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Financial Reporting Knowledge Check MCQ 16b

MCQ Financial Reporting

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50% found this document useful (2 votes)

1K views

Financial Reporting Knowledge Check MCQ 16b

MCQ Financial Reporting

Uploaded by

Elaine Tor

We take content rights seriously. If you suspect this is your content, claim it here.

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Knowledge Checks:

Multiple Choice
Questions and Solutions
FINANCIAL REPORTING

Version 16b
Copyright CPA Australia unless otherwise indicated.

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

iv | FINANCIAL REPORTING

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Questions
Module 1
Question 1.1
Which one of the following factors will be reflected in the amount of a short-term employee
benefit obligation measured in accordance with IAS 19 Employee Benefits ?
A
B
C
D

the risk-free interest rate

salary rates current at reporting date
salary rates that reflect the future sacrifice
interest rates on high-quality corporate bonds
(FR ID 1.1)

Question 1.2
According to IAS 19 Employee Benefits , measurement of the long-term employee benefit
obligation should be based on
A
B
C
D

vested
vested
vested
vested

benefits at future salary rates.

benefits at current salary rates.
and non-vested benefits at future salary rates.
and non-vested benefits at current salary rates.
(FR ID 1.2)

Question 1.3
Which of the following identifies the assumption(s) underpinning the preparation of general
purpose financial statements in accordance with the Conceptual Framework? Select which
two options are correct.
A
B
C
D

relevance
going concern
cash basis of accounting
accrual basis of accounting
(FR ID 1.3)

Question 1.4
Sandy Ltd (Sandy) measures its investment in Blue Chip Ltd (Blue Chip) shares at fair value.
Blue Chip shares are listed and actively traded on the stock exchange. Which one of the
following valuations should Sandy use to measure its investment in shares in Blue Chip in its
financial statements at 30 June 20X3?
A
B
C
D

the closing price of Blue Chip shares on the stock market at 30 June 20X3
the average price of Blue Chip shares on the stock market from 1 June 20X3 to 30 June 20X3
an estimate derived from a model that uses observable industry growth rates and past
cash flows
an estimate derived from a model that uses Sandys estimates of Blue Chips future profits
and required rate of return
(FR ID 1.4)

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| FINANCIAL REPORTING

Question 1.5
Which one of the following is a criticism of the distinction between operating leases and finance
leases in IAS 17 Leases ?
A
B
C
D

Commitments arising under non-cancellable operating leases must be disclosed.

The obligations of the lessee are not recognised unless substantially all of the risks and
rewards of ownership are transferred.
It results in a lack of comparability because operating leases, but not finance leases,
are recognised in the statement of financial position.
The principles-based approach provides greater opportunity than a rules-based approach
to structure leases so as to avoid recognition of lease assets and liabilities.
(FR ID 1.5)

Question 1.6
Which one of the following statements is correct in relation to the approach adopted by
IAS 17 Leases to classifying leases as either finance or operating leases?
A
B
C
D

This approach is dependent on only qualitative criteria.

This approach copes well with the wide variety of lease arrangements.
This approach ensures that present obligations are recognised as liabilities.
This approach can result in leases with similar economic characteristics being
treated differently.
(FR ID 1.6)

Question 1.7
Which of the following factors contribute to a finance lease classification?
Select which two options are correct.
A
B
C
D

The lease term is for two years of the leased assets economic life of 10 years.
Legal ownership of the leased asset transfers to the lessee at the end of the lease term.
The return on the lease only compensates the lessor for insurance, maintenance and
operating costs incurred by the lessor.
The present value of the minimum lease payments equals 95 per cent of the fair value
of the leased asset at the start of the lease.
(FR ID 1.7)

Question 1.8
Self-Starter Sports Ltd (Self-Starter Sports) internally developed several assets. Which one of the
following internally generated assets should be recognised in accordance with IAS 38 Intangible
Assets ? Assume that the expected future economic benefits of the internally generated assets
are probable and the cost of the asset can be measured reliably.
A
B
C
D

brand name OneStep associated with Self-Starter Sports starter range

customer list of customers signed up to Self-Starter Sports loyalty program
computer program to keep track of customers orders and automate the generation
of invoices
masthead for a new sporting magazine called Hockey Highlights launched by
Self-Starter Sports Ltd
(FR ID 1.8)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 1.9
On 1 June 20X1 Bridget Ltd (Bridget) acquired an item of plant for an agreed consideration of
1000 of its own shares.
The plant was received on 1 June 20X1 and the obligation to transfer shares was to be settled on
1 August 20X1. The fair value of the plant was $10 000 on 1 June 20X1. Bridgets share price was
$8 on 1 June 20X1 and $9 on 30 June 20X1.
In accordance with IFRS 2 Share-based Payment Bridget should
A
B
C
D

remeasure the equity to $9000 on 30 June 20X1.

initially recognise the plant and equity at $8000 on 1 June 20X1.
make no entry in relation to the transaction until 1 August 20X1.
initially recognise the plant and equity at $10 000 on 1 June 20X1.
(FR ID 1.9)

Question 1.10
A long-term employee benefit obligation should reflect the amount which, if invested at
measurement date, would provide the necessary pre-tax cash flows to pay the accrued obligation
when expected to be settled. Where a deep market exists for all relevant financial instruments,
IAS 19 requires that this amount is invested in
A
B
C
D

risk-free securities.
government bonds.
a portfolio of high-quality shares.
a portfolio of high-quality corporate bonds.
(FR ID 1.10)

Question 1.11
Hook Ltd (Hook) purchases an investment property on 1 July 20X0 for $100 000. At 30 June 20X1,
Hook determines the fair value of the investment property to be $150 000. At 30 June 20X2,
the fair value of the investment property had fallen to $80 000. Hooks accounting policy is to
carry investment properties at fair value.
Which one of the following journal entries is processed by Hook on 30 June 20X1?
A

No entry is required

Dr. Investment property

Cr. Rental revenue

$50 000

Dr. Investment property

Cr. Asset revaluation reserve

$50 000

Dr. Investment property

Cr. Gain on revaluation (profit or loss)

$50 000

$50 000
(FR ID 1.11)

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| FINANCIAL REPORTING

Question 1.12
Hook Ltd (Hook) purchases an investment property on 1 July 20X0 for $100 000. At 30 June 20X1,
Hook determines the fair value of the investment property to be $150 000. At 30 June 20X2,
the fair value of the investment property had fallen to $80 000. Hook Ltds accounting policy is
to carry investment properties at fair value.
Which one of the following journal entries is processed by Hook Ltd on 30 June 20X2?
A

Dr. Asset revaluation reserve

Cr. Investment property

$70 000

Dr. Asset revaluation reserve

Dr. Loss on revaluation (profit or loss)
Cr. Investment property

$50 000
$20 000

Dr. Loss on revaluation (profit or loss)

Cr. Investment property

$50 000

Dr. Loss on revaluation (profit or loss)

Cr. Investment property

$70 000

$50 000

$70 000
(FR ID 1.12)

Question 1.13
Cayenne Ltd (Cayenne) purchases a property on 1 July 20X0 for $100 000. It sells the property
on 1 January 20X3 to Snow Ltd (Snow) in exchange for 10 000 shares in Snow. On that date,
Snows share price is $11 and the fair value of the property is $108 000.
Which one of the following statements is correct?
A
B
C
D

Snow
Snow
Snow
Snow

initially recognises the

initially recognises the
initially recognises the
recognises a decrease

property
property
property
in equity

at $100 000.
at $108 000.
at $110 000.
of $110 000.
(FR ID 1.13)

Question 1.14
Which one of the following is a criticism of IAS 40 Investment Property?
A
B
C
D

Fair value of investment properties cannot be reliably measured due to their specific nature.
Since entities can choose between fair value or cost, the comparability between entities
is reduced.
Requiring fair value movements to be recognised in profit or loss results in less reliable
information for users.
Classifying investment properties separately from property, plant and equipment on the
statement of financial position does not faithfully represent the operations of the business.
(FR ID 1.14)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 1.15
Hayden Ltd (Hayden) purchases plant on 1 July 20X5 in exchange for cash consideration equal to
the value of 10 000 shares in Hayden, determined and payable on 14 July 20X5. Haydens share
price was $15 on 1 July 20X5 and $20 on 14 July 20X5. The fair value of the plant was $160 000 on
both 1 July 20X5 and 14 July 20X5.
Which one of the following statements is correct?
A
B
C
D

Hayden
Hayden
Hayden
Hayden

initially recognises the plant at $150 000.

initially recognises the plant at $160 000.
recognises an increase in equity of $200 000.
remeasures the plant to $200 000 on 14 July 20X5.
(FR ID 1.15)

Question 1.16
On 30/6/20X0 Beta Ltd (Beta) leased equipment from Capital Finance Group. The lease had the
following terms.

The term of the lease is five years.

The useful life of the equipment is eight years.
The fair value of the equipment is $675 000 at the commencement of the lease.
Lease rentals are $120 000 per annum, payable at the beginning of each year.
The residual value is $110 000 but is not guaranteed.
The present value of the minimum lease payments is equal to 50 per cent of the fair value
of the asset at commencement of the lease.
If Beta returns the leased equipment before the expiry of the lease, it will be liable to pay an
amount equal to 80 per cent of the present value of remaining lease rentals, discounted at a
non-risk adjusted rate.

Which one of the following statements is correct?

A
B
C
D

According to IAS 17 Leases , Beta should recognise an asset and liability at the inception of
the lease.
According to the Conceptual Framework, Beta should recognise an asset and liability at
the inception of the lease.
According to the Conceptual Framework and IAS 17 Leases , Beta should recognise an asset
and liability at the inception of the lease.
According to the Conceptual Framework and IAS 17 Leases , Beta should not recognise an
asset and liability at the inception of the lease.
(FR ID 1.16)

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Module 2
Question 2.1
The following is an extract from the 20X6 annual report of Status Ltd (Status).
1.

Statement of accounting policies

Basis of accounting
The financial statements are drawn up on a historical cost basis and, except where stated,
do not take into account changing money values and/or current valuations of non-current
assets.
Changes in accounting policies
During the 20X6 financial year, Status voluntarily changed its policy on accounting for
inventory. This did not materially affect the 20X6 financial statements, but will have a
material impact on the financial statements in subsequent reporting periods.

In addition to the above accounting policy details, what must the accountant for Status include
as disclosures? Select which two options are correct.
A
B
C
D

the nature and reason for the accounting policy change

the fact that the financial report has been prepared on a going concern basis
the financial effects of the accounting policy change on subsequent reporting periods
the fact that the financial report has been prepared in accordance with International
Financial Reporting Standards
(FR ID 2.1)

Question 2.2
In preparing the 20X4 financial statements of Medal Ltd (Medal), there was a voluntary change of
accounting policy in relation to inventories. The accountant for Medal noted that this change
would not require any adjustment in the financial report for the reporting period ending on
30 June 20X4. However, the accountant considered that the change in accounting policy would
have a material effect on the subsequent reporting period.
In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors ,
which one of the following actions should be taken when preparing the financial report for
the year ended 30 June 20X4?
A
B
C
D

No information about the accounting policy change needs to be disclosed.

