F7 MORCK QUESTIONS DEC 2017

Transcription

1 F7 MORCK QUESTIONS DEC 2017 Multiple Choice (30 marks 2 15=30) 1. Grey entered into a lease on 1 January 2011 to lease an item of plant for 5 years. Under the terms of the lease Grey pays $50,000 in advance each year from 1 January 2011 to 1 January The present value of the lease payments is $228,000. The interest rate implicit in the lease is 4.83% How much should Grey record as a non-current liability in its statement of financial position as at 31 December 2011? A. $136,597 B. $50,000 C. $149,177 D. $148,142 2.Which of the following are disadvantages of historical cost accounting in times of persistent inflation? (i) Profit is overstated (ii) Asset values are overstated (iii) Return on capital employed is overstated (iv) Gearing (calculated as debt divided by equity) is overstated A. (ii) and (iv) only B. (i) and (iii) only C. All four D. (i), (iii) and (iv) 3.Pancha acquired 80% of the ordinary $1 shares of Silta on 1 April Extracts of the statements of profit or loss for two companies for the year ended 31 December 2012 are: Pancha Silta $'000 $'000 Revenue 100,800 28,400 Cost of sales (70,400) (19,600) In the post-acquisition period, Silta purchased $400,000 of goods (at transfer price) from Pancha per month. Pancha sold the goods to Silta at a mark-up on cost of 20% on these sales. At 31 December 2012, $600,000 of the goods purchased from Pancha (at transfer price) after the acquisition were still in Slita's inventories. What would the gross profit in Pancha's consolidated statement of profit or loss be for the year ended 31 December 2012? A. $36,900 B. $33,300 C. $39,100 D. $40,100

2 4.Salvat sells goods to a customer on 1 January 2014 for $100,000. The terms of the sale are that the customer pays $50,000 on delivery and the remaining $50,000 on 1 January The goods were delivered on 1 January An appropriate discount rate to apply if necessary is 5%. How much should Salvat recognise as sales revenue in its financial statements for the year ended 31 December 2014? A. $50,000 B. $47,619 C. $97,619 D. $95,238 5.Particle acquired 30% of another entity Atom for $550,000 on 1 July 2014, and began to exercise significant influence. Atom's total comprehensive income for the year ended 31 December 2014, which accrued evenly over the year, was $360,000. Atom paid dividends of $140,000 in December Particle sold goods to Atom for $150,000 in the post - acquisition period at a profit margin 20%. $50,000 of those goods (at transfer price) was still in Atom's inventories as at 31 December At what value should Particle show its investment in Atom in its consolidated financial statements for the year ended 31 December 2014? A. $562,000 B. $559,000 C. $613,000 D. $601,000 6.Metric owns an item of plant which has a carrying amount of $248,000 as at 1 April It is being depreciated at 12½% per annum on a reducing balance basis. The plant is used to manufacture a specific product which has been suffering a slow decline in sales. Metric has estimated that the plant will be retired from use on 31 March The estimated net cash flows from the use of the plant and their present values are: Net cash flows Present values $ $ Year to 31 March , ,200 Year to 31 March ,000 66,400 Year to 31 March ,000 39, , ,600 On 1 April 2015, Metric had an alternative offer from a rival to purchase the plant for $200,000. At what value should the plant appear in Metric s statement of financial position as at 31 March 2015? A $248,000 B $217,000 C $214,600 D $200,000 7.On 31 March 2016, Delta received an order from a new customer, Xavier, for products with a

