assets other than cash cannot transfer the asset at fair value to the joint operation and recognise a full profit on the transaction. *b. Where an operator contributes a non-current asset to a joint operation, the value of the contribution is the asset’s historical cost. c.

If a joint operator supplies management services to the joint operation, it cannot earn a profit on supplying services to itself. d.

Where an operator contributes a non-current asset to a joint operation, the value of the contribution is effectively the non-current asset’s fair value.

Correct answer: b Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation. .

24.7

Testbank to accompany Company Accounting 10e

22.

Ally Ltd and Cat Ltd have established the Ally Cat Joint Operation. Ally Ltd has a 60% interest in the joint operation and Cat Ltd has a 40% interest.

Ally Ltd contributed an asset with a carrying amount of $180 000 and a fair value of $240 000 and Cat Ltd agreed to provide technical services to the joint operation over the first two years of operations. The fair value of the technical services was agreed to be $160 000 and the cost to provide the services was estimated at $130 000 at the inception of the joint operation.

As part of its initial contribution entry Ally Ltd will record a: a. *b. c. d.

debit against the services receivable in JO account of $64 000. debit against the plant in JO account of $108 000. credit against the plant of $240 000. credit against the gain on sale of plant of $36 000.

Correct answer: b Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

23.

Ally Ltd and Cat Ltd have established the Ally Cat Joint Operation. Ally Ltd has a 60% interest in the joint operation and Cat Ltd has a 40% interest.

Ally Ltd contributed an asset with a carrying amount of $180 000 and a fair value of $240 000 and Cat Ltd agreed to provide technical services to the joint operation over the first two years of operations. The fair value of the technical services was agreed to be $160 000 and the cost to provide the services was estimated at $130 000 at the inception of the joint operation.

As part of its initial contribution entry Cat Ltd will record a: a. b. *c. d.

debit against the services receivable in JO account of $64 000. debit against the plant in JO account of $72 000. credit against the obligation to JO of $78 000. credit against the gain on provision of services of $12 000.

Correct answer: c Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

24.

On 1 July 2010, the Ears & Eyes Joint Operation was established. The two joint operators participating in this arrangement, Ears Ltd and Eyes Ltd, share control equally. Both joint operators contributed cash to establish the joint operation. The joint operation holds equipment with a carrying amount of $1 200 000. Both joint operators depreciate equipment using the straight-line method and the depreciation is regarded a cost of production. The equipment has a useful life of 5 years. At 30 June 2011, Ears Ltd had sold all of the inventory distributed to it and Eyes Ltd had sold 50% of the inventory distributed to it. At 30 June 2011, Eyes must recognise which of the following entries, in relation to depreciation, in its records? .

24.8

Chapter 24: Investments in joint arrangements

a. b. *c. d.

DR DR DR DR

Depreciation expense Accumulated depreciation Inventory Cost of goods sold

$240 000 $120 000 $60 000 $120 000

Correct answer: c Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

25.

When eliminating any unrealised profit arising when a joint operator provides services to a joint operation, the profit is eliminated against: a. b. *c. d.

the investment in the joint operation. fee revenue. work in progress, finished goods and other inventory related accounts. cash in JO.

Correct answer: c Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

26.

On 1 July 2010, Sunday Ltd entered into a 50:50 joint operation with Night Ltd to develop an open cut coal mine in central Queensland. Each operator’s initial contribution was $4 million.

Sunday contributed $2 million cash and equipment with a fair value of $2 million and a book value of $1 000 000. Night contributed $4 million cash.

Additional information •

Production costs for the JO for the year ended 30 June 2011 were as follows.

Purchases Wages Management fee Total production costs Less: work in progress Cost of production • • •

$’000 1 500 2 600 800 4 900 (1300)

3 600

The remaining useful life of the equipment contributed by Sunday is 5 years.

Night is responsible for the day to day management of JO and has recognised the management fee received during the year as revenue. The costs of providing these management services to JO was $450 000.

Night has sold all of the coal distributed to it and Sunday has sold 50% of the coal distributed to it by 30 June 2011.

.