Disclosure of the nature and reason for the change and its estimated financial effect in the
subsequent reporting period.
Disclosure of the nature and reason for the change and that no adjustments were recognised
in the 20X4 financial statements.
Inclusion of a note stating that an accounting policy had been changed but no adjustments
were required in the 20X4 financial statements.
(FR ID 2.2)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 2.3
In preparing the accounts of Oscar Ltd (Oscar) for the financial year ended 30 June 20X7,
the following items were considered. In accordance with IAS 1 Presentation of Financial
Statements , IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors and
IAS 10 Events after the Reporting Period, which of the following items would be included in
the determination of profit after income tax?
Select which three options are correct.
A
B
C
D

the loss from a major fire that closed the plant during April 20X7
a reassessment of the useful life of plant and equipment in December 20X6
a major currency realignment on 11 July 20X7 that affected the amount of Oscars
foreign currency receivables
a change in accounting estimate related to the determination of the bad debts write-off
for the 20X6 financial statements
(FR ID 2.3)

Question 2.4
In accordance with IAS 1 Presentation of Financial Statements , which one of the following
statements is correct?
A
B
C
D

Assets and liabilities must be presented broadly in the order of their liquidity.
Assets and liabilities can be offset if they result from the same transaction or event.
Intangible assets must be presented separately in the statement of financial position.
Even if less than 12 months, the length of an entitys operating cycle must be disclosed.
(FR ID 2.4)

Question 2.5
In accordance with IAS 1 Presentation of Financial Statements , which one of the following
statements in relation to the statement of profit or loss and other comprehensive income
is correct?
A
B
C
D

A reclassification adjustment is made to other comprehensive income when a revalued

item of plant and equipment is sold.
Items of income and expense that are outside the ordinary operations of an entity are
included in other comprehensive income.
Where an entity has an investment in an associate, the profit of the entity would include
a line item Share of profit or loss and other comprehensive income of associate.
The components of other comprehensive income may be presented in the statement
of profit or loss and other comprehensive income before tax with an aggregate amount of
tax for all components.
(FR ID 2.5)

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| FINANCIAL REPORTING

Question 2.6
Sandal Ltd (Sandal) prepares consolidated financial statements. During the financial year ended
30 June 20X4, Sandal disposed of an investment in a foreign operation. Up to the date of
disposal, Sandal had to translate the financial statement of the foreign operation from another
currency for inclusion in its consolidated financial statements. During prior reporting periods,
$14 000 of exchange difference gains net of tax (pre-tax exchange difference gains $20 000)
had been recognised in other comprehensive income in the consolidated financial statements
of Sandal. During the 20X4 reporting period, a $3500 exchange difference gain net of tax (pre-tax
exchange difference gain $5000) up to the date of disposal of the foreign operation had been
recognised in other comprehensive income.
In accordance with IAS 1 Presentation of Financial Statements , which one of the following
statements is correct in relation to the treatment of the disposal of the foreign operation in the
consolidated statement of profit or loss and other comprehensive income of Sandal for the year
ended 30 June 20X4?
A
B
C
D

Other comprehensive income would include an exchange difference net of tax gain of $3500.
Other comprehensive income would include a reclassification adjustment net of tax of $14 000.
Other comprehensive income would include a reclassification adjustment net of tax of $17 500.
No reclassification adjustment from other comprehensive income to profit or loss is necessary
on disposal of the foreign operation.
(FR ID 2.6)

Question 2.7
In accordance with IAS 1 Presentation of Financial Statements , which one of the following
items does not have to be separately presented in the statement of profit or loss and other
comprehensive income?
A
B
C
D

finance costs
share of losses from associates
expenses from ordinary activities
profit attributable to non-controlling interests
(FR ID 2.7)

Question 2.8
Salter Ltd has completed its 20X5 financial statements which reveal, in part, the following information.

Profit for the year$110 000

Total comprehensive income$130 000
Other comprehensive income relates to the revaluation of land and buildings to fair value
Dividends paid$35 000
Opening equity balancesshare capital $300 000, retained earnings $220 000, asset revaluation
surplus $60 000
No more share capital was issued during the reporting period

In accordance with IAS 1 Presentation of Financial Statements , which one of the following items
would correctly be included in the statement of changes in equity for the year ended 30 June 20X5?
A
B
C
D

Closing retained earnings$295 000

Closing retained earnings$315 000
Total closing equity$655 000
Total closing equity$695 000
(FR ID 2.8)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 2.9
In accordance with the requirements of IAS 1 Presentation of Financial Statements , which one
of the following statements is correct?
A
B
C
D

Reclassification adjustments relating to components of other comprehensive income must

be disclosed.
The share of profit or loss of associates determined using the equity method must be
included in other comprehensive income.
Every item that appears in other comprehensive income will require a reclassification
adjustment in future reporting periods when the item involved is derecognised.
Retrospective adjustments arising from a change in accounting policy in accordance with
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors must be included in
other comprehensive income.
(FR ID 2.9)

Question 2.10
The accountant for Indra Ltd (Indra) has determined the following information for the year ended
30 June 20X6.
$
300 000
20 000
15 000

Profit or loss
Share of total comprehensive income after tax of associates
Share of profit (after tax) of associates
Exchange difference gain (net of tax of $3000) on translation of foreign operation
up to the date sold (1 March 20X6)
Exchange difference gain (net of tax of $9000) on disposal of foreign operation
recognised in profit for the year
Increase in asset revaluation surplus (net of tax)

7 000
21 000
45 000

In accordance with the requirements of IAS 1 Presentation of Financial Statements , what is the
total amount of other comprehensive income for Indra for the year ended 30 June 20X6?
A
B
C
D

$36 000
$51 000
$57 000
$72 000
(FR ID 2.10)

Question 2.11
In accordance with IAS 1 Presentation of Financial Statements , which one of the following items
must be separately presented in the statement of financial position?
A
B
C
D

net assets
non-financial assets
asset revaluation surplus
issued capital and reserves
(FR ID 2.11)

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| FINANCIAL REPORTING

Question 2.12
The following information relates to the affairs of Funny Money Ltd.

Trade receivables
Allowance for doubtful debts

30 June 20X2
$000
150 Debit
8 Credit

Year ended 30 June 20X3

Sales revenue
Doubtful debts expense

30 June 20X3
$000
120 Debit
12 Credit

$
500 000
15 000

Bad debts incurred during the year were written off against the allowance for doubtful debts.
What is the amount of cash collected from trade receivables during 20X3?
A
B
C
D

$481 000
$485 000
$515 000
$519 000
(FR ID 2.12)

Question 2.13
Note: This question provides information on receivables net of allowance for doubtful debts.
There is a need to use the data to determine the change in gross receivables and bad debt
write-off for the period.
The following information relates to Cashflow Ltd for the year ended 30 June 20X6.
$
450 000
100 000
132 500
5 000
2 000

Sales revenue
Opening balance of trade receivables (net of allowance)
Closing balance of trade receivables (net of allowance)
Doubtful debts expense
Increase in allowance for doubtful debts
Bad debts are written off against the allowance for doubtful debts

What is the amount of cash collected from customers during the year ended 30 June 20X6?
A
B
C
D

$412 500
$418 500
$481 500
$487 500
(FR ID 2.13)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 2.14
Balances of the deferred tax accounts of Taxflow Ltd were as follows.

Deferred tax liability

Deferred tax asset

30 June 20X3
$
3 200 Credit
2 650 Debit

30 June 20X4
$
2 000 Credit
1 900 Debit

Income tax expense for the year ended 30 June 20X4 was $1750. The current tax payable at
30 June 20X4 is $200 less than the current tax payable at the preceding year end.
What was the amount of income tax paid during the year ended 30 June 20X4?
A
B
C
D

Nil
$1500
$2400
$3900
(FR ID 2.14)

Question 2.15
The following information relates to the activities of Cashin Ltd. Income tax may be ignored.
$
720 000
23 000
11 500
24 600
14 000
1 000

Net cash inflows from operating activities

Decrease in trade payables
Decrease in inventory
Increase in trade receivables
Cash proceeds from sale of plant (book value of $25 000)
Increase in allowance for doubtful debts
What is the profit for the period?
A
B
C
D

$698 100
$730 100
$744 100
$767 100
(FR ID 2.15)

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| FINANCIAL REPORTING

Module 3
Question 3.1
In relation to provisions, for a present obligation to exist, which one of the following factors must
be present?
A
B
C
D

The obligation must be capable of being reliably measured.

The entity must have a legal obligation that can be enforced by law.
The entity must have no realistic alternative to settling the obligation.
It must be more likely than less likely that there will be a future flow of economic benefits.
(FR ID 3.1)

Question 3.2
In accordance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent
Assets , where measurement uncertainty exists, which one of the following methods is not an
appropriate valuation for a provision based on accounting standards?
A
B
C
D

the mid-point of a range of equally likely outcomes of expenditure

no provision should be recognised where measurement uncertainty exists
the minimum amount expected to represent a best estimate, where the other option
is omission
the most likely amount expected to represent a best estimate, where there is a single
obligation
(FR ID 3.2)

Question 3.3
A manufacturer provides warranties at the time of sale to purchasers of its product lines.
Under the terms of the warranty, the manufacturer undertakes to repair or replace items that
fail to perform satisfactorily within a period of two years from the date of sale. When should the
manufacturer recognise the provision? Select which one of the following is correct.
A
B
C
D

At the time of sale.

At the end of the warranty period.
When the company is notified of a claim.
Never. A provision should not be recognised; rather the costs associated with the
warranty should be expensed as incurred.
(FR ID 3.3)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 3.4
Which one of the following is a correct statement in relation to IFRS 15 Revenue from Contracts
with Customers ?
A
B
C
D

The expected value method may better predict variable consideration if the contract has
only two possible outcomes.
The expected value method requires an entity to identify the probability of each possible
outcome of a contract occurring.
The expected value method can be adopted as an entitys accounting policy to estimate
variable consideration for every contract.
The transaction price determined at the start of a contract is not updated for any changes in
an entitys assessment of the amount of consideration to which it expects to be entitled.
(FR ID 3.4)

Question 3.5
Zulu Ltd (Zulu) enters into a contract with a customer to deliver a phone package to the customer
in return for an upfront payment of $1000. Under the terms of the contract the customer will
receive a free phone upon signing the contract, and phone service for two years. Zulu also sells
phones and phone services separately.
Which one of the following statements is correct?
A
B
C
D

At contract inception, Zulu recognises revenue of $1000.

At contract inception, Zulu recognises a contract liability of $1000.
Zulu identifies one performance obligation in the phone package.
Zulu identifies two performance obligations in the phone package.
(FR ID 3.5)

Question 3.6
Which one of the following is included in the scope of IAS 37 Provisions, Contingent Liabilities
and Contingent Assets ?
A
B
C
D

provisions related to employee benefits

all financial instruments within the scope of IFRS 9
all provisions related to owned long-lived assets, such as oil rigs
all provisions related to insurance contracts within the scope of IFRS 4
(FR ID 3.6)

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15b

02-06-16

| FINANCIAL REPORTING

Question 3.7
The Acme Building Company Ltd is aware of draft legislation that, when enacted, will require the
company to refund certain amounts previously charged to its customers. The company intends to
lobby against the legislation. At the reporting date, the planned legislative changes have been
approved and are now effective.
Which one of the following treatments would be required at the reporting date?
A
B
C
D

Recognise a provision as the legislation has been enacted.

