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advanced financial accounting
Questions and Answers of
Advanced Financial Accounting
(a) Define ‘cost’ in relation to inventory. (b) What is meant by NRV? (c) Explain the rule of lower of cost and ‘NRV for inventory.
(a) In what circumstances should assumptions be made in order to assign a cost fo inventory items when they are sold? (b) What is the difference between FIFO, LIFO and AVCO cost formulas? (c)
Entity A purchases motorcycles from Italy, Germany and Japan. It sells to domestic and foreign customers. Entity A incurred the following expenses during 2010: Entity A seeks your advice on which
Entity B is a newly established international trading company. It commenced its operations in 2008. Entity B imports goods from China and sells in the local market. It uses the FIFO method to value
Entity C, a newly incorporated company, uses the latest version of a software package (EXODUS) to cost and value its inventory. The software uses the AVCO formula to value inventory. The following
The following information has been extracted from the records of entity D about one of its products. Entity D’s reporting date is 30 September 2010. Determine the cost of inventory on hand at 30
Assume that entity E’s beginning inventory on 1 March 2010 is nil. All inventory is finished goods and is of the same type. Details of the inventory received and sent out by entity E are shown
The following information relates to the inventory on hand at 30 June 2010 held by entity F. Calculate the value of inventory on hand at 30 June 2010 in accordance with IAS 2. Item no. A1458 A1965
Entity G is a retailer of Italian furniture and has five major product lines: sofas, dining tables, beds, closets, and lounge chairs. As at 30 June 2010, quantity on hand, cost per unit, and NRV per
The financial statements of entity H for 2009 and 2010 had the following errors: By what amount will the 2009 and 2010 profit before taxes be overstated or understated if these errors are not
(a) Define the term ‘property, plant and equipment’. (b) When should an item of PPE be recognised as an asset and when should it be derecognised? (c) Which of the following costs should be
(a) On 1 September 2010, an entity paid EUR 160,000 to replace the wall lining of one of its furnaces. The furnace had been acquired several years previously and its carrying amount on 1 September
On 31 July 2009, an entity which prepares financial statements to 31 March each year bought a machine for EUR 1,269,000. This amount was made up as follows: The entity is VAT-registered and reclaims
(a) Entity X prepares financial statements to 31 May each year. On 31 May 2007, the entity acquired land for EUR 800,000. This land was revalued to EUR 900,000 on 31 May 2008 and to EUR 750,000 on 31
(a) Define the terms ‘depreciation’, ‘depreciable amount’, ‘useful life and residual value’. (b) On 1 July 2008, an entity which prepares financial statements to 30 June each year
On 1 January 2010, an entity, which prepares financial statements to 31 December each year, buys a machine at a cost of EUR 92,600. The machine’s useful life is estimated at four years with a
(a) Define the term ‘borrowing costs’ and explain the accounting treatment of such costs in accordance with IAS 23. (b) During the year ended 31 December 2009, an entity started work on the
(a) Define the term ‘investment property’ and explain the two models permitted by IAS 40 for the measurement of investment property after its initial recognition. (b) How do these two models
Golden leisure is a private limited liability entity that operates a single cruise ship. The chip was acquired on 1 October 2000. Details of the cost of the ship’s components and their estimated
IAS 17 distinguishes between finance leases and operating leases and prescribes the accounting treatment for each type of lease. (a) Define terms ‘finance lease’ and ‘operating lease’. (b)
(a) Leases are classified on the basis of ‘substance over form’. What does this criterion mean and how does it relate to finance leases? (b) What are ‘minimum lease payments’? (c) What is
For the following arrangements, explain whether they are operating or finance lease transactions: (a) Entity A leases an asset to entity B, and obtains a loan from a financial institution using the
On 1 January 2010, Qalam Ltd leases a machine to Shabs plc. The lease is for a term of three years and lease payments of EUR 2,000 per month are required. The machine has a useful life of eight years
On 1 July 2008, Huge & Co Ltd entered into a finance lease to acquire a machine. The cash price of the machine would have been EUR 264,000. The lease agreement specified that the company would make