24.9

Testbank to accompany Company Accounting 10e

An extract of JO’s balance sheet at 30 June 2011 shows: $’000 Assets Cash Work in progress Finished goods inventory Plant & equipment Accounts payable Net assets

1 300 1 300 200 2 000 (200) 4 600

Which of the following will not form part of Sunday Ltd’s initial contribution entry? a. *b. c. d.

Debit against the cash in JO account of $3 000 000.

Debit against the equipment in JO account of $1 000 000.

Credit against the cash of $2 000 000.

Credit against the gain on equipment of $500 000.

Correct answer: b Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

27.

On 1 July 2010, Sunday Ltd entered into a 50:50 joint operation with Night Ltd to develop an open cut coal mine in central Queensland. Each operator’s initial contribution was $4 million.

Sunday contributed $2 million cash and equipment with a fair value of $2 million and a book value of $1 000 000. Night contributed $4 million cash.

Additional information •

Production costs for the JO for the year ended 30 June 2011 were as follows.

Purchases Wages Management fee Total production costs Less: work in progress Cost of production • • •

$’000 1 500 2 600 800 4 900 (1300)

3 600

The remaining useful life of the equipment contributed by Sunday is 5 years.

Night is responsible for the day to day management of JO and has recognised the management fee received during the year as revenue. The costs of providing these management services to JO was $450 000.

Night has sold all of the coal distributed to it and Sunday has sold 50% of the coal distributed to it by 30 June 2011.

.

24.10

Chapter 24: Investments in joint arrangements

An extract of JO’s balance sheet at 30 June 2011 shows: $’000 Assets Cash Work in progress Finished goods inventory Plant & equipment Accounts payable Net assets

1 300 1 300 200 2 000 (200) 4 600

Night Ltd’s initial contribution entry will include a debit to the Cash in JO account of: a. *b. c. d.

$2 000 000. $3 000 000. $4 000 000. $6 000 000.

Correct answer: b Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

28.

On 1 July 2010, Sunday Ltd entered into a 50:50 joint operation with Night Ltd to develop an open cut coal mine in central Queensland. Each operator’s initial contribution was $4 million.

Sunday contributed $2 million cash and equipment with a fair value of $2 million and a book value of $1 000 000. Night contributed $4 million cash.

Additional information •

Production costs for the JO for the year ended 30 June 2011 were as follows.

Purchases Wages Management fee Total production costs Less: work in progress Cost of production • • •

$’000 1 500 2 600 800 4 900 (1300)

3 600

The remaining useful life of the equipment contributed by Sunday is 5 years.

Night is responsible for the day to day management of JO and has recognised the management fee received during the year as revenue. The costs of providing these management services to JO was $450 000.

Night has sold all of the coal distributed to it and Sunday has sold 50% of the coal distributed to it by 30 June 2011.

.

24.11

Testbank to accompany Company Accounting 10e

An extract of JO’s balance sheet at 30 June 2011 shows: $’000 Assets Cash Work in progress Finished goods inventory Plant & equipment Accounts payable Net assets

1 300 1 300 200 2 000 (200) 4 600

The value of inventory distributed to Sunday Ltd by the joint venture and subsequently sold by 30 June 2011 is: *a. b. c. d.

$850 000. $1 700 000. $1 800 000. $3 400 000.

Correct answer: a Learning Objective 24.3 ~ prepare the journal entries required by a joint operator to recognise its share of the assets, liabilities, revenues and expenses of the joint operation.

29.

When a joint operator is accounting for an interest in joint operation it is required to recognise which of the following in its financial statements?

The assets that it controls The liabilities that it incurs Its share of income from the sale of goods by the joint operation The expenses that it incurs *a. b. c. d.

I Yes Yes Yes

II Yes Yes No

III Yes No Yes

IV Yes No No

Yes

No

No

No

I II III IV

Correct answer: a Learning Objective 24.4 ~ prepare the disclosures required in relation to joint operations.

30.

Disclosures for joint arrangements are covered by: *a. b. c.

AASB 12 Disclosure of Interests in Other Entities.

AASB 10 Consolidated Financial Statements.