Make no disclosure as the company has not yet started refunding the amounts.
Make no disclosure if the company does not intend to comply with the legislation.
Disclose a contingent liability as the company intends to lobby against the legislation.
(FR ID 3.7)

Question 3.8
Which of the following circumstances would result in a disclosure of a contingent liability?
Select which two options are correct.
A
B
C
D

An event has caused the possibility of a sacrifice of future economic benefits, but the
likelihood is remote.
A present obligation has been determined and the future sacrifice of economic benefits is
probable and may be reliably measured.
The occurrence of an event has resulted in a probable sacrifice of future economic benefits,
but the amount cannot be reliably measured.
As a consequence of an event, the existence of a present obligation is not clear and the
future sacrifice of economic benefits cannot be reliably measured.
(FR ID 3.8)

Question 3.9
Which one of the following is a correct statement in relation to provisions and contingencies?
A
B
C
D

An item of a contingent nature may be recognised, but not disclosed, in the body of the
financial statements.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies to provisions to
perform land rehabilitation activity.
IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies to contingent
liabilities and contingent assets of insurers that result from insurance contracts.
A present obligation exists in all circumstances where a company may have some
choice in whether or not to make a future sacrifice of economic benefits in settlement
of an obligation.
(FR ID 3.9)

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 3.10
Which one of the following represents an appropriate discount rate for measuring a provision
based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets ?
A
B
C
D

market yields on national government bonds

market yields on high-quality corporate bonds
pre-tax rate that reflects current market assessment of the time value of money and
the risks specific to the liability
pre-tax rate that reflects current market assessment of the time value of money and the
risks specific to the entity
(FR ID 3.10)

Question 3.11
Beta Ltd (Beta) enters into a contract with a customer to provide 100 widgets at a price of $50 per
widget. Under the contract terms, unused widgets may be returned within 30 days of sale for a
full refund. Based on past experience, Beta attaches the following probabilities to the estimated
number of widgets the customer will return:
Widgets returned
0
10
15
20
30

Probability of outcome
10%
10%
60%
15%
5%

Probability-weighted consideration
$500
$450
$2550
$600
$175

Which two of the following statements are correct?

A
B
C
D

Under
Under
Under
Under

the
the
the
the

expected value method, the transaction price is $2550.

expected value method, the transaction price is $4275.
most likely amount method, the transaction price is $2550.
most likely amount method, the transaction price is $4250.
(FR ID 3.11)

Question 3.12
As at 30 June 20X8 (reporting date), STU Ltd (STU) is involved in a legal dispute with a supplier in
relation to the early termination of the exclusive licence agreement between the two entities.
The supplier is seeking damages of $40 million. The directors of STU believe they will be
successful in defending the claim. STUs lawyers have advised that it is 90 per cent probable
the entity would not be found liable.
In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets , which one
of the following is the most appropriate option for STU when preparing its financial report for
30 June 20X8?
A
B
C
D

Do nothing.
Disclose information about the possible liability as a contingent liability.
Recognise a provision for the best estimate of the obligation to the supplier.
Recognise a contingent liability for the best estimate of the obligation to the supplier.
(FR ID 3.12)

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15b

02-06-16

| FINANCIAL REPORTING

Module 4
Question 4.1
The accounting profit before tax of Gamma Ltd (Gamma) for the year ended 30 June 20Y0 was
$100 000 after charging all expenses and recognising all items of revenue. The carrying amounts
in the books of Gamma of those assets and liabilities relevant to income taxes were as follows.
20X9
$

95 000
27 000

Depreciable asset
Accumulated depreciation
Carrying amount
Goodwill (less allowance for impairment)
Unearned insurance premiums

20Y0
$
100 000
15 000
85 000
80 000
31 000

In preparing the tax return of the company, the accountant included the following item.
Depreciation of equipment

$25 000

Reductions in goodwill are not deductible for tax purposes. The companys effective tax rate
was 30 per cent. Assume that the recognition criteria were satisfied.
Which one of the following journal entries would Gamma process to recognise the income tax
consequences of these transactions in accordance with IAS 12 Income Taxes ?

Deferred tax expense

Deferred tax asset
Deferred tax liability
Current tax expense
Tax payable
Deferred tax asset
Deferred tax expense
Deferred tax liability
Current tax expense
Tax payable
Deferred tax asset
Deferred tax income
Deferred tax liability
Current tax expense
Tax payable
Deferred tax expense
Deferred tax asset
Deferred tax liability
Current tax expense
Tax payable

$
1 800
1 200

3 000
32 700
32 700
3 000
1 800
1 200
36 300
36 300
5 700
2 700
3 000
32 700
32 700
2 700
3 000
5 700
27 300
27 300
(FR ID 4.1)

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15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.2
In relation to accounting for income taxes, which one of the following statements is correct?
A
B
C
D

Current tax expense is the sum of tax expense plus deferred tax expense.
Tax expense is the sum of current tax expense plus deferred tax expense.
Deferred tax liabilities are determined from deductible temporary differences.
All movements in deferred tax assets and liabilities are recognised in the statement
of profit or loss and other comprehensive income.
(FR ID 4.2)

Question 4.3
To calculate the tax base of a liability for employee benefits, which one of the following
formulas would be used?
A
B
C
D

Carrying
Carrying
Carrying
Carrying

amount
amount
amount
amount

+ Future
Future
+ Future
Future

assessable amounts
non-assessable amounts of revenue
deductible amounts Future assessable amounts
deductible amounts + Future assessable amounts
(FR ID 4.3)

Question 4.4
At 30 June 20X3, the carrying amount of an asset is $100 000 and its tax base is $80 000. The tax
rate is 30 per cent. At 30 June 20X3, in relation to this asset, which one of the following items
would be recognised?
A
B
C
D

deferred
deferred
deferred
deferred

tax asset of $6000

tax liability of $6000
tax asset of $24 000
tax liability of $24 000
(FR ID 4.4)

Question 4.5
For the year ended 30 June 20X5, Hope Ltd (Hope) had a taxable profit of $230 000.
The following comparative information was ascertained from the tax calculations of Hope.

Deferred tax asset

Deferred tax liability

20X4
$78 000
$40 000

20X5
$92 000
$34 000

The tax rate is 30 per cent.

What is the amount of tax expense of Hope for the year ended 30 June 20X5?
A
B
C
D

$20 000
$49 000
$61 000
$69 000
(FR ID 4.5)

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2nd set

15b

02-06-16

| FINANCIAL REPORTING

Question 4.6
For the year ended 30 June 20X7, Pringle Ltd (Pringle) had an accounting profit of $200 000 and
a taxable profit of $170 000. The tax expense of Pringle for the year ended 30 June 20X7 was
$60 000. At 30 June 20X7 it was determined that the company had a deferred tax liability of
$27 000. Assume that there was no deferred tax asset at the beginning or end of the period.
The tax rate is 30 per cent.
Which one of the following statements is correct?
A
B
C
D

The
The
The
The

deferred tax liability as at 30 June 20X6 was $0.

deferred tax liability as at 30 June 20X6 was $18 000.
current tax expense for the year ended 30 June 20X7 was $33 000.
deferred tax expense for the year ended 30 June 20X7 was $27 000.
(FR ID 4.6)

Question 4.7
At 30 June 20X3, the gross amount of the accounts receivable of Atom Ltd (Atom) was $10 000.
At the same date, there was a related allowance for doubtful debts of $500. Revenue from sales
is included in the statement of profit or loss and other comprehensive income in the same period
as it is included in taxable profit. The tax rate is 30 per cent.
At 30 June 20X3, Atom would recognise which one of the following items in its statement
of financial position?
A
B
C
D

deferred
deferred
deferred
deferred

tax asset of $150

tax liability of $150
tax asset of $2850
tax liability of $2850
(FR ID 4.7)

Question 4.8
At 31 December 20X6, the statement of financial position of Multi Manufacturing Ltd (MM)
contained a liability for employee benefits of $1 200 000. For tax purposes, a deduction for
employee benefits is allowed in the reporting period in which they are paid. In addition,
during the year ended 31 December 20X6, MM obtained a foreign currency loan of FC100 000
repayable in three years. During the year ended 31 December 20X6, the AUD equivalent of the
foreign currency loan decreased from $200 000 on initial recognition to $180 000. Gains or losses
on foreign currency loans are included in the determination of taxable profit in the period when
the loan is settled. The tax rate is 30 per cent. Assume that for the purposes of statement of
financial position presentation, deferred tax assets and deferred tax liabilities are netted off
against each other.
At 31 December 20X6, in relation to the above liabilities, MM would recognise which one of the
following items in its statement of financial position?
A
B
C
D

net
net
net
net

deferred
deferred
deferred
deferred

tax asset of $354 000

tax asset of $366 000
tax liability of $354 000
tax liability of $366 000
(FR ID 4.8)

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.9
The following information is available for Alpha Ltd (Alpha).
1. The taxable profit for the year ended 30 June 20X8 was $100 000.
2. Deductible temporary differences were:

Accounts receivable
Provision for employee benefits

20X7
$
10 000
65 000

20X8
$
15 000
80 000

20X7
20 000

20X8
30 000

3. Taxable temporary differences were:

Prepaid insurance

Assume that the tax rate is 30 per cent. What was the amount of the tax expense of Alpha for the
year ended 30 June 20X8?
A
B
C
D

$24 000
$27 000
$30 000
$33 000
(FR ID 4.9)

Question 4.10
Assetsale Ltd sold a fixed asset for $160 000. The following data are relevant.

$
100 000
125 000
90 000
60 000

Cost of asset sold

Capital gains tax cost base of asset
Statement of financial position carrying amount
Tax written-down amount of asset (tax cost less tax depreciation)
The tax rate, including tax on taxable capital gains, is 30 per cent
Capital gains are calculated by deducting the capital gains tax cost base from
the sale proceeds

Which one of the following journal entries should be processed to record this transaction?

Deferred tax liability

Deferred tax income
Current tax expense
Tax payable
Deferred tax expense
Deferred tax liability
Current tax expense
Tax payable
Deferred tax expense
Deferred tax liability
Current tax expense
Tax payable

R:\Workgroups\CPA-Production\CPA Digitisation\2nd Semester 2015\FR\FR-Knowledge-check-MCQ_15b.docx

$
9 000

19 500
19 500
9 000
9 000
22 500
22 500
9 000
9 000
4 500
4 500

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2nd set

15b

02-06-16

| FINANCIAL REPORTING

Deferred tax liability

Deferred tax expense
Current tax expense
Tax payable

9 000
9 000
22 500
22 500
(FR ID 4.10)

Question 4.11
On 31 December 20X9, SUFA Ltd (SUFA) revalued a depreciable asset to $160 000. The asset
had not previously been revalued and the revaluation was recorded in accordance with the
requirements of IAS 16 Property, Plant and Equipment. The following data are relevant.

Cost of asset
Statement of financial position carrying amount
Tax written-down value (tax cost less tax depreciation)
Capital gains tax is not taxable
Effective life of asset at 1 January 20Y0
The tax rate is 30 per cent

DTP: Jen, Leigh, Mira

2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.12
The following items appeared in the records of Changerate Ltd as at 30 June 20Y0.