3 sales value of $900,000. Xavier enclosed a deposit with the order of $90,000. On 31 March 2016, Delta had not completed credit referencing of Xavier and had not despatched any goods. Delta is considering the following possible entries for this transaction in its financial statements for the year ended 31 March Which of the following would be the correct accounting entry to record the transaction with Xavier for the year ended 31 March 2016? A Dr Cash $90,000, Dr Trade receivables $810,000; Cr Revenue $900,000 B Dr Trade receivables $900,000; Cr Revenue $900,000 C Dr Cash $90,000; Cr Revenue $90,000 D Dr Cash $90,000; Cr Deferred income $90, Although most items in financial statements are shown at their historical cost, increasingly the. IASB is requiring or allowing current cost to be used in many areas of financial reporting. Drexler acquired an item of plant on 1 October 2012 at a cost of $500,000. It has an expected life of five years (straight-line depreciation) and an estimated residual value of 10% of its historical cost or current cost as appropriate. As at 30 September 2014, the manufacturer of the plant still makes the same item of plant and its current price is $600,000. What is the correct carrying amount to be shown in the statement of financial position of Drexler as at 30 September 2014 under historical cost and current cost? historical cost current cost $ $ A 320, ,000 B 320, ,000 C 300, ,000 D 300, ,000 9.Lucindy issued a debt instrument on 1 January 2014 at its nominal value of $4,000,000. The Instrument carries a fixed coupon interest rate of 6%, which is payable annually in arrears. Transaction costs associated with the issue were $200,000. The effective interest rate applicable to this instrument has been calculated at approximately 8.4%. What are the amounts that should be recorded as the opening liability on 1 January 2014 and the finance cost in the statement of profit or loss for the year ended 31 December 2014? A Liability $3,800,000 Finance cost $228,000 B Liability $4,000,000 Finance cost $240,000 C Liability $4,200,000 Finance cost $352,800 D Liability $3,800,000 Finance cost $319, On 1 October 2013, Hoy had $2 5 million of equity shares of 50 cents each in issue. No new shares were issued during the year ended 30 September 2014, but on that date there were outstanding share options to purchase 2 million equity shares at $1 20 each. The average market value of Hoy s equity shares during the year ended 30 September 2014 was $3 per share. Hoy s profit after tax for the year ended 30 September 2014 was $1,550,000. In accordance with IAS 33 Earnings per Share, what is Hoy s diluted earnings per share for the year ended 30 September 2014?

4 A 25 0 cents B 22 1 cents C 31 0 cents D 41 9 cents 11 Which of the following statement is correct? A Current ratio measures the adequacy of current assets to meet the liabilities as they fall due. So when current ratio is lower then 1:1, the entity is not appropriate for liquidity for sure no matter what industry it runs. B when ROCE is measured, it always means the lower ROCE, the worse performance the entity has. C Low interest cover indicates that investor s interests are at risk. D Gearing ratios indicate the degree of financial risk attached to the company so it s important to measure it if and only if the entity is going to obtain finance. 12 An associate is an entity in which an investor has significant influence over the investee. Which of the following indicate(s) the presence of significant influence? (i) The investor owns 330,000 of the 1,500,000 equity voting shares of the investee (ii) The investor has representation on the board of directors of the investee (iii) The investor is able to insist that all of the sales of the investee are made to a subsidiary of the investor (iv) The investor controls the votes of a majority of the board members A (i) and (ii) only B (i), (ii) and (iii) C (ii) and (iii) only D All four 13 For construction contracts which should not be included in contract costs. A Site labor and supervision B Plant and equipment depreciation C Penalties D Design 14 On 30 September 2017, ABC s closing inventory was counted and valued at its cost of $1 million. Some items of work-in-process which had cost $210,000 had been damaged in a fire (on 25 September 2017) and are not expected to achieve their normal selling price $ 400,000 if they are processed further to finished goods. The estimated cost to completion is $ 50,000. The sale of these goods will be handled by an agent who sells them at 80% of the normal selling price and charges ABC a commission of 30%. At what value will the closing inventory of ABC be reported in its statement of financial