AASB 11 Joint Arrangements. .

24.12

Chapter 24: Investments in joint arrangements

d.

the Corporations Act 2001.

Correct answer: a Learning Objective 24.4 ~ prepare the disclosures required in relation to joint operations.

.

24.13

Chapter 25: Insolvency and liquidation

Chapter 25: Insolvency and liquidation Multiple-choice questions 1.

When an administrator is appointed to a company they must give an opinion as to the best of three options available to creditors. Which of the following is not one of the options available? a. *b. c. d.

To end the voluntary administration and return the company to the director’s control.

To end the voluntary administration and appoint a receiver.

To approve a deed of company arrangement through which the company will pay all or part of its debts and then be free of those debts.

To wind up the company and appoint a liquidator.

Correct answer: b Learning Objective 25.1 ~ describe the meaning of insolvency and identify the requirements imposed on an administrator of an insolvent company.

2.

When a company is unable to pay its debts when they fall due and payable, this is referred to as: a. b. c. *d.

liquidation. receivership. administration. insolvency.

Correct answer: d Learning Objective 25.1 ~ describe the meaning of insolvency and identify the requirements imposed on an administrator of an insolvent company.

3.

Which of the following is entitled to make an application to the court for an insolvent company to be wound up? a. b. *c. d.

A court appointed receiver Employees of the company ASIC The company’s external auditor

Correct answer: c Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

.

25.2

Testbank to accompany Company Accounting 10e

4.

Which of the following is not a general ground under s. 461 of the Corporations Act on which the court can order a winding up? a. *b. c. d.

The company has no members.

The company has not commenced business within three months of its incorporation.

The court is of the opinion that it is just and equitable that the company be wound up.

The company has by special resolution resolved that it be wound up by the court.

Correct answer: b Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

5.

Which of the following is a task of a liquidator under the Corporations Act? a. b. c. *d.

To determine the creditors and order of priority of payment.

To bring about the dissolution of the company.

To take possession of the company’s assets.

All of the above.

Correct answer: d Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

6.

What is the timeframe within which the liquidator must submit a preliminary report to ASIC after receiving the statement of affairs from the directors? a. *b. c. d.

12 months 2 months 3 months 14 days

Correct answer: b Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

7.

Who is required to prepare the report as to affairs (Form 507)? a. *b. c. d.

Members of the company Directors of the company Creditors of the company The liquidator

.

25.3

Chapter 25: Insolvency and liquidation

Correct answer: b Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

8.

Which of the following is a ground under s. 461 of the Corporations Act on which the court can order a winding up?

I. II. III. IV.

The company has no members.

The company has not commenced business within one year of incorporation.

The court is of the opinion that it is just and equitable that the company be wound up.

The company has resolved that it be wound up by the court.

a. b. c. *d.

I and IV I, II and III II, III and IV I, II, III and IV

Correct answer: d Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

9.

A declaration of solvency is required to be signed by the directors of the company in order for: a. *b. c. d.

the company to issue more shares to its shareholders. the liquidation to proceed as a members’ voluntary winding up. the court to make an order for liquidation. the company to borrow more money from a bank.

Correct answer: b Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

10.

The basis for a voluntary winding up of a company is: a. b. *c. d.

the company directors voting to wind up the company. the company is unable to pay its debts. the passing of a special resolution by the company to wind up. a request from ASIC for the company to be wound up.

Correct answer: c Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

.

25.4

Testbank to accompany Company Accounting 10e

11.

At the commencement of a members’ voluntary winding up, a written declaration must be provided by directors stating that all debts will be able to be paid in full within a period: a. b. *c. d.

of no more than 30 days. of not more than 6 months. not exceeding 12 months. more than one year but less than two years.

Correct answer: c Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

12.

A voluntary winding up commences when: *a. b. c. d.

the members of the company pass a special resolution to wind up. an application is filed with the court by the company’s external auditor. the company is unable to pay its debts.

ASIC applies to the court for the winding up.

Correct answer: a Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

13.

Under a members’ voluntary winding up, the directors of the company are required to prepare which of the following documents?