Statement of financial position item

Rental revenue received in advance
Provision for employee benefits
Interest revenue receivable
Development costs carried forward
Plant and equipment less
accumulated depreciation

Carrying amount
$
80 000
20 000
50 000
40 000
100 000

Notes
Taxable when received in cash
Deductible for tax on a cash basis
Taxable on receipt in cash
Claimed as an allowable deduction
in a previous period
Tax written-down amount of $40 000

Additional information
Unused tax losses were $120 000.
The recognition criteria for deferred tax assets and deferred tax liabilities were satisfied.
On 31 May 20Y0, the responsible government minister announced that the rate of income tax
was to be increased from 30 per cent to 35 per cent as from 1 July 20Y0. The government
had a comfortable majority and it was highly probable, as at 30 June 20Y0, that the required
legislation would be approved by the legislature.
Which one of the following choices correctly records the tax consequences of these events?
$
A

30 June 20Y0
Deferred tax expense
Deferred tax asset
Deferred tax liability

3 500
7 500

30 June 20Y0
Deferred tax expense
Deferred tax asset
Deferred tax liability

2 500
5 000

30 June 20Y0
Deferred tax expense
Deferred tax asset
Deferred tax liability

4 500
7 000

30 June 20Y0
Deferred tax asset
Deferred tax liability
Deferred tax income

11 000

7 500

11 500

11 000
7 500
3 500
(FR ID 4.12)

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2nd set

15b

02-06-16

| FINANCIAL REPORTING

Question 4.13
XYZ Company (XYZ) paid $4000 in 20X1 for a piece of equipment that had an expected life of
four years and a residual value of zero. Straight-line depreciation was used for accounting
purposes and diminishing value for tax purposes. Accounting profit before tax and taxable
profit for 20X1 and the next three years were as follows.

20X1
20X2
20X3
20X4

Accounting profit
before tax
$
4 000
5 000
6 000
4 000

Taxable profit
$
3 000
5 400
6 400
4 200

Assume that
a tax rate of 30 per cent applies;
depreciation accounts for the difference between accounting profit before tax and taxable
profit; and
it is probable that future taxable profit will be sufficient to utilise any deductible temporary
differences.
From the information above, what item would be included in the books of XYZ at the end of 20X1?
A
B
C
D

a deferred
a deferred
a deferred
a deferred

tax asset of $300

tax liability of $300
tax asset of $1000
tax liability of $1000
(FR ID 4.13)

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.14
XYZ Company (XYZ) paid $4000 in 20X1 for a piece of equipment that had an expected life
of four years and a residual value of zero. Straight-line depreciation was used for accounting
purposes and diminishing value for tax purposes. Accounting profit before tax and taxable profit
for 20X1 and the next three years were as follows.

20X1
20X2
20X3
20X4

Accounting profit
before tax
$
4 000
5 000
6 000
4 000

Taxable profit
$
3 000
5 400
6 400
4 200

Assume that
a tax rate of 30 per cent applies;
depreciation accounts for the difference between accounting profit before tax and taxable
profit; and
it is probable that future taxable profit will be sufficient to utilise any deductible temporary
differences.
From the information above, when would the books of XYZ record a deferred tax asset of $180?
A
B
C
D

20X1
20X2
20X3
Never
(FR ID 4.14)

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2nd set

15b

02-06-16

| FINANCIAL REPORTING

Question 4.15
The accounting profit before tax of Overseas Ltd for the year ended 30 June 20Y0 was $100 000
after charging all expenses and recognising all items of revenue.
The carrying amounts of assets and liabilities relevant to the calculation of income tax were
as follows.
20X9
20Y0
$
$
Liabilities
Statutory fines payable
0
5 000
Assets
Dividends receivable from other companies
18 000
8 000
Foreign currency loan receivable
100 000
110 000
Inventory
35 000
24 000
Less: Allowance for write-down to recoverable amount
0
(4 000)
35 000
20 000
The following information is also relevant for the purposes of income tax calculations.
(a) Statutory fines were not deductible for tax purposes.
(b) The increase in the foreign currency loan receivable was attributable to a foreign exchange
gain that was not taxable until the asset was recovered.
(c) Dividends from other companies were exempt from income tax. Dividends received during
the year ended 30 June 20Y0 amounted to $18 000.
(d) Inventory write-downs were not deductible for tax purposes until the period in which the
inventory was sold or used to produce goods or services.
(e) As at 30 June 20X9, unused tax losses were $60 000. A deferred tax asset for these unused
losses had been recognised.
The companys effective tax rate was 30 per cent. Assume that the recognition criteria were
satisfied as at 30 June 20X9 and 30 June 20Y0.
Which one of the following options correctly presents the explanation of the relationship
between tax expense and accounting profit for the year ended 30 June 20Y0 required to be
disclosed by paragraph 81(c) of IAS 12 Income Taxes ?

Accounting profit before tax

Tax at the applicable tax rate of 30%
Tax effect of
Inventory write-down
Foreign currency gain (loss)
Exempt dividends
Non-deductible statutory fines
Benefit of previously unrecognised tax loss
Tax expense
A
B
C
D

Option
Option
Option
Option

I
$
100 000
30 000

II
$
100 000
30 000

III
$
100 000
30 000

IV
$
100 000
30 000

(1 200)
3 000

31 800

(2 400)
1 500

29 100

2 400
(1 500)

30 900

1 200
(3 000)

(18 000)
10 200

I
II
III
IV
(FR ID 4.15)

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.16
The accounting profit before tax of Overseas Ltd (Overseas) for the year ended 30 June 20Y0 was
$100 000 after charging all expenses and recognising all items of revenue.
The carrying amounts of assets and liabilities relevant to the calculation of income tax were
as follows.
20X9
20Y0
$
$
Liabilities
Statutory fines payable
0
5 000
Assets
Dividends receivable from other companies
18 000
8 000
Foreign currency loan receivable
100 000
110 000
Inventory
35 000
24 000
Less: Allowance for write-down to recoverable amount
0
(4 000)
35 000
20 000
The following information is also relevant for the purposes of income tax calculations.
(a) Statutory fines were not deductible for tax purposes.
(b) The increase in the foreign currency loan receivable was attributable to a foreign exchange
gain that was not taxable until the asset was recovered.
(c) Dividends from other companies were exempt from income tax. Dividends received during
the year ended 30 June 20Y0 amounted to $18 000.
(d) Inventory write-downs were not deductible for tax purposes until the period in which the
inventory was sold or used to produce goods or services.
(e) As at 30 June 20X9, unused tax losses were $60 000. A deferred tax asset for these unused
losses had been recognised.
The companys effective tax rate was 30 per cent. Assume that the recognition criteria were
satisfied as at 30 June 20X9 and 30 June 20Y0.
Which one of the following options correctly reflects the necessary adjustments to derive
current tax expense (income) and deferred tax expense (income) of Overseas for the year ended
30 June 20Y0?

Current tax expense (income)

Tax on taxable profit
Tax benefit from recoupment of previously
unrecognised tax losses(para. 80(e))
Current tax expense (income)(para. 80(a))
Deferred tax expense (income)
Deferred tax expense (income) relating to
origination and reversal of temporary
differences(para. 80(c))
Deferred tax expense relating to recoupment
of previously recognised tax losses
Deferred tax expense
A
B
C
D

Option
Option
Option
Option

I
$

II
$

III
$

IV
$

9 300

12 900

9 300

11 100

18 000
27 300

12 900

9 300

11 100

1 800

(1 800)

1 800

18 000
16 200

18 000
19 800

18 000
18 000

I
II
III
IV
(FR ID 4.16)

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15b

02-06-16

| FINANCIAL REPORTING

Question 4.17
During the year ended 31 December 20Y0, Epsilon Ltd (Epsilon) incurred a loss of $100 000 on
the sale of a non-depreciable asset. The loss was deductible for tax purposes. Epsilon also
received royalty payments of $150 000 during that year, only $70 000 of which was recognised as
income in the statement of profit or loss and other comprehensive income. Royalties are taxed
when received in cash. As at 31 December 20Y0, it was expected that the company would
generate sufficient future taxable profit to utilise the benefit of deductible temporary
differences and tax losses. The tax rate is 30 per cent.
Which one of the following journal entries should Epsilon process?

Deferred tax asset

Deferred tax income
Current tax expense
Current tax payable

$
24 000

15 000
15 000

Deferred tax asset

Deferred tax liability
Deferred tax income

54 000

Deferred tax asset

Deferred tax liability
Deferred tax income

33 000

Deferred tax asset

Deferred tax income
Current tax expense
Current tax payable

24 000

24 000
30 000

24 000
9 000

24 000
45 000
45 000
(FR ID 4.17)

Question 4.18
The financial statements of Taxloss Ltd included the following carrying amounts for liabilities for
product warranties.
Liability for product warranties
30 June
20X7
40 000

30 June
20X8
20 000

30 June
20X9
30 000

30 June
20Y0
50 000

Reconciliations between accounting profit before tax and taxable profit for each of the last three
years were as follows.
Reconciliation between accounting profit before tax and taxable profit

Accounting profit (loss) before income tax

Adjustments for movements in temporary differences
Increase (decrease) in liability for product warranties
Taxable profit (Tax loss)

Year ended
30 June
20X8
$
(30 000)

Year ended
30 June
20X9
$
25 000

Year ended
30 June
20Y0
$
40 000

(20 000)
(50 000)

10 000
35 000

20 000
60 000

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

As at 30 June of each year, the recognition criteria for assets and liabilities discussed in IAS 12
were satisfied. The tax rate is 30 per cent.
Which one of the following sets of journal entries correctly records the income tax consequences
of the events described above?
A
30 June 20X8

30 June 20X9
$

Deferred tax asset

9 000

Deferred tax expense

6 000

Current tax income

30 June 20Y0

$
Deferred tax asset

$
Deferred tax expense

7 500

1 500

Deferred tax asset

Current tax expense

1 500
13 500

30 June 20Y0
$

Deferred tax asset

15 000

13 500

Deferred tax income

$
Deferred tax asset

13 500

1 500

Deferred tax income

Current tax expense

1 500
13 500

Tax payable

13 500
(FR ID 4.18)

Module 5
Question 5.1
IFRS 9 Financial Instruments requires that all investments in equity instruments and contracts on
those instruments must be measured at fair value. However, in limited circumstances, cost may
be an appropriate estimate of fair value. Which of the following circumstances are likely to
suggest cost is not an appropriate estimate of fair value in accordance with IFRS 9?
Select which two options are correct.
A
B
C
D

The CEO retires at the end of his contracted term.

There is a significant improvement in the market for the companys product.
There is a significant downturn in the economy in which the company operates.
There is an allegation of low-level fraud by an employee of the company. Management
does not consider the fraud to be a significant internal problem or widespread.
(FR ID 5.1)

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Question 5.2
A company holds two main portfolios of debt securities. Both portfolios provide cash flows that
meet the test of solely payments of interest and principal in IFRS 9. Securities held in portfolio A
are sold on a regular basis, based on movements in the prices of the securities in the portfolio.
Securities held in portfolio B are never sold but are held to maturity.
How should the portfolios be classified and measured? Select which one of the following
is correct.
A
B
C
D

both at fair value

both at amortised cost
portfolio A at fair value and portfolio B at amortised cost
portfolio A at amortised cost and portfolio B at fair value
(FR ID 5.2)

Question 5.3
Which one of the following instruments does not satisfy the sole payments of interest and
principal requirement in IFRS 9?
A
B
C
D

a variable rate loan where the rate varies based on LIBOR up to a specified upper cap
a variable rate loan where the rate varies based on LIBOR and any changes in the credit risk
a variable rate loan where, if the loan is repaid before maturity, the borrower pays a
25 per cent premium as a penalty for early repayment
a variable rate loan where the loan can be extended and the amount to be repaid is
determined based on the amount outstanding at the applicable interest rate at the time
of extension
(FR ID 5.3)

Question 5.4
Given the definition adopted in IAS 32 Financial Instruments: Presentation, which one of the
following would not be a financial instrument?
A
B
C
D

cash at bank
bill of exchange
prepaid insurance
forward exchange contract
(FR ID 5.4)

Question 5.5
A company has issued preference shares that are redeemable at the option of the holder.
Three months before the end of the year, it was probable that the holders would require
redemption.
Which one of the following is the appropriate classification for the annual payment of $12 000
to preference shareholders at year end?
A
B
C
D

dividend $12 000

interest expense $12 000
dividend $3000, interest expense $9000
dividend $9000, interest expense $3000
(FR ID 5.5)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 5.6
A derivative financial asset is designated as the hedging instrument in a fair value hedge.
The following details are available concerning its cost and fair value for three years.