5 position as at 30 September 2017? A $ 1 million B $ 790,000 C $ 964,000 D $210, A company's trial balance at 31 December 20X3 shows a debit balance of $700,000 on current tax and a credit balance of $8,400,000 on deferred tax. The directors have estimated the provision for income tax for the year at $4.5 million and the required deferred tax provision is $5.6 million, $1.2 million of which relates to a property revaluation. What is the profit or loss income tax charge for the year ended 31 December 20X3? A $1.2 million B $2.4 million C $1 million D $3.6 million Multiple Choice Case (30 marks 2 15=30) Section B ALL 15 questions are compulsory and MUST be attempted The following scenario relates to questions Bubble buys and sells goods in Peso (Pe), but has a functional currency of dollars($). Bubble purchased goods for Pe 10,000 on 1 September 20X1. At year-end this is unpaid. Bubble sold goods on 1 September 20X1 for Pe 60,000. On 1 October Bubble received Pe 30,000. The remaining Pe 30,000 is unpaid at 31 December 20Xl. Relevant exchange rates are: 1 September Pe10:$1 1 October Pe 10.5:$1 31 December Pe 8:$1 Average rate Pe 9:$1 16 What gain or loss should be recorded in the statement of profit or loss for the year ended 31 December 20X1 in relation to the payable recorded for the purchase of goods? A Loss of $111 B Gain of $111 C Loss of $250 D Gain of $ What gain or loss should be recorded in the statement of profit or loss for the year ended 31 December 20X1 in relation to the sale of goods? A Loss of $607 B Gain of $607 C Loss of $893 D Gain of $893

6 18 Which of the statements below is/are true? Statement 1: The inventory purchased on 1 October 20X1 should be retranslated at the closing rate if the goods remain in inventory at 31 December 20X1. Statement 2: The foreign exchange gains will be added to the revenue for the year. A Statement 1 is true B Statement 2 is true C Both statements are true D Neither statement is true 19 In relation to las 21 The Effects of Changes in Foreign Exchange Rates, which of the following statements are true? (i) Exchange gains and losses arising on the retranslation of monetary items are recognised in other comprehensive income in the period (ii) Non-monetary items measured at historical cost in a foreign currency are not retranslated at the reporting date (iii) An intangible asset is a non-monetary item A All of the above B (ii) and (iii) only C (i) and (iii) only D (i) and (ii) only 20 Which of the following is non-monetary item? A Inventory B Cash C Receivable D Loans The following scenario relates to questions COCO Company has following building through the year ended 31 December 20X7. First office building was purchased on 1 January 20X7 at cost $ 500,000 which was used by sales department. The building was depreciation over 50 years. At 1 October 20X7 this building ceased to occupy and rent it to another company, rental is $35,000 per year. Second office building at $100,000 was purchased 10 years ago at 1 January 20W7. The building was depreciation at 2% per annual. At 1 July on the Board of meeting, the company decided sold this building to solve financial problems. 21 Which Two of following will show in the financial statement for the year ended 31 December 20X7 for first office building? (i) Depreciation $7,500 (ii)depreciation $10,000 (iii)rental income $8,750 (iv)property, plant and equipment $492,500 A (i) and (iii) B (i) and (iv)

7 C D (ii) and (iii) (ii) and (iv) 22 Which one of following is not an example of investment property? A Land held for long-term capital appreciation rather than for short-term sale in the ordinary course of business. B A building owned by the entity and leased out under operating leases. C A Property that is being constructed or developed for future use as investment property. D A property that is leased to another entity under a finance lease. 23 How to recognized Gains or losses arising from disposal of investment property difference between the net disposal proceeds and the carrying amount of the asset? A B C D Profit or loss Other comprehensive income Revaluation reserve Other reserve 24 Which of the following apply for IFRS 5 Non-current Assets Held for Sale and Discontinued Operations prescribes the recognition criteria for non-current assets held for sale? (i) Asset must be available for immediate sale in its present condition (ii)there has already locate a buyer (iii)the sale is expected to be completed within 12 months of its classification as held for sale (iv)it is unlikely that the plan will be significantly changed or will be withdrawn. (v)management are committed to a plan to sell the asset A B C D All (i), (ii),(iii),(iv), (i), (iii),(iv),(v) (i), (iii),(v) 25 At 1st September, if on 1 July 20x7 secondary building fulfill the condition of IFRS 5 Noncurrent Assets Held for Sale and Discontinued Operations. What will be show in the Statement o f Financial Position for the year ended 31December 20X7? A Non current assets $79,000 B Non current assets $80,000 C Current assets $79,000 D Current assets $80,000 The following scenario relates to questions Mighty IT Co provides hardware, software and IT services to small business customers. Mighty IT Co has developed an accounting software package. The company offers a supply and installation service for $1,000 and a separate two-year technical support service for $500. Alternatively, it also offers a combined goods and services contract which includes both of these elements for $1,200. Payment for the combined contract is due one month after the date of