I. II. III. IV.

Statement of affairs Summary of affairs Preliminary liquidation report Declaration of solvency

*a. b. c. d.

I and IV I, II and III I, III and IV I, II and IV

Correct answer: a Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

14.

A voluntary winding up may be put in place by either: *a. b. c.

the company’s members or creditors. the company’s directors or creditors.

ASIC or the company’s members.

.

25.5

Chapter 25: Insolvency and liquidation

d.

none of the above.

Correct answer: a Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

15.

Under a court ordered winding up, a liquidator does not have the power to: a. b. c. *d.

enter into legal proceedings on behalf of the company. dispose of the property of the company. use any legal methods to obtain money from a debtor. pay the company’s shareholders before paying the creditors.

Correct answer: d Learning Objective 25.4 ~ describe the duties and powers of a liquidator.

16.

In relation to the order of priority of payment of debts upon liquidation, which statement is correct? a. *b. c. d.

Ordinary unsecured creditors are paid before preferential unsecured creditors.

Preferential unsecured creditors are paid before deferred creditors.

Deferred creditors are paid before ordinary unsecured creditors.

Deferred creditors are paid before secured creditors.

Correct answer: b Learning Objective 25.7 ~ determine the order of priority of payment of the company’s debts in liquidation.

17.

Claims against a company whereby the creditor has a charge against specific property is known as a: *a. b. c. d.

non-circulating security interest. floating charge. circulating security interest. specific debt covenant.

Correct answer: a Learning Objective 25.7 ~ determine the order of priority of payment of the company’s debts in liquidation.

18.

Which of the following is an example of a deferred creditor? a.

Liquidator’s remuneration

.

25.6

Testbank to accompany Company Accounting 10e

*b. c. d.

Arrears of preference dividends Trade creditors Audit fees payable

Correct answer: b Learning Objective 25.7 ~ determine the order of priority of payment of the company’s debts in liquidation.

19.

Which of the following statements is incorrect? a. *b. c. d.

If the company is limited by shares, members do not have to contribute more than the amount unpaid on the shares for which each is liable as a past or present member.

Past members must contribute money for company debts which have been incurred after they cease to be members.

Most liquidations in Australia do not have sufficient funds to pay creditors.

In the absence of any guidance in the company’s constitution, calls in advance with related interest will be repaid before any payments are made to shareholders.

Correct answer: b Learning Objective 25.8 ~ determine the rights and obligations of contributories on liquidation.

20.

Which of the following is the journal entry recorded on realisation of the assets by the liquidator? *a. b. c. d.

DR Cash, CR Liquidation DR Liquidation, CR Cash DR Cash, CR Revenue from sale of assets DR Shareholders’ distribution, CR Cash

Correct answer: a Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

21.

The journal entry to record the distribution of cash to shareholders includes which of the following? *a. b. c. d.

DR Shareholders’ distribution DR Cash CR Liquidation CR Shareholders’ distribution

Correct answer: a

.

25.7

Chapter 25: Insolvency and liquidation

Learning Objective 25.9 ~ determine the order of priority of payment of the company’s debts in liquidation.

22.

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $ 40 000 $1 preference shares fully paid 40 000 120 000 $1 ordinary shares paid to 50 cents 60 000 100 000 Cash available (after payment of all creditors)

10 000

Assume that the constitution of Great South East Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.

For preference shareholders, what is the amount of the actual refund or call? *a. b. c. d.

A refund of $17 500 A call of $17 500 A refund of $10 000 A call of $22 500

Correct answer: a Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

23.

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $ 40 000 $1 preference shares fully paid 40 000 120 000 $1 ordinary shares paid to 50 cents 60 000 100 000 Cash available (after payment of all creditors)

10 000

Assume that the constitution of Great South East Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.

For ordinary shareholders, what is the amount of the actual refund or call? a.

A refund of $10 000

.

25.8

Testbank to accompany Company Accounting 10e

b. *c. d.

A refund of $7500 A call of $7500 A call of $60 000

Correct answer: c Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

24.