Year
Year
Year
Year

0
1
2
3

Fair value
$90 000
$100 000
$85 000
$85 000

Cost
$90 000
$90 000
$90 000
$90 000

In accordance with the accounting required by IFRS 9, which one of the following would be the
gain or (loss) recorded in the statement of profit or loss and other comprehensive income in year 2?
A
B
C
D

($15 000)
($5 000)
Nil
$10 000
(FR ID 5.6)

Question 5.7
The term market risk includes which two of the following risks?
A
B
C
D

currency credit risk

currency risk
liquidity risk
interest rate risk
(FR ID 5.7)

Question 5.8
According to IAS 32, which one of the following instruments would be classified as equity?
A
B
C
D

redeemable preference shares with a fixed redemption date

redeemable preference shares redeemable at the discretion of the issuer
redeemable preference shares redeemable in five years at the request of the holder
redeemable preference shares redeemable at the discretion of the issuer, who has given
formal notification of such intention
(FR ID 5.8)

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Question 5.9
A company discloses the following information in relation to its receivables in the notes to its
financial statements.
Gross amount receivable
Provision for doubtful debts
Net carrying amount of receivables

$80m
$6m
$74m

Which one of the following is the maximum credit risk that it must also disclose in the notes
to comply with IFRS 7?
A
B
C
D

$6m
$74m
$80m
No disclosure is required.
(FR ID 5.9)

Question 5.10
XYZ issues a $1000 note with no maturity date that is redeemable at the discretion of the issuer,
but can be converted by the holder for 10 ordinary shares of XYZ at any time. According to
IAS 32, XYZ should classify the instrument as which one of the following?
A
B
C
D

equity because the holder is exposed to changes in the fair value of the issuers shares
a liability because the holder is exposed to changes in the fair value of the issuers shares
equity because the holder is not exposed to changes in the fair value of the issuers shares
a liability because the holder is not exposed to changes in the fair value of the issuers shares
(FR ID 5.10)

Question 5.11
Which one of the following statements is correct?
A
B
C
D

A reclassification of a financial liability is prohibited.

Reclassification of financial assets is permitted and is likely to be frequent.
A reclassification of a financial asset from amortised cost to fair value is prohibited.
A reclassification of a financial asset from fair value to amortised cost is prohibited.
(FR ID 5.11)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 5.12
On 1 January 20X6, XYZ Company (XYZ) issues a new instrument with the following characteristics.
1.
2.
3.
4.
5.

Face value $100, issue price $90.

Cumulative dividend payable at 5 per cent per annum for 10 years. After 10 years, the dividend
is payable at the discretion of the issuer.
The holder of the note has the option to convert to ordinary shares of XYZ after 10 years,
and conversion will be 10 ordinary shares for each instrument.
The holder can demand redemption for the face value at any time, with six months notice up
until the end of 10 years. After 10 years, redemption is at the discretion of the issuer.
There is no fixed maturity date.

How should the instrument be classified by XYZ in the first 10 years in accordance with IAS 32?
Select which one of the following is correct.
A
B
C
D

as equity
as a liability
as either equity or liability
as a compound instrument
(FR ID 5.12)

Question 5.13
On 1 January 20X6, XYZ Company (XYZ) issues a new instrument with the following characteristics.
1.
2.
3.
4.
5.

Face value $100, issue price $90.

How should the instrument be classified by XYZ after year 10 in accordance with IAS 32?
Select which one of the following is correct.
A
B
C
D

as equity
as a liability
as either equity or liability
as a compound instrument
(FR ID 5.13)

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| FINANCIAL REPORTING

Question 5.14
On 1 January 20X6, XYZ Company (XYZ) issues a new instrument with the following characteristics.
1.
2.
3.
4.
5.

Face value $100, issue price $90.

Assume that in year 12 the issuer formally notifies the holders of the instrument that the notes are
to be redeemed. How should the notes be classified in year 12 in accordance with IAS 32?
Select which one of the following is correct.
A
B
C
D

as equity
as a liability
as either equity or liability
as a compound instrument
(FR ID 5.14)

Question 5.15
XYZ Ltd issues five-year interest-bearing bonds. The bonds are convertible to a fixed number
of equity instruments of the issuer at the discretion of the holder. How should the bonds be
classified under IAS 32?
Select which one of the following is correct.
A
B
C
D

as equity
as a liability
as either equity or a liability
as having equity and liability components
(FR ID 5.15)

Question 5.16
A company issues $100 000 of convertible notes in 20X1. Holders of the notes have the right to
convert the notes into shares only in December 20X3. At the date of issue, the fair value of a note
without a similar conversion right was $90 000. The company considered that it was probable that
all holders of the notes would convert their notes into shares.
Under IAS 32, how should the convertible notes be recognised in the issuers statement of
financial position on the date of issue? Select which one of the following is correct.

A
B
C
D

Liability
$100 000
$90 000
$10 000
$90 000

Equity
$10 000
$90 000
(FR ID 5.16)

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Question 5.17
A company enters a forward exchange contract to hedge a USD receivable. Assuming that the
receivable is measured at fair value, what is the required measurement of the forward exchange
contract if the entity accounts for this as a fair value hedge under IFRS 9 Financial Instruments ?
Select which one of the following is correct.
A
B
C
D

cost
fair value
lower of cost and fair value
any of the above
(FR ID 5.17)

Question 5.18
XYZ Ltd (XYZ) sells a financial asset to ABC Ltd (ABC) for $350 000. The carrying amount of the
financial asset is $300 000, and its fair value is not expected to change materially in the next three
months. At the same time, XYZ enters a repurchase agreement with ABC, whereby XYZ agrees to
repurchase the financial asset in three months for $365 000. In applying the IFRS 9 principles for
the derecognition of financial assets, how would XYZ record the transaction?
Select which one of the following is correct.

Cash
Gain on sale
Financial asset

$
350 000

$
50 000
300 000

Cash
Loan
Financial asset

350 000

Cash
Loan

350 000

Cash
Loss on sale
Loan

350 000
15 000

50 000
300 000

350 000

365 000
(FR ID 5.18)

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Question 5.19
On 1 January 20X6, an Australian company signs a firm and binding contract to supply a new
ferry to a company in Hong Kong on 31 December 20X6. There are significant penalties for
non-performance for the Australian company. The company will receive payment in Hong Kong
dollars (HKD) when the ferry is delivered. It enters a forward foreign exchange (FX) contact to sell
HKD for AUD in 12 months. At 30 June 20X6, the fair value to the entity of the forward FX contact
has increased by AUD 165 000. At 31 December 20X6, the fair value of the forward FX contract
has increased in value by AUD 130 000 since 30 June.
The company has designated the FX contract as the hedging instrument in a fair value hedge.
The company has a balance date of 30 June. The ferry was delivered on 31 December and the
company was paid in HKD.
Under the provisions of IFRS 9 Financial Instruments , what should the company do in relation to
the forward FX contract as at 30 June 20X6? Select which one of the following is correct.
A
B
C
D

record
record
record
record

a loss of AUD 165 000 in profit or loss

a gain of AUD 165 000 in profit or loss
an increase of AUD 165 000 in other comprehensive income
a decrease of AUD 165 000 in other comprehensive income
(FR ID 5.19)

Module 6
Question 6.1
On 1 July 20X7, Investor Ltd (Investor) acquired all of the ordinary shares in Investee Ltd (Investee)
for cash consideration. At that date, the shareholders equity of Investee was as follows.

Issued capital (100 000 shares issued)

Retained profits

$
100 000
80 000
180 000

Acquisition costs totalled $2000.

On acquisition, Investor revalued the assets of Investee to fair value, resulting in a revaluation
increment of $20 000. The revaluation led to the recognition of a deferred tax liability of $6000.
The amount of goodwill included in the consolidated statement of financial position was $10 000.
What was the consideration paid by Investor for the shares in Investee?
A
B
C
D

$202 000
$204 000
$210 000
$212 000
(FR ID 6.1)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 6.2
On the acquisition of a subsidiary, purchased goodwill should
A
B
C
D

be recorded as a consolidation adjusting entry.

not be separately recognised in any financial statements.
be recorded separately in the financial statements of the subsidiary.
be recognised separately in the financial statements of the investor.
(FR ID 6.2)

Question 6.3
On 8 August 20X3, Alpha Ltd (Alpha) acquired 20 000 shares in Beta Ltd (Beta) in return for an
issue of 10 000 of its own shares. At that date, Alphas shares had a current market value of $2.70
each. Shares of Beta have a current market value of $1.30 each. Fees paid to legal advisers for
the transaction totalled $2000. What is the amount of the consideration transferred?
A
B
C
D

$26 000
$27 000
$28 000
$29 000
(FR ID 6.3)

Question 6.4
In relation to goodwill arising from a business combination, which one of the following
statements is in accordance with IFRS 3 Business Combinations ?
A
B
C
D

Goodwill
Goodwill
Goodwill
Goodwill

should be measured at cost less accumulated amortisation.

should be amortised on a straight-line basis over its useful life.
should be measured at cost less accumulated impairment losses.
is only tested for impairment if circumstances indicate it may be impaired.
(FR ID 6.4)

Question 6.5
Which one of the following statements is not a key feature of the acquisition method?
A
B
C
D

An acquirer being identified for each business combination.

The measurement of acquired identifiable assets at fair value.
Cost of the business combination is measured at the fair value of the net assets
received from the acquiree.
Goodwill is measured as the consideration transferred plus the amount of any
non-controlling interest, plus the fair value of any previously held equity interest in
the acquiree, less the fair value of the identifiable net assets acquired.
(FR ID 6.5)

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Question 6.6
On 1 July 20X7, Big Ltd (Big) agreed to purchase the assets and liabilities of Small Ltd (Small) for
$400 000 cash, plus 1 million shares in Big. At this date, the fair value of each share in Big was
at $1.20.
Costs directly attributable to the business combination totalled $5000.
The statement of financial position of Small as at the date of purchase is presented below.
Small Ltd: Statement of financial position as at 1 July 20X7
Assets
Trade receivables
Inventory
Land and buildings
(net of depreciation)

$000
250
520
800
1 570

Liabilities
Bank overdraft
Creditors
Equity
Capital and retained earnings

$000
50
300
1 220
1 570

In the negotiation process, Big has determined the following fair values for Smalls assets and
liabilities (assume that no deferred tax assets or liabilities arose from the business combination).

Trade receivables
Inventory
Land and buildings
Bank overdraft
Creditors

$000
240
500
1 000
(50)
(300)
1 390

At what figure would the goodwill purchased by Big be measured?

