Question 11

Peterlee Co Case

During the year Peterlee Co acquired an ore mine at a cost of 6 million. In addition, when all the ore has been extracted (estimated 10 years time) the company will face estimated costs of landscaping the area affected by the mining that have a present value of 2 million. These costs would still have to be incurred even if no further ore was extracted.

How should this 2 million future cost be recognised in the financial statements?

Correct answer

AProvision 2 million and 2 million capitalised (IAS 37 paragraph 45) as part of cost of mine.

BProvision 2 million and 2 million charged to operating costs.

CShould not be recognised as no cost has yet arisen.

DAccrual 200,000 per annum for next 5 years.

Question 12

0 / 3 pts

Peterlee Co Case

Peterlee Co prepares financial statements to 31 December each year. The following events occurred after 31 December 2019 but before the financial statements for the year to 31 December 2019 were authorised for issue. Which one is is an adjusting event according to IAS10?

The company made a major investment in plant and equipment.

It was discovered that an item of equipment shown as an asset in the statement of financial position at 31 December 2019 had been stolen on 12 January 2020.

The company made a take-over bid for another company.

Correct answer

Inventory held at 31 December 2019 was sold to a customer.

Question 13

0 / 3 pts

Peterlee Co Case

Read the following business information of Peterlee Co:

• Peterlee Co decided to reorganise a manufacturing facility during November 2019 and commissioned a consulting engineer to carry out a feasibility study. A provision for the reorganisation was created at 31^st December 2019.
• Staff functions will change following the reorganisation, so in December 2019, Peterlee Co contracted with a new training company to provide retraining to take place in January 2020. A provision for this expenditure was created at 31^st December 2019.
• Peterlee Co hopes that reorganising its manufacturing facility will improve quality control. It gives a one-year warranty with all products and the rate of returns under warranty is 10%. 5% of the returned items can be repaired at a cost of 5 (free of charge to the customer). The other 95% are scrapped and a full refund of 30 is given. Peterlee Co sold 500,000 units during the year to 31^st December 2019.
• In 5 years, Peterlee Co will have to dismantle its factory and return the site to the local authority. A provision was set up for the present value of the dismantling costs when the factory was first acquired. The opening balance on the provision at 1^st January 2019 was 2 million. X has a cost of capital of 8%.

What is the amount of the provision that should be created at 31^st December 2019 for returns under warranty?

1,438,500

1,436,500

1,437,000

Correct answer

1,437,500

Question 14

Peterlee Co Case

Read the following business information of Peterlee Co:

• Peterlee Co decided to reorganise a manufacturing facility during November 2019 and commissioned a consulting engineer to carry out a feasibility study. A provision for the reorganisation was created at 31^st December 2019.
• Staff functions will change following the reorganisation, so in December 2019, Peterlee Co contracted with a new training company to provide retraining to take place in January 2020. A provision for this expenditure was created at 31^st December 2019.
• Peterlee Co hopes that reorganising its manufacturing facility will improve quality control. It gives a one-year warranty with all products and the rate of returns under warranty is 10%. 5% of the returned items can be repaired at a cost of 5 (free of charge to the customer). The other 95% are scrapped and a full refund of 30 is given. Peterlee Co sold 500,000 units during the year to 31^st December 2019.
• In 5 years, Peterlee Co will have to dismantle its factory and return the site to the local authority. A provision was set up for the present value of the dismantling costs when the factory was first acquired. The opening balance on the provision at 1^st January 2019 was 2 million. X has a cost of capital of 8%.

What is the amount of the provision that should be carried forward at 31^st December 2019 for the dismantling of the factory?

2,170,000

2,140,000

2,150,000

Correct answer

2,160,000

Question 15

Peterlee Co Case

Peterlee Co, with the dollar as its functional currency, purchases plant from a foreign entity for 18m on 31 May 2019 when the exchange rate was 2 to $1. Peterlee Co also sells goods to a foreign customer for 10.5m on 30 September 2019, when the exchange rate was 1.75 to $1. At Peterlee Cos year end of 31 December 2019, both amounts are still outstanding and have not been paid. The closing exchange rate was 1.5 to $1.

At the year-end, what will be accounted for the above items in profit or loss, for the period ending 31 December 2019?

Correct answer

An exchange loss of $3m, and an exchange gain of $1m.

An exchange gain of $3m, and an exchange loss of $1m.

An exchange gain of $1.5m, and an exchange loss of $0.5m.

An exchange loss of $1.5m, and an exchange gain of $0.5m.