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $ 40 000 $1 preference shares fully paid 40 000 120 000 $1 ordinary shares paid to 50 cents 60 000 100 000 Cash available (after payment of all creditors)

10 000

Assume that the constitution of Great South East Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.

What will be the deficiency or surplus apportioned to preference shareholders? a. *b. c. d.

A surplus of $22 500 A deficiency of $22 500 A surplus of $67 500 A deficiency of $67 500

Correct answer: b Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

25.

The details below were extracted from the accounting records of Great South East Ltd (a company in the process of liquidation). $ 40 000 $1 preference shares fully paid 40 000 120 000 $1 ordinary shares paid to 50 cents 60 000 100 000 Cash available (after payment of all creditors)

.

10 000

25.9

Chapter 25: Insolvency and liquidation

Assume that the constitution of Great South East Ltd states that in the event of liquidation, all shares are to rank equally, based on the number of shares held, in distributing any surplus or deficiency.

What will be the deficiency or surplus apportioned to ordinary shareholders? a. b. c. *d.

A surplus of $17 500 A deficiency of $17 500 A surplus of $67 500 A deficiency of $67 500

Correct answer: d Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

26.

Which of the following is not one of the main accounts used for liquidation? *a. b. c. d.

Liquidator’s distribution Liquidator’s cash Shareholders’ distribution Liquidation

Correct answer: a Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

27.

The existence of accumulated losses at the commencement of a winding up will: *a. b. c. d.

increase any deficiency calculated in the liquidation account. decrease any deficiency calculated in the liquidation account. have no effect on any deficiency calculated in the liquidation account. increase cash available.

Correct answer: a Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

28.

The main purpose of the liquidation account is to: a. *b. c. d.

show the capital amount due to contributories. calculate the deficiency or surplus on liquidation. show the final cash payment to each class of contributory. record additional calls made on shareholders.

.

25.10

Testbank to accompany Company Accounting 10e

Correct answer: b Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

29.

The report as to affairs shows which of the following? a. b. c. *d.

Estimated realisable values of assets.

Potential payments to creditors.

Estimated surplus or deficiency for contributories.

All of the above.

Correct answer: d Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

30.

Which of the following is not a way in which a receivership can end? a. b. *c. d.

The receiver can resign.

The receivership can progress to liquidation and the receiver can be appointed as liquidator.

A voluntary administrator can be appointed to take over from the receiver.

The receivership can progress to liquidation and a separate party can be appointed as liquidator.

Correct answer: c Learning Objective 25.10 ~ describe the role of a receiver appointed by a secured creditor.

.

25.11

Chapter 25: Insolvency and liquidation

True/false questions 31.

The shareholders of a company are liable for prosecution under the Corporations Act 2001 if they allow the company to trade while it is insolvent.

The statement is false. It is the directors who can be prosecuted if they allow the company to trade while insolvent.

Learning Objective 25.1 ~ describe the meaning of insolvency and identify the requirements imposed on an administrator of an insolvent company.

32.

Winding up of a company only ever arises from the issuing of an order from the court.

The statement is false. This is not the only way a company can be wound up – voluntary liquidations (by members or creditors) are also allowed under the Corporations Act. Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

33.

Past holders of shares in a company are able to make an application to the court for an insolvent company to be would up.

The statement is true. Immediate past holders of shares are able to make such applications under s. 459P of the Corporations Act. Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

34.

The court is only able to make an order for a company to be wound up if the company is insolvent.

The statement is false. Where a member believes that the affairs of a company are being conducted in a manner that is offensive, unfairly prejudicial, discriminatory against, or contrary to the interests of members as a whole, they may make an application to the court for the company to be would up.

Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

35.

The liquidator is required to lodge a preliminary report with ASIC within 14 days of their appointment setting out details of capital issued, estimated assets and liabilities and causes of the company’s failure.

The statement is false. The liquidator is required to lodge a preliminary report with ASIC normally within two months after receipt of the statement of affairs from the directors of the company.

.

25.12

Testbank to accompany Company Accounting 10e

Learning Objective 25.2 ~ identify the legal requirements for the winding up of a company by the court.

36.

Voluntary winding up can only take place where a company is solvent.