A
B
C
D

$210 000
$215 000
$380 000
$385 000
(FR ID 6.6)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 6.7
On 1 August 20X2, Parent Ltd (Parent) acquired a 70 per cent interest in Sub Ltd (Sub). At that
date, the equity section of Subs statement of financial position revealed the following.

Issued capital
General reserve
Retained earnings
Owners equity

$000
500
100
50
650

At acquisition date, Sub revalued its non-current assets to fair value (an increase of $200 000,
net of tax).
Parent determined that it had paid $100 000 for goodwill. Any NCI is measured at the
proportionate share of the fair value of the identifiable net assets of Sub.
Which one of the following proforma entries would be processed in the consolidation worksheet
for the year ended 30 June 20X3?

Issued capital
General reserve
Retained earnings (o/b)
Asset revaluation reserve
Goodwill
Inves tment in Sub

Debit
$000
350
70
35
140
100

Credit
$000

695

Issued capital
General reserve
Retained earnings (o/b)
Goodwill
Inves tment in Sub

500
100
50
100

Issued capital
General reserve
Retained earnings (o/b)
Goodwill
Inves tment in Sub

350
70
35
100

Issued capital
General reserve
Retained earnings (o/b)
Asset revaluation reserve
Goodwill
Inves tment in Sub

500
100
50
200
100

750

555

950
(FR ID 6.7)

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Question 6.8
Small Ltd (Small) is a wholly owned subsidiary of Large Ltd (Large). During the 20X3 financial
year, Small declared and paid an interim dividend of $10 000 and declared a final dividend of
$20 000 (which remains payable at year end). Large accounts for dividends when they are
declared and payable.
Which one of the following proforma entries would be processed in the consolidation worksheet
during the financial year ending on 30 June 20X3 in relation to the dividends?

Dividend income
Retained earnings (interim dividend)
Retained earnings (final dividend)

Debit
$000
30

Credit
$000
10
20

Dividends payable
Dividend income
Retained earnings (interim dividend)
Retained earnings (final dividend)
Dividends receivable

20
30

Dividend income
Dividends receivable
Retained earnings (final dividend)
Dividends payable

20
20

Dividends payable
Dividend income
Retained earnings (interim dividend)
Retained earnings (final dividend)
Dividends receivable

30
30

10
20
20

20
20

10
20
30
(FR ID 6.8)

Question 6.9
In accordance with IFRS 10 Consolidated Financial Statements and IFRS 12 Disclosure of Interests
in Other Entities , a consolidated statement of financial position (or notes thereto) would not
present information relating to which one of the following?
A
B
C
D

investments in subsidiaries
goodwill acquired by the group
loans to entities not related to the group
non-controlling interests share of consolidated net assets
(FR ID 6.9)

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Question 6.10
On 15 August 20X2, Parent Ltd (Parent) acquired control of a subsidiary via a 60 per cent
shareholding. During the year ended 30 June 20X5, the subsidiary company declared and paid
an interim dividend of $10 000.
On 30 June 20X5, the subsidiary declared a dividend of $20 000. Parent accounts for dividends
on an accrual basis. Assume that Parent is exempt from income tax on dividends received from
group entities. The tax rate is 30 per cent.
Which one of the following proforma entries would be processed in the consolidation worksheet
for the year ended 30 June 20X5?

Dividend income
Dividends payable
Retained earnings (interim dividend)
Retained earnings (final dividend)
Dividends receivable

Debit
$
30 000
20 000

Credit
$

10 000
20 000
20 000

Deferred tax asset

Dividend income
Dividends payable
Income tax expense
Retained earnings (interim dividend)
Retained earnings (final dividend)
Dividends receivable

9 000
30 000
20 000

Dividend income
Dividends payable
Retained earnings (interim dividend)
Retained earnings (final dividend)
Dividends receivable

18 000
12 000

Deferred tax asset

Dividend income
Dividends payable
Income tax expense
Retained earnings (interim dividend)
Retained earnings (final dividend)
Dividends receivable

5 400
18 000
12 000

9 000
20 000
10 000
20 000

6 000
12 000
12 000

5 400
6 000
12 000
12 000
(FR ID 6.10)

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Question 6.11
IFRS 10 Consolidated Financial Statements sets out how to determine whether one entity has
control over another entity.
Which one of the following statements is in accordance with the IFRS 10 requirements and
guidance for control to exist over another entity?
A
B
C
D

The investor
The investor
The investor
The investor
other entity.

must
must
must
must

be the only party that receives variable returns from the investee.
have greater than 50 per cent of the voting rights in the other entity.
have existing rights that give it the current ability to direct relevant activities.
be represented on the board of directors or governing body of the
(FR ID 6.11)

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Question 6.12
On 1 July 20X2, Holding Ltd (Holding) purchased all the issued capital of Subsidiary Ltd
(Subsidiary) for $400 000. At acquisition date, the equity section of the statement of financial
position of Subsidiary contained the following accounts.

Issued capital
Retained earnings

$000
200
110
310

In addition, Holding determined that Subsidiary held equipment with a fair value of $60 000,
which was disclosed in the statement of financial position at a cost of $80 000 and accumulated
depreciation of $40 000.
The tax rate is 30 per cent.
Which one of the following consolidation adjusting entries would be processed on acquisition date?

Issued capital
Retained earnings
Deferred tax asset
Accumulated depreciation
Goodwill
Equipment
Inves tment in Subsidiary

Debit
$000
200
110
6
40
64

Credit
$000

20
400

Issued capital
Retained earnings
Accumulated depreciation
Goodwill
Equipment
Deferred tax liability
Inves tment in Subsidiary

200
110
40
76

Issued capital
Retained earnings
Accumulated depreciation
Goodwill
Equipment
Inves tment in Subsidiary

200
110
40
70

Issued capital
Retained earnings
Goodwill
Inves tment in Subsidiary

200
110
90

20
6
400

20
400

400
(FR ID 6.12)

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Question 6.13
Which one of the following statements is consistent with the principle of control as defined
by FRS 10 Consolidated Financial Statements ?
A
B
C
D

The investor must be exposed to a return from the investee.

The investor has the ability to use its power over the investee to affect the investors returns
from the investee.
An investors power over an investee relates to their ability to determine the amount of
returns received from the investee.
If two or more investors have existing rights to direct different relevant activities, no investor
can have control over the investee.
(FR ID 6.13)

Question 6.14
Alpha Ltd (Alpha) owns 25 per cent of the shares (and voting rights) in Beta Ltd (Beta) but has no
representation on the board of directors of the company. In accordance with IAS 28 Investments
in Associates and Joint Ventures , Alpha
A
B
C
D

will need to have board representation to ensure it has significant influence over Beta.
will have significant influence over Alpha if it has both 20 per cent of the share capital and
board representation.
will be presumed to have significant influence over Beta as it holds more than 20 per cent
of the voting power in that company.
is presumed to have significant influence over Beta because it has greater than 20 per cent
of the share capital of that company.
(FR ID 6.14)

Question 6.15
Investor Ltd (Investor) acquired an interest in an associate, Investee Ltd (Investee), on 1 January
20X8, on which date the purchased goodwill was measured at $300 000. The goodwill should
A
B
C
D

be recorded in the books of Investor.

be recorded in the books of Investee.
not be recorded separately in any financial statements.
be included in the consolidated financial statements of Investor.
(FR ID 6.15)

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Question 6.16
Which one of the following events would change the amount of the item Investment in
associate in a companys consolidated financial report?
A
B
C
D

The directors of the associate decide to issue bonus shares from the general reserves of
the associate.
There is sale of inventory from the investor to the associate, which results in unrealised profit
at the end of reporting period.
Subsequent to acquisition, the associate revalues its assets, which then reflect the fair values
of the assets at the acquisition date.
The directors of the associated company decide to transfer an amount from the retained
earnings account to the general reserve.
(FR ID 6.16)

Question 6.17
When an investment in an associate is acquired, the initial amount of the investment should be
A
B
C
D

recorded at cost to the investor.

adjusted to reflect fair value of the assets acquired.
reduced by the goodwill component of the cost to the investor.
recorded at the investors share of the fair value of the investees assets.
(FR ID 6.17)

Question 6.18
Raven Ltd (Raven) is a parent entity that invested in an associate. In accordance with IFRS 3
Business Combinations , Raven determined that the acquisition involved a gain of $200 000.
In accordance with IAS 28 Investments in Associates and Joint Ventures , the gain should be
A
B
C
D

included in the carrying amount of the investment.

deducted from the assets in the consolidated financial statements of Raven.
amortised as income in the determination of the investors share of the associates profit
over the period the investment is held.
included as income in the determination of the investors share of the associates profit in
the period the investment was acquired.
(FR ID 6.18)

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Question 6.19
Parent Ltd (Parent) acquired 70 per cent interest in Subsidiary Ltd (Subsidiary) on 1 July 20X0.
During the year ended 30 June 20X1, Subsidiary sold inventory to Parent for $8000. The original
cost to Subsidiary was $6000. Half of the inventory was still on hand as at 30 June 20X1.
During the year ended 30 June 20X2, the remainder of the inventory was sold to parties
external to the group.
Assume a tax rate of 30 per cent.
Which one of the following proforma journal entries would be processed in the consolidation
worksheet for the year ended 30 June 20X1?

Sales
Income tax expense
Cost of goods sold
Inventory
Deferred tax liability

Debit
$
8 000
300

Credit
$

7 000
1 000
300

Sales
Deferred tax asset
Cost of goods sold
Inventory
Income tax expense

8 000
600

Sales
Deferred tax asset
Cost of goods sold
Inventory
Income tax expense

8 000
300

Sales
Income tax expense
Cost of goods sold
Inventory
Deferred tax liability

8 000
600

6 000
2 000
600

7 000
1 000
300

6 000
2 000
600
(FR ID 6.19)

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Retained earnings (o/b)

Income tax expense
Cost of goods sold

1 300

1 000
300

2 000

300
1 000
(FR ID 6.20)

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Question 6.21

Big Ltd (Big) owns 80 per cent of Little Ltd (Little).

On 1 July 20X3, Little sold equipment to Big for $40 000. At the time of the sale, the carrying
amount of the equipment in the books of Little was $30 000. Both entities depreciate the
equipment at 10 per cent on cost.
During the year ended 30 June 20X5, Big sold Little land at a profit of $5000. The profit
was taxable.
The 20X5 consolidation worksheet contains the following.

Profit for the year

Retained earnings (closing bal.)

Big Ltd
80 000
25 000

Little Ltd
20 000
10 000

Note: The tax rate was 30 per cent.

Which one of the following proforma entries would be processed in the consolidation worksheet
for the year ended 30 June 20X5 in regard to the equipment sold during the 20X4 financial year?

Accumulated depreciation
Income tax expense
Retained earnings (o/b)
Depreciation expense
Deferred tax asset
Equipment

Debit
$
1 000
300
10 000

Credit
$

1 000
300
10 000

Accumulated depreciation
Income tax expense
Deferred tax asset
Retained earnings (o/b)
Depreciation expense
Equipment

2 000
300
2 400
6 300

Accumulated depreciation
Income tax expense
Deferred tax asset
Retained earnings (o/b)
Depreciation expense
Equipment

1 000
300
2 700
7 000

Accumulated depreciation
Income tax expense
Deferred tax asset
Retained earnings (o/b)
Depreciation expense
Equipment

2 000
600
2 400
7 000

1 000
10 000

2 000
10 000
(FR ID 6.21)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 6.22

Big Ltd (Big) owns 80 per cent of Little Ltd (Little).