You are given the following information: Determine: (a) the interest rate implicit in the lease; (b) the finance charge to be allocated in each accounting period using the actuarial method; (c)
Sabrina Ltd prepares financial statements at 31 December each year. On 1 January 2009, the company acquired an asset by means of a finance lease. Details of the lease agreement are as
On 1 July 2009, Moose Jaw Ltd leased a plastic moulding machine from Winnipeg Ltd. The machine cost Winnipeg Ltd EUR 260,000 to manufacture and had a fair value of EUR 308,218 on 1 July 2009. The
On 1 July 2009, Haines Ltd leased a processing plant to Kitmat Ltd. The plant was purchased by Haines Ltd on 1 July 2009 at fair value of EUR 934,224. The lease agreement contained the clauses shown
On 1 July 2007, Vancouver Ltd leased a photocopier from Kamloops Ltd, a company that manufactures, retails and leases copiers. The photocopier had cost Kamloops Ltd EUR 60,000 to make but had a fair
(a) Explain the term ‘identifiable’, and list assets that would be excluded from intangible assets as a result of this criterion included in the definition of an intangible asset. (b) What is an
Entity X holds a trade mark that is well known within consumer circles and has enabled entity X to be a market leader in this area. The trade mark has been held by the entity for nine years. The
An entity that sells DVDs by sending emails to prospective customers has acquired a customer list from another entity that also markets its products in a similar fashion. The entity estimates that it
Extreme SpA is a newly established entity. It was set up by an entrepreneur who is generally interested in the business of providing engineering and operational support services to aircraft
Costs incurred by an established entity include: (a) pre-opening costs of a business facility; (b) recipes, secret formulas, models and designs, prototype; (c) training, customer loyalty, and
Soweto Ltd is unsure of how to obtain computer software. Four possibilities are: (1) Purchase computer software externally, including packages for payroll and general ledger. (2) Contract
Autocar SpA, a motor vehicle manufacturer, has a research division that worked on the following projects during 2009: Project 1 — the design of a steering mechanism that does not operate like a
An entity has acquired local broadcast rights to the 2010 World Cup. Management expect World Cup related advertising revenue to commence from 1 March 2010. Management propose that amortisation of
Entity A, acquired entity B, which operated a TV channel. Entity B negotiates the sale of air time directly with advertisers who are mostly big companies. Advertisement contracts are negotiated
Pretoria Ltd is a highly successful engineering company that manufactures filters for air-conditioning systems. Due to its dissatisfaction with the quality of the filters currently available, on 1
At 30 June 2010, entity A needs to undertake an impairment test. Having only recently adopted IFRS, the management of entity A seek your advice in relation to this test under IAS 36 — Impairment of
Entity B is a water and sewage company with a country wide water and sewage network. Although entity B is a listed company, the government is the controlling shareholder. Management have asked the
Entity C uses asset D to manufacture product X. There has been a significant reduction in demand for product X as a result of a change in consumer taste. Management have not assessed asset D for
Entity G produces mousetraps and has for some time been the market leader. Its chief competitor, Entity H has recently developed a new product that is widely acknowledged as being superior to entity
Entity E owns a large number of dairy farms in Italy. It has a number of factories that are used to produce milk products that are then sent to other factories to be converted into milk-based
An entity is reviewing its business segments for impairment. The carrying value of its net assets is EUR 20m. Management have produced two computations for the value-in use of the business segment.
Entity F is involved in the generation and distribution of electricity. Management are reviewing all of its assets for impairment as a result of a fall in the market price of electricity. One of
The following information relates to individual equipment items of entity H at a balance sheet date: 1. Items 2 and 3 are carried at revalued amounts, and the cumulative revaluation surpluses
A manufacturing entity owns several vehicles. The vehicles are several years old and could only be sold for scrap value. They do not generate cash independently from the entity. How should the
A railway entity has a contract with the government that requires service on each of 10 different routes. The trains operating on each route and the income from each route can be identified easily.