The statement is false. Where the directors are unable to provide a declaration of solvency, the liquidation is classified as a creditor’s voluntary winding up.

Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

37.

A declaration of solvency is required to be signed by directors of the company in order for the liquidation to be classified as a member’s voluntary winding up.

The statement is true. Where the directors are unable to provide a declaration of solvency the liquidation is classified as a creditors’ voluntary winding up.

Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

38.

In the case of a member’s voluntary winding up, the directors of the company are required to prepare both a statement of affairs and a declaration of solvency.

The statement is true. These requirements are set out in ss. 494(1) and (2) of the Corporations Act. Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

39.

Under a creditor’s voluntary winding up, the company must provide each creditor with a copy of the statement of affairs.

The statement is false. The company is required to provide all creditors with a summary of affairs, a condensed version of the statement of affairs.

Learning Objective 25.3 ~ compare a voluntary winding up with a winding up by the court.

40.

In the case of a company being wound up by the court, the liquidator may carry on the business of the company so far as is necessary for its beneficial disposal or winding up.

The statement is true. This is one of the powers of the liquidator under s. 477 (1) of the Corporations Act. Learning Objective 25.4 ~ describe the duties and powers of a liquidator.

41.

It is the responsibility of the directors of the company to realise the assets, and pass the proceeds to the liquidator to enable distributions to be made to creditors.

.

25.13

Chapter 25: Insolvency and liquidation

The statement is false. It is the responsibility of the liquidator to realise the assets.

Learning Objective 25.4 ~ describe the duties and powers of a liquidator.

42.

A liquidator is required to keep proper records, containing entries and proceedings of meetings.

The statement is true. Creditors and contributories are entitled to inspect these records, unless the court orders otherwise.

Learning Objective 25.4 ~ describe the duties and powers of a liquidator.

43.

The liquidator must arrange for their statement of receipts and payment to be audited on the completion on the liquidation.

The statement is false. An audit is only required to be performed on a liquidator’s statement of receipts and payments if so directed by ASIC. Learning Objective 25.5 ~ describe the different accounts that a liquidator is required to keep.

44.

Debts may be admitted by a liquidator to a liquidation without formal proof of the debt.

The statement is true. The liquidator may request formal proof but can admit a debt without such proof if they choose.

Learning Objective 25.6 ~ determine how a company’s debts are proven for liquidation.

45.

A mortgage is an example of a creditor secured by a circulating security interest.

The statement is false. A mortgage is an example of a non-circulating security interest.

Learning Objective 25.7 ~ determine the order of priority of payment of the company’s debts in liquidation.

46.

Ordinary unsecured creditors have no preferential treatment and are the last to be paid before funds are returned to contributories.

The statement is true. Ordinary unsecured creditors rank equally and if the company’s property is insufficient to meet them in full, they are to be paid proportionately.

Learning Objective 25.7 ~ determine the order of priority of payment of the company’s debts in liquidation.

47.

Salaries and wages and employee entitlements owing to staff always rank above the payment of creditors secured by a circulating security interest.

.

25.14

Testbank to accompany Company Accounting 10e

The statement is false. Such amounts rank above the payment of creditors secured by a circulating security interest only where there are limited funds.

Learning Objective 25.7 ~ determine the order of priority of payment of the company’s debts in liquidation.

48.

Past members do not have to contribute money for a company’s debts which occurred after they ceased to be members.

The statement is true. This requirement is in s. 520 of the Corporations Act. Learning Objective 25.8 ~ determine the rights and obligations of contributories on liquidation.

49.

The main purpose of the Liquidation account is to calculate the deficiency or surplus on liquidation to show how it is distributed between the shareholders.

The statement is false. The Liquidation account shows how the deficiency or surplus is distributed between the contributories.

Learning Objective 25.9 ~ prepare accounting records necessary for the liquidation of a company.

50.

A court has the power to appoint a receiver to a company.

The statement is true. Where parties other than secured creditors are seeking the appointment of a receiver, such appointments are made by the court.

Learning Objective 25.10 ~ describe the role of a receiver appointed by a secured creditor.

.

25.15