Profit for the year

Retained earnings (closing bal.)

Big Ltd
80 000
25 000

Little Ltd
20 000
10 000

Note: The tax rate was 30 per cent.

The non-controlling interest in the profit for the year of the group is
A
B
C
D

$3440.
$4000.
$4140.
$4200.
(FR ID 6.22)

Question 6.23

Big Ltd (Big) owns 80 per cent of Little Ltd (Little).

Profit for the year

Retained earnings (closing bal.)

Big Ltd
80 000
25 000

Little Ltd
20 000
10 000

Note: The tax rate was 30 per cent.

The non-controlling interest in the closing retained earnings of the group is
A
B
C
D

$180.
$400.
$880.
$2000.
(FR ID 6.23)

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Question 6.24
Parent Ltd (Parent) controls a subsidiary Sub Ltd (Sub), in which it owns 70 per cent of the issued
capital. The following transactions are relevant to the preparation of the consolidated financial
statements for the financial year ending 30 June 20X7.
Transaction 1: During the 20X4 financial year, Sub sold an item of plant to Parent at a loss.
Parent is still using the plant.
Transaction 2: Sub paid an interim dividend in August 20X6. Parent is exempt from income tax
on dividends received from the subsidiary.
Transaction 3: During the 20X7 financial year, Parent sold inventory to Sub for a price greater
than its cost to Parent. One third of this inventory is still on hand at 30 June 20X7.
Transaction 4: In November 20X6, Parent borrowed $50 000 from Sub at an interest rate of
10 per cent. The interest on the loan is payable semi-annually.
Transactions 1 to 4 above each require an entry in the consolidation worksheet. Some of these
consolidation worksheet entries will affect items in the consolidated statement of profit or loss and
other comprehensive income.
Which three of the transactions would result in a consolidation entry that increased or decreased
the consolidated profits for the year, as compared with the sum of the profits for the year of
Parent and Sub?
A
B
C
D

transaction
transaction
transaction
transaction

1
2
3
4
(FR ID 6.24)

Question 6.25
Parent Ltd (Parent) controls a subsidiary Sub Ltd (Sub), in which it owns 70 per cent of the issued
capital. The following transactions are relevant to the preparation of the consolidated financial
statements for the financial year ending 30 June 20X7.
Transaction 1: During the 20X4 financial year, Sub sold an item of plant to Parent at a loss.
Parent is still using the plant.
Transaction 2: Sub paid an interim dividend in August 20X6. Parent is exempt from income tax
on dividends received from the subsidiary.
Transaction 3: During the 20X7 financial year, Parent sold inventory to Sub for a price greater
than its cost to Parent. One third of this inventory is still on hand at 30 June 20X7.
Transaction 4: In November 20X6, Parent borrowed $50 000 from Sub at an interest rate of
10 per cent. The interest on the loan is payable semi-annually.
Which two of the transactions will require tax-effect entries in the consolidation worksheet that
result in a net adjustment to recognised tax balances?
A
B
C
D

transaction
transaction
transaction
transaction

1
2
3
4
(FR ID 6.25)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 6.26
Parent Ltd (Parent) controls a subsidiary Sub Ltd (Sub), in which it owns 70 per cent of the issued
capital. The following transactions are relevant to the preparation of the consolidated financial
statements for the financial year ending 30 June 20X7.
Transaction 1: During the 20X4 financial year, Sub sold an item of plant to Parent at a loss.
Parent is still using the plant.
Transaction 2: Sub paid an interim dividend in August 20X6. Parent is exempt from income tax
on dividends received from the subsidiary.
Transaction 3: During the 20X7 financial year, Parent sold inventory to Sub for a price greater
than its cost to Parent. One third of this inventory is still on hand at 30 June 20X7.
Transaction 4: In November 20X6, Parent borrowed $50 000 from Sub at an interest rate of
10 per cent. The interest on the loan is payable semi-annually.
Which one of the transactions will affect the calculation of the non-controlling interest in the
consolidated profit for the financial year ended 30 June 20X7?
A
B
C
D

transaction
transaction
transaction
transaction

1
2
3
4
(FR ID 6.26)

Question 6.27

On 1 July 20X7, Investor Ltd (Investor) acquired 40 000 shares in Investee Ltd (Investee) at a
cost of $75 000. At that date, the equity section of the statement of financial position of
Investee was as follows.
$
Issued capital (100 000 shares issued)
100 000
Retained earnings
80 000
180 000

Investor used its significant influence to have the assets of Investee revalued to fair value,
yielding a revaluation increment of $20 000 (net of tax).
For the year ending on 30 June 20X8, the following information was available for Investee.

$000

$000
120
(36)
84
80

Profit before tax

Less: Income tax expense
Profit for the year
Retained earnings 1 July 20X7
Dividend paid
Dividend declared
Retained earnings 30 June 20X8

164
(20)
(30)

(50)
114

Assume a tax rate of 30 per cent.

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Investor recognises dividends as revenue when they are declared.

During the year ended 30 June 20X8, Investee sold $15 000 of inventory to Investor.
The inventory originally cost $5000. One half of the inventory is still on hand at 30 June 20X8.
Investor prepares consolidated financial statements.

The consolidated statement of profit or loss and other comprehensive income for the financial
year ended 30 June 20X8 would reveal the item Share of profit of associates.
Which one of the following would be the amount of this item?
A
B
C
D

$17 200
$32 200
$37 200
$38 600
(FR ID 6.27)

Question 6.28

$000

$000
120
(36)
84
80
164

Profit before tax

Less: Income tax expense
Profit for the year
Retained earnings 1 July 20X7
Dividend paid
Dividend declared
Retained earnings 30 June 20X8

(20)
(30)

(50)
114

Assume a tax rate of 30 per cent.

Investor recognises dividends as revenue when they are declared.

The consolidated statement of financial position would reveal the item Investment in associates.
Which one of the following would be the amount of this item?
A
B
C
D

$87 200
$92 200
$93 600
$112 200
(FR ID 6.28)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 6.29

$000

$000
120
(36)
84
80
164

Profit before tax

Less: Income tax expense
Profit for the year
Retained earnings 1 July 20X7
Dividend paid
Dividend declared
Retained earnings 30 June 20X8

(20)
(30)

(50)
114

Assume a tax rate of 30 per cent.

Investor recognises dividends as revenue when they are declared.

If the inventory had been sold from Investor to Investee, this would have affected the consolidated
financial statements via
A
B
C
D

a reduction
an increase
a reduction
an increase

in Inventory on hand.
in Investment in associates.
in Investment in associates.
in Share of profit of associates.
(FR ID 6.29)

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Module 7
Question 7.1
In accordance with IAS 36 Impairment of Assets , which one of the following statements
is correct?
A
B
C
D

Investment properties carried at fair value must be tested annually for impairment.
Goodwill must be tested for impairment only when there is an indication that it is impaired.
Intangible assets with indefinite useful lives must be tested at least annually for impairment.
Inventory must be tested for impairment only when there is an indication that it is impaired.
(FR ID 7.1)

Question 7.2
In accordance with IAS 36 Impairment of Assets , which one of the following statements could
be an indicator that an asset may be impaired?
A
B
C
D

evidence that the asset is physically damaged

a fall in interest rates that materially affects the assets value in use
a decline in the assets market value, as would be expected from normal use
the market capitalisation of the entity is greater than the carrying amount of its net assets
(FR ID 7.2)

Question 7.3
In accordance with IAS 36 Impairment of Assets , which one of the following situations is most
likely to be an impairment indicator?
A
B
C
D

Short-term interest rates relating to long-lived assets have increased.

The assets of the business are due for a major overhaul in the next reporting period.
The budgeted cash outflows and cash inflows associated with an asset have both increased.
An entity has discontinued an activity, which means that the assets involved will be idle
until a different use can be found.
(FR ID 7.3)

Question 7.4
The IAS 36 Impairment of Assets impairment test for an individual asset requires that the carrying
amount of the asset be compared with its recoverable amount. According to IAS 36, recoverable
amount is described as the higher of two items.
Which of the following items are included in the definition of recoverable amount?
Select which one of the following options is correct.
A
B
C
D

future cash flows from the asset and fair value of asset
present value of future cash flows from the asset and fair value of the asset
future cash flows from the asset and fair value of asset less costs of disposal
present value of future cash flows from the asset and fair value of asset less costs of disposal
(FR ID 7.4)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 7.5
Roller Ltd (Roller) is testing an asset for impairment. The carrying amount of the asset is $85 000.
The following data has been obtained by Roller in relation to the asset.

Future cash flows expected to be derived from the asset, $100 000.
Estimated fair value of the asset, $80 000.
Present value of future cash flows expected to be derived from the asset, $60 000.
Costs of disposal for the asset, $2000.

In accordance with IAS 36 Impairment of Assets , what is the recoverable amount of the asset?
Select which one of the following is correct.
A
B
C
D

$60 000
$78 000
$80 000
$100 000
(FR ID 7.5)

Question 7.6
The accountant for a manufacturing company is determining the value in use of an item of
equipment. In accordance with IAS 36 Impairment of Assets , which one of the following items
should be included in the determination of the equipments value in use?
A
B
C
D

income tax payments

interest payments related to a loan obtained to fund capital expenditures
the cash inflow from the disposal of the equipment at the end of its useful life
cash inflows arising from planned improvements to the equipment to which the
company is not yet committed
(FR ID 7.6)

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Question 7.7
Diva Ltd (Diva) has an item of equipment with a carrying amount of $110 000 (cost $150 000 less
accumulated depreciation $40 000). The following data has been obtained by Diva in relation
to the asset.

Estimated fair value of the asset less costs of disposal, $90 000.
Present value of future cash flows expected to be derived from the asset, $70 000.

To account for the impairment loss, the accountant for Diva is considering a number
of accounting entries.
In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets ,
which one of the following entries would be appropriate to recognise the impairment loss?

Impairment loss
Accumulated depreciation and accumulated impairment losses

Debit
$
40 000

Credit
$
40 000

Accumulated depreciation
Impairment loss
Equipment

40 000
20 000

Impairment loss
Accumulated depreciation and accumulated impairment losses

20 000

Accumulated depreciation
Impairment loss
Equipment

40 000
40 000

60 000

20 000

80 000
(FR ID 7.7)

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 7.8
At 30 June 20X5, Dome Ltd (Dome) had an item of machinery with a carrying amount of $140 000
(cost $200 000 less accumulated depreciation $60 000). The machinery was purchased on 3 July
20X2 and was depreciated at $20 000 per year based on a useful life of 10 years. On 30 June
20X5, it was determined that the recoverable amount of the machinery was $105 000. Therefore,
an impairment loss of $35 000 was recognised.
After the depreciation entry for 30 June 20X6 had been processed, the recoverable amount of
the machinery was reassessed. It was determined that the recoverable amount of the asset at
30 June 20X6 was $128 000.
To account for the reversal of the impairment loss, the accountant for Dome is considering
a number of accounting entries.
In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets ,
which one of the following entries would be appropriate to recognise the reversal of the
impairment loss?
Debit
Credit
$
$
A Accumulated depreciation and accumulated impairment losses
30 000
Incomereversal of impairment loss
30 000
B

Accumulated depreciation and accumulated impairment losses

Incomereversal of impairment loss

35 000

Accumulated depreciation and accumulated impairment losses

Incomereversal of impairment loss

38 000

Accumulated depreciation and accumulated impairment losses

Incomereversal of impairment loss

43 000

35 000

38 000

43 000
(FR ID 7.8)

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Question 7.9
Hope Ltd has determined that one of its cash-generating units (CGUs) has sustained an
impairment loss of $50 000. The carrying amounts of the assets within the CGU are as follows.
$
150 000
200 000
50 000
400 000

Asset 1
Asset 2
Asset 3
Total

The estimated fair value less costs of disposal of Asset 2 is $190 000, which is greater than its
value in use.
A number of options are being considered as the amounts of impairment loss to be allocated to
the three assets within the CGU.
In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets ,
which one of the following options would be the amount of impairment loss allocated to the
three assets?