A cash-generating unit has the following net assets: The recoverable amount has been determined at EUR 45m. Allocate the impairment loss to the net Assets of the entity. Goodwill Property Plant and
Management of entity I are thinking of allocating the reversal of an impairment loss of a CGU. The original impairment was EUR 990 based on an original carrying amount of the CGU of EUR 2,790 less
Hillman Ltd prepares financial statements to 31 March each year. Consider each of the following situations and determine in each case whether or not a provision should be accounted for in the
(a) Explain how the amount of a provision should be measured. (b) A company needs to make a provision for the cost of repairing a faulty product supplied to a customer some weeks previously. The
Kenton Ltd prepares financial statements to 30 April each year. At 30 April 2010, the company is being sued by a customer who claims to have been harmed by one of the company’s products. The case
The annual accounting date of Lawson plc is 31 May. The following matter needs to be dealt with before the financial statements for the year ended 31 May 2010 can be finalised. The company operates
An entity prepares financial statements to 31 December each year. The following events occurred-after 31 December 2009 but before the financial statements for the year ended 31 December 2009 were
Triangle, a public listed company, is in the process of finalising its draft financial statements for the year ended 31 March 2010. The following matters have been brought to your attention: (i) On
(a) Distinguish between current tax and deferred tax. (b) Distinguish between permanent differences and temporary differences. (c) Explain how temporary differences between accounting profits and
Entity A prepares its financial statements on 31 July each year. The entity’s balance sheet as at 31 July 2008 showed a liability for current tax of EUR 240,000. This was an estimate of the current
The pretax profit of entity B for the last three years have been as follows: In the year ended 31 August 2007, there was a temporary difference of EUR 100,000 between accounting profit and taxable
Consider each of the following assets and liabilities which appear in an entity’s balance sheet at 30 April 2010: Compute the tax base of each of these assets and liabilities and identify any
Entity C prepares its financial statements on 31 December each year. On 1 January 2005, the entity acquired a non-current-asset at a cost of EUR 512,000 and decided to depreciate this asset on a
The draft income statement of entity D, a public company, for the year ended 31 March 2009 shows an income tax expense of EUR 110,000. The draft balance sheet shows a non-current liability of EUR
Entity E has the following assets and liabilities recorded in its balance sheet as at 31 December 2009: The values for tax purposes of property and for plant and equipment are EUR 14m and EUR 8m
An entity acquired plant and equipment for EUR 2m on 1 January 2009. The asset is depreciated at 25 per cent a year on a straight-line basis, and local tax legislation permits the management to
An entity has revalued its property and has recognised the revaluation in its financial statements. The carrying value of the property was EUR 16m and the revalued amount is EUR 20m. Tax base of the
For entity F, you are given the following information: (a) Tax bases of the above assets and liabilities are the same as their carrying amounts except for: (b) During 2005, a building was revalued.
An entity has 10,000 employees. Each employee is entitled to 20 days of paid holiday per calendar year. Up to five days of this entitlement may be carried forward and taken in the following year but
(a) Distinguish between defined contribution pension plans and defined benefit pension plans. (b) An entity’s agreed contributions to a defined contribution plan for 2009 are EUR 700,000. Of this
Northern plc prepares its financial statements to 31 December each year and has operated a defined benefit pension scheme for many years. At 31 December 2008, the present value of the defined benefit
Outline the accounting treatments that are permitted by IAS 19 for actuarial gains and losses in connection with defined benefit pension plans.
(a) Define the terms ‘financial instrument, ‘financial asset’, ‘financial liability’ and ‘equity instrument’. (b) Which of the following is a “financial instrument’ as defined by
(a) Explain what is meant by a ‘compound’ financial instrument. (b) Illustrate the accounting treatment of such an instrument.
Explain what the tainting rule is.