8 installation. In December 20X5, Mighty IT Co revalued its corporate headquarters. Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2 5m. Mighty IT Co also revalued a sales office on the same date. The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects reduced its value to $400,000. No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes. Mighty It Co s income tax rate is 30%. 26 In accordance with IFRS 15 Revenue from Contracts with Customers, when should Mighty IT Co recognize revenue from the combined goods and services contract? A Supply and install: on installation Technical support: over two years B Supply and install: when payment is made Technical support: over two years C Supply and install: on installation Technical support: on installation D Supply and install: when payment is made Technical support: when payment is made 27 For each combined contract sold, what is the amount of revenue which Mighty IT Co should recognise in respect of the supply and installation service in accordance with IFRS 15? A $700 B $800 C $1,000 D $1, Mighty IT Co sells a combined contract on 1 January 20X6, the first day of its financial year. In accordance with IFRS 15, what is the total amount for deferred income which will be reported in Mighty IT Co s statement of financial position as at 31 December 20X6? A $400 B $250 C $313 D $ In accordance with IAS 12 Income Taxes, what is the impact of the property revaluations on the income tax expense of Mighty IT Co for the year ended 31 December 20X5? A Income tax expense increases by $180,000 B Income tax expense increases by $120,000 C Income tax expense decreases by $30,000 D No impact on income tax expense 30 In January 20X6, the accountant at Mighty IT Co produced the company s draft financial statements for the year ended 31 December 20X5. He then realised that he had omitted to

9 consider deferred tax on development costs. In 20X5, development costs of $200,000 had been incurred and capitalised. Development costs are deductible in full for tax purposes in the year they are incurred. The development is still in process at 31 December 20X5. What adjustment is required to the income tax expense in Mighty IT Co s statement of profit or loss for the year ended 31 December 20X5 to account for deferred tax on the development costs? A Increase of $200,000 B Increase of $60,000 C Decrease of $60,000 D Decrease of $200,000

10 Long questions(40 marks 20 2=40) Section C Both questions are compulsory and MUST be attempted 31. Parid acquired 300,000 at $1 of the ordinary share capital of Sidy on 1 October 20X7. On that date the Market share price of Parid and Sidy was $2.2 and $1.2. Parid offer every 1 shares for every 5 shares acquired in Sidy and a cash payment of $1 per share on date of acquisition and future $1 per share on 1 October 20X8. The cost of capital is 10%. STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 20X7 Parid Sidy $'000 $'000 Revenue 1, Cost of sales (498) (180) Gross profit Administrative expenses (220) (20) Distribution cost (130) (16) Finance cost (55) (4) Profit before tax Tax (50) (20) Profit for the year Equity of Sidy on 1 January 20X7 $'000 Share capital at $1 375 Retained earnings 300 Additional information (i) During the year Sidy sold goods to Parid for $26,000. Sidy adds a 30% mark-up on cost to all its sales. 50% of the goods were included in Parid 's stock at end of year. Current account was $12,000. (ii) Also at the date of acquisition Sidy s one of brand included that had a fair value of $40,000 less than its carrying value. This brand had a remaining life of ten years. (iii) Consolidated goodwill has suffered impairment to $95,000 Required (a) Calculated the goodwill of Sidy at date of acquisition. (6 marks) (b) Prepare the draft consolidated statement of profit or loss for the Parid group at 31 December 20X7. (14 marks) (20 marks)

