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advanced financial accounting

Questions and Answers of Advanced Financial Accounting

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
The issued share capital of Edwards ple consists of 800,000 ordinary shares. There are no preference shares. Some years ago, the entity issued EUR 2m of 10 per cent convertible loan stock. The
The net income attributable to the ordinary shareholders of Frobisher plc is as follows: For many years, the entity’s issued share capital consisted of 9 million ordinary shares. However, on 1
On 1 January 2008, an entity issued EUR 4m of 7 per cent convertible loan stock. The holders of this stock may choose to convert the stock to ordinary shares on 1 January 2012, 2013 or 2014. The
Apex plc owns 55 per cent of the ordinary shares of Mitchell Ltd. Brown Ltd owns 30 per cent of the ordinary shares of Mitchell Ltd. During the accounting period under review, there are no
A parent company, P, has a 51 per cent interest in subsidiary S, a listed company. The other shareholders are dispersed and tend not to attend meetings or appoint proxies to represent them. Entity P
The balance sheet of entity H as at 31 December 2009 is shown below: On 1 January 2010, entity H acquired 80 per cent of the 30,000 EUR 1 ordinary shares in entity S$ for EUR 1.60 per share in cash
(a) Explain what is meant by the terms ‘associate’ and ‘significant influence’. (b) Explain the equity method of accounting. Also explain how this differs from the consolidation approach
Analyse the following situations: (a) A owns 60 per cent of the voting rights of B, C owns 19 per cent of the voting rights of B, and the remainder are dispersed among the public. C also is the sole
(a) Entities A and B decide to manufacture products jointly in a new territory. Entity C will undertake the manufacturing process in this territory using components supplied by entity A and entity B.
Entities A, B and C have 60 per cent, 30 per cent and 10 per cent equity interests in entity D. Entity D has 10 board members, six from entity A, three from entity B and one from entity C. Each board
Entity A has a subsidiary B, which has been struggling in recent years and requires significant investment to expand its operations. Entity A’s owners do not have sufficient financial resources
A acquires 25 per cent of the voting shares of B on 1 January 2009. The purchase consideration was EUR 10m, and A has significant influence over B. The retained earnings of B were EUR 15m at the date
A acquired 30 per cent of the issued capital of B for EUR 1m on 31 December 2007. The retained earnings at that date were EUR 2m. A appointed three directors to the board of B. A intends to hold the
The balance sheets of Fiera Ltd, Cole Ltd and Jong Ltd as at 31 July 2009 are as follows: Additional information: (a) On 31 July 2006, Fiera Ltd paid EUR 820,000 to acquire 90 per cent of the share
On December 31, 20X4, Bennett Corporation recorded the following entry on its books to adjust its investment in Stone Container Company stock from the basic equity method to the fully adjusted equity
What is a corporate joint venture? How should an investment in the common stock of a corporate joint venture normally be reported?
Power Corporation purchased 35 percent of the common stock of Snow Corporation on January 1, 20X2, by issuing 15,000 shares of its $6 par value common stock. The market price of Power's shares at the
Best Corporation acquired 25 percent of the voting common stock of Flair Company on January 1, 20X7, by issuing bonds with a par value and fair value of $170,000 and making a cash payment of $26,000.
Which of the costs incurred in completing a business combination are capitalized under the acquisition method?
Roller Corporation purchased 20 percent ownership of Steam Company on January 1, 20X5, for $70,000. On that date, the book value of Steam's reported net assets was $200,000. The excess over book
Turner Manufacturing Corporation owns 40 percent of the common shares of Straight Lace Company. If Straight Lace reports net income of $100,000 for 20X5, what factors may cause Turner to report less
Capital Corporation purchased 40 percent of Cook Company's stock on January 1, 20X4, for $136,000. On that date, Cook reported net assets of $300,000 valued at historical cost and $340,000 stated at
Brindle Company purchased 25 percent of Monroe Company's voting common stock for $162,000 on January 1, 20X4. At that date, Monroe reported assets of $690,000 and liabilities of $230,000. The book
During review of the adjusting entries to be recorded on December 31, 20X8, Grand Corporation discovered that it had inappropriately been using the cost method in accounting for its investment in
How is the total amount of income from a nonsubsidiary investment computed using the fair value method?
Branch Corporation purchased 30 percent of Hardy Company's common stock on January 1, 20X5, and paid $28,000 above book value. The full amount of the additional payment was attributed to amortizable
Rod Corporation purchased 30 percent ownership of Stafford Corporation on January 1, 20X4, for $65,000, which was $10,000 above the underlying book value. Half the additional amount was attributable
When must tax allocation procedures be used in recording income tax expense under the equity method?
Special Corporation reported net income of $250,000 for 20X5 and paid dividends of $50,000. Power Company owns 40 percent of Special's shares and uses the equity method in accounting for its
Long Company owns 25 percent of Computech Company's common stock, purchased December 28, 20X3, at book value. During the two years following the acquisition of its stock by Long, Computech reported
Baltic Corporation owns 30 percent of the voting shares of Cumberland Company. Cumberland reported net income of $70,000 and paid dividends of $30,000 in 20X8. Baltic accounts for its ownership of
On January 1, 20X3, Guild Corporation reported total assets of $470,000, liabilities of $270,000, and stockholders' equity of $200,000. At that date, Bristol Corporation reported total assets of
Potter Company acquired 100 percent of the voting common shares of Stately Corporation by issuing bonds with a par value and fair value of $135,000 to Stately's existing shareholders. Immediately
Fineline Pencil Company acquired 100 percent of Smudge Eraser Corporation's stock on January 2, 20X3, for $150,000 cash. Summarized balance sheet data for the companies on December 31, 20X2, are as
Route Manufacturing acquired 80 percent of the stock of Hampton Mines Inc. in 20X3. In preparing the consolidated financial statements at the end of 20X5, Route's controller discovered that Route had
Byte Computer Corporation acquired 100 percent of Nofail Software Company's stock on January 2, 20X3, by issuing bonds with a par value of $140,000 and a fair value of $150,000 in exchange for the
Byte Computer Corporation acquired 100 percent of Nofail Software Company's common stock on January 2, 20X3, by issuing preferred stock with a par value of $6 per share and a market value of $10 per
Banner Corporation acquired all of Dwyer Company's common stock at underlying book value. At the acquisition date, the book values and fair values of all of Dwyer's assets and liabilities were equal.
Master Products acquired 100 percent ownership of LoCal Bakeries on January 1, 20X3, when the fair value of LoCal's depreciable assets was $50,000 greater than book value. The depreciable assets had
Knight Corporation owns 100 percent of Spahn Company's voting shares. During 20X6, Spahn purchased inventory items for $20,000 and sold them to Knight for $50,000. Knight continues to hold the items
River Products Corporation purchases all its inventory from its wholly owned subsidiary, Clayborn Corporation. In 20X2, Clayborn produced inventory at a cost of $10,000 and sold it to River Products
Beryl Corporation acquired 100 percent of Stargel Enterprises' common stock on December 31, 20X4. At that date, the book values and fair values of Stargel's identifiable assets and liabilities were
Potash Company acquired 100 percent of Bortz Corporation's common stock at underlying book value on December 31, 20X4, which was equal to the fair value of Bortz as a whole. Potash uses the equity

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