On 1 January 2010, an entity issued EUR 400,000 of 7 per cent bond at par. Interest on this loan stock is payable on 31 December each year. The stock is due for redemption at par on 31 December 2013
An entity issues 300,000 convertible bonds at the start of year 2010. The bonds have a three-year term, and are issued at par with a face value of EUR 100 per bond, resulting in total proceeds of EUR
(a) When should a financial asset or liability be recognised? (b) What are the approaches to derecognition of financial assets under IFRS? (c) What are the provisions of IAS 39 relating to
(a) To which financial assets does impairment refer to? When are such financial assets impaired? (b) List examples of evidence of an impairment loss. (c) If there is objective evidence that an
(a) Explain the terms ‘credit risk’, ‘liquidity risk’ and ‘market risk’ used in IFRS 7. (b) List the main disclosures required by IFRS 7 in relation to each of these three types of risk.
Entity A holds a small number of shares in entity B. The shares are classified as available-for-sale. On 31 March 2010, the shares’ fair value is EUR 2,400 and the cumulative gain recognised in OCI
An entity purchases EUR 20m, 10 per cent five-year government bonds on 1 January 2009 with semi-annual interest payable on 30 June and 31 December for EUR 21.6m that results in a premium of EUR 1.6m.
On 1 January 2006, an entity issued 1 million 8 per cent EUR 100 nominal ten-year term bonds with interest payable each 30 June and 31 December. The bonds, which are traded in the market, were issued
An entity issued a five-year bond that is listed and traded on a stock exchange. In the following year, the entity proposes a modification of the bond’s repayment terms, to extend the maturity. The
On 1 January 2008, an entity bought EUR 200,000 of 6 per cent loan stock for EUR 187,860. Interest is receivable on 31 December each year and the stock will be redeemed at par on 31 December 2012.
On 1 July 2008, a company issued EUR 2m of 8 per cent loan stock. The stock was issued at a 10 per cent discount (so only EUR 1,800,000 is received from the lenders) and issue costs of EUR 78,600
On 1 January 2005 entity A originated a ten-year 7 per cent EUR 2m loan. The loan carried an annual interest rate of 7 per cent payable at the end of each year and is repayable at par at the end of
On 1 January 2005, entity A originated a ten-year 7 per cent EUR 2m loan. The loan is repaid in equal annual payments of EUR 284,756 through to maturity date at 31 December 2014. Entity A charged a
Entity A, as part of its cash management activities, invested EUR 20 million in redeemable preference shares (within three months from the date of their redemption). To do so, entity A instructed its
Entity E prepares its statement of cash flows’under the direct method and has provided this information: For the purposes of the statement of cash flows under the direct method, you are required
Entity F has provided you with the following information to prepare the operating activities of the statement of cash flows under the indirect method: Prepare the operating activities section of the
The accounting records of entity H at 31 December 2008 and 31 December 2009 showed the following information in relation to its non-current assets: Determine the amount of net investing cash flows
The following information has been extracted from the accounting records of entity I:Determine the amount of financing cash flows entity I would report in its statement of cash flows for the year
A UK company which accounts in sterling (£) was set up in January 2009 and raised £400,000 by issuing shares. It purchased goods for resale from Italy in February 2009 for EUR 400,000, when the
The opening balance sheet at 1 January 2009 of an Italian company, which accounts in euro consists of cash of EUR 200,000 and share capital of EUR 200,000. The company takes out a long-term loan on
A summarised comparative balance sheet of entity N is presented below, together with the income statement for the year ended 30 September 2009: Additional information: • There were no disposals
A summarised comparative balance sheet of entity O is presented below: Using the indirect method of presenting cash flows from operating activities, prepare a statement of cash flows in accordance
Financial information for Tremendous SpA for the year ended 31 December 2009 follows: Additional information: This additional information is relevant to the preparation of statement. of cash
MacTavish plc has four geographical segments (based on the location of the entity’s operations). The following information relates to the year ended 31 March 2010: In addition to the external
An entity reported net income of EUR 250,000 for 2009. The entity had 125,000 ordinary shares of EUR 1 and 30,000 convertible preference shares of EUR 40 each outstanding during the year. The
Canterbury plc has the following net income for its two most recent accounting periods: On 1 November 2008, the company’s issued share capital consisted of 500,000 ordinary shares. On 1 August
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