11 32. The following trial balance relates to Downing Co as at 31 March 2016: $000 $000 Equity shares of $1 each 25,000 Other equity 11,800 Retained earnings at 1 April ,000 5% convertible loan notes (note (iii)) 30,000 Land and buildings at cost (land element $14 million) (note (iv)) 64,000 Plant and equipment at cost (note (iv)) 82,700 Patent at cost (ten-year life) (note (iv)) 7,500 Accumulated depreciation/amortisation at 1 April 2015: buildings 5,000 plant and equipment 36,700 patent 3,000 Inventory at 31 March ,100 Trade receivables 38,500 Bank 2,700 Current tax (note (v)) 1,550 Deferred tax (note (v)) 4,800 Revenue (note (i)) 267,900 Cost of sales 166,600 Distribution costs 20,000 Administrative expenses 22,000 Contract asset (note (ii)) 5,000 Loan note interest paid (note (iii)) 1,500 Bank interest 150 Other operating income from royalties 300 Trade payables 46, , ,600 The following notes are relevant: (i) Revenue includes an amount of $16 million for a sale made on 1 April The sale relates to a single product and includes ongoing servicing from Downing Co for four years. The normal selling price of the product and the servicing would be $18 million and $500,000 per annum ($2 million in total) respectively. (ii) The contract asset is comprised of contract costs incurred at 31 March 2016 of $15 million less a payment of $10 million from the customer. The agreed transaction price for the total contract is $30 million and the total expected costs are $24 million. Downing Co uses an input method based on costs incurred to date relative to the total expected costs to determine the progress towards completion of its contracts. (iii) Downing Co issued 300,000 $100 5% convertible loan notes on 1 April The loan notes can be converted to equity shares on the basis of 25 shares for each $100 loan note on 31 March 2018 or redeemed at par for cash on the same date. An equivalent loan note without the

12 conversion rights would have required an interest rate of 8%. The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, are: 5% 8% End of year (iv) Non-current assets: Due to rising property prices, Downing Co decided to revalue its land and buildings on 1 April 2015 to their market value. The values were confirmed at that date as land $16 million and buildings $52 2 million with the buildings having an estimated remaining life of 18 years at the date of revaluation. Downing Co intends to make a transfer from the revaluation surplus to retained earnings in respect of the annual realisation of the revaluation surplus. Ignore deferred tax on the revaluation. Plant and equipment is depreciated at 15% per annum using the reducing balance method. During the current year, the income from royalties relating to the patent had declined considerably and the directors are concerned that the value of the patent may be impaired. A study at the year end concluded that the present value of the future estimated net cash flows from the patent at 31 March 2016 is $3 25 million; however, Downing Co also has a confirmed offer of $3 4 million to sell the patent immediately at that date. No depreciation/amortisation has yet been charged on any non-current asset for the year ended 31 March All depreciation/amortisation is charged to cost of sales. There were no acquisitions or disposals of non-current assets during the year. (v) The directors estimate a provision for income tax for the year ended 31 March 2016 of $11 4 million is required. The balance on current tax in the trial balance represents the under/over provision of the tax liability for the year ended 31 March At 31 March 2016, Downing Co had taxable temporary differences of $18 5 million requiring a provision for deferred tax. Any deferred tax movement should be reported in profit or loss. The income tax rate applicable to Downing Co is 20%. Required: (a) Prepare the statement of profit or loss and other comprehensive income for Downing Co for the year ended 31 March (b) Prepare the statement of financial position of Downing Co as at 31 March Notes to the financial statements are not required. Work to the nearest $1,000. The following mark allocation is provided as guidance for these requirements: (a) 10 marks (b) 10 marks