A
B
C
D

Asset 1
$
16 667
18 75 0
20 000
30 000

Asset 2
$
16 667
25 000
10 000
10 000

Asset 3
$
16 666
6 250
20 000
10 000

Total
$
50 000
50 000
50 000
50 000
(FR ID 7.9)

Question 7.10
The following information relates to three cash generating units.

Carrying amount prior to allocation of corporate asset

Allocation of corporate asset (building)
Carrying amount after corporate asset allocation
Recoverable amount

CGU A
$000
1 000
150
1 150
1 500

CGU B
$000
2 000
200
2 200
1 800

CGU C
$000
4 000
350
4 350
3 850

Total
$000
7 000
700
7 700

In accordance with IAS 36 Impairment of Assets , what is the amount (to the nearest thousand)
of the impairment loss that would be allocated to the corporate asset (building)?
Select which one of the following is correct.
A
B
C
D

Nil
$76 000
$82 000
$84 000
(FR ID 7.10)

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Question 7.11
In accordance with IAS 36 Impairment of Assets , how should an impairment loss for a cash
generating unit (CGU) that includes goodwill be allocated?
Select which one of the following is correct.
A
B
C
D

evenly over both the identifiable assets and goodwill of the CGU
to both the identifiable assets and goodwill on a pro rata basis of the carrying amount of
each asset
to each of the identifiable assets in the CGU on a pro rata basis of the carrying amount
of each identifiable asset
first to reduce goodwill and then to the other identifiable assets on a pro rata basis of the
carrying amount of each identifiable asset
(FR ID 7.11)

Question 7.12
The carrying amount of a cash generating unit (CGU) is comprised of the following.

Machinery
Other plant
Land
Goodwill

$
400 000
600 000
1 000 000
400 000
2 400 000

It has been determined that the recoverable amount of the CGU is $1 800 000. It is not possible
to estimate the recoverable amounts of the individual assets within the CGU.
A number of options are being considered as the carrying amounts of the assets in the cash
generating unit after allocation of the impairment loss.
In accordance with IAS 16 Property, Plant and Equipment and IAS 36 Impairment of Assets ,
which one of the following options would be the carrying amounts of the assets after accounting
for the impairment loss?

A
B
C
D

Machinery
$
250 000
300 000
333 333
360 000

Other plant
$
450 000
450 000
533 333
540 000

Land
$
850 000
750 000
933 334
900 000

Goodwill
$
250 000
300 000

Total
$
1 800 000
1 800 000
1 800 000
1 800 000
(FR ID 7.12)

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Question 2.10
Correct answer: A
The correct answer is Option A. Other comprehensive income would include the following items:
$
5 000
7 000
(21 000)
45 000
36 000

Share of other comprehensive income of associates*

Exchange difference gain on foreign operation up to date of sale
Reclassification adjustment for translation of foreign operation**
Increase in asset revaluation surplus
Total other comprehensive income
*
**

Share of total comprehensive income of associates less share of profit of associates ($20 000 $15 000).
This is the net of tax gain recognised in the profit or loss and represents the total gain over the life of
the foreign operation (refer to Question 2.7 for example).

Option B is incorrect. The share of total comprehensive income of associate ($20 000) has been
included and not the share of other comprehensive income of associate ($5000).
Option C is incorrect. The reclassification adjustment ($21 000) has not been included in other
comprehensive income.
Option D is incorrect. The share of total comprehensive income of associate ($20 000) has been
included and not the share of other comprehensive income of associate ($5000). In addition,
the reclassification adjustment ($21 000) has not been included in other comprehensive income.
You can review this topic area in the study guide under the sections titled Determination of
comprehensive income and IAS 1disclosures and classification, see other comprehensive
income presentation and disclosures.

Question 2.11
Correct answer: D
The correct answer is Option D. Refer to paragraph 54(r) of IAS 1 Presentation of Financial
Statements .
Option A is incorrect. Refer to paragraph 54 of IAS 1it is not a required disclosure.
Option B is incorrect. Refer to paragraph 54 of IAS 1it is not a required disclosure.
Option C is incorrect. Refer to paragraph 54 of IAS 1reserves in aggregate only have to be
disclosed on the face of the statement of financial position.
You can review this topic area in the study guide under the section titled IAS 1disclosures in the
statement of financial position or in the notes, see Disclosures in the statement of financial position.

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Question 2.12
Correct answer: D
The correct answer is Option D. The amount may be obtained from reconstructing trade
receivables and allowance for doubtful debts as shown below. Alternatively, the formula provided
at the end of the accounts may be used. The formula can be derived from first principles or by
examining the structure of the two ledger accounts.
Trade receivables
Date
Particulars
20X2
30 June
Opening balance
Various sales revenue

$000
150
500

Date
20X2
(3)
(4)
20X3
30 June

Particulars

$000

Allowance for doubt.

Debts (bad debts )
Cash

11
519

Closing balance

120
650

650
20X3
30 June

Balance c/d.

120

This figure is derived from reconstructing the Allowance for doubtful debts account below.
Note: The Allowance for doubtful debts increases for doubtful debts expense and decreases as bad
debts are written off. If you are unsure how to account for bad and doubtful debts, you should review a
financial accounting text. In relation to the Allowance for doubtful debts account, the question data
provides the opening and closing balances plus the doubtful debts expense. Hence the missing
variable bad debt write-off can be determined from this data.

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Allowance for doubtful debts

Date Particulars
20X2
(3) Trade receivables
20X3
30 June

$000

Closing balance

Date
20X2
30 June
(2)

Particulars

$000

Opening balance
Profit & loss
(Doubtful debts exp.)

8
15

12
23

23
20X3
30 June

Balance c/d.

Cash collected is:

+
Sales revenue

Decrease in gross receivables

or
Increase in gross receivables

Bad debts

Note: The bad debt write-off must be determined from either reconstructing the Allowance for
doubtful debts account or by using the movement in the Allowance for doubtful debts account
and doubtful debts expense information.
$500 000 + $30 000 $11 000 = $519 000
Option A is incorrect as it uses:
$500 000 $30 000 + $11 000 = $481 000
Option B is incorrect as it uses:
$500 000 $30 000 + $15 000 = $485 000
Option C is incorrect as it uses:
$500 000 + $30 000 $15 000 = $515 000
You can review this topic area in the study guide under the section titled Statement of cash flows.

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 2.13
Correct answer: A
The correct answer is Option A. The following formula may then be used:
+
Sales revenue

Decrease in gross receivables

or
Increase in gross receivables

Bad debts

Bad debts written off are determined as follows:

Doubtful debts expense + () Decrease (increase) in allowance for doubtful debts
= $5000 $2000
= $3000
Another way of viewing the above calculation is to consider what an increase in Allowance for
doubtful debt implies. That is, an allowance for doubtful debts is increased by doubtful debts
expense and decreased as bad debts are written off. As the allowance increased by $2000,
the doubtful debts expense must be $2000 greater than the bad debt write-off. The question
data reveals a doubtful debts expense of $5000. Hence, the bad debt write-off must be $3000.
The change in gross receivables can be determined using the change in net receivables adjusted
for the change in the allowance for doubtful debts. The net receivables increased by $32 500
while the allowance for doubtful debts increased by $2000. The increase in allowance for
doubtful debts would have reduced the change in net receivables by $2000 as it is deducted
from gross receivables. Hence the change in gross receivables is $34 500.
Option A is correct as it uses:
$450 000 $34 500 $3000 = $412 500
Option B is incorrect as it uses:
$450 000 $34 500 + $3000 = $418 500
Option C is incorrect as it uses:
$450 000 + $34 500 $3000 = $481 500
Option D is incorrect as it uses:
$450 000 + $34 500 + $3000 = $487 500
You can review this topic area in the study guide under the section titled Statement of cash flows.

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| FINANCIAL REPORTING

Question 2.14
Correct answer: C
The correct answer is Option C. This is found by reconstructing the tax payable account. To do
this, first the credit (or debit) to tax payable resulting from the current year tax calculations is
found. This amount, together with the change in the balance of tax payable, is the tax cash flow.
Any changes in the balances of the deferred tax accounts are the result of debits or credits to
those accounts. Therefore, given that the tax expense is known, the debit or credit to tax payable
can be found by reconstructing the current year tax journal entry as follows:

Tax expense
Deferred tax liability
Deferred tax asset
Tax payable

$
1 750
1 200

750
2 200

The cash outflow is then simply the credit to tax payable plus the decrease in tax payable as follows:

Credit to tax payable

Plus: Decrease in tax payable

$
2 200
200
2 400

Options A, B and D are incorrect as the changes in the balances of the deferred tax accounts
have not been appropriately reflected.
A is incorrect as it is based on:
Tax expense
Tax payable
Deferred tax liability
Deferred tax asset
Debit to tax payable
Plus: Decrease in tax payable

$
1 750
200

1 200
750
(200)
200

B is incorrect as it is based on:

Tax expense
Deferred tax asset
Deferred tax liability
Tax payable
Credit to tax payable
Plus: Decrease in tax payable

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$
1 750
750

1 200
1 300
$
1 300
200
1 500

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

D is incorrect as it is based on:

Tax expense
Deferred tax liability
Deferred tax asset
Tax payable
Credit to tax payable
Plus: Decrease in tax payable

$
1 750
1 200
750

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15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Option C is incorrect. Any distinct good or service promised to a customer as a result of a

contract gives rise to a performance obligation. There are two distinct goods or services to be
delivered to the customer in the phone package: the phone, and the phone service. Both the
phone and the phone plan are considered as distinct as the customer can benefit from the
good (the phone) or service (the phone service) either on its own or together with other readily
available resources; and Zulus promise to transfer the phone to the customer can be separately
identifiable from its promise to provide phone services under the contract (see IFRS 15, para. 27),
You can review this topic area in the study guide under the sections titled Recognition of revenue
Step 2: Identify the performance obligation(s) in the contract and Step 5: Recognise revenue when
each performance obligation is satisfied.

Question 3.6
Correct answer: C
The correct answer is Option C. IAS 37 applies to the accounting for all provisions, contingent
liabilities and contingent assets, except for those resulting from executory contracts (except
where the contract is onerous) and those covered by another Australian Accounting Standard.
Paragraph 5 of IAS 37 scopes out provisions for employee benefits within the scope of IAS 19 and
insurance contracts within the scope of IFRS 4 as they are addressed in another Australian
Accounting Standard. Accordingly, Options A and D are incorrect.
Option B is incorrect as paragraph 2 of IAS 37 specifically scopes out financial instruments within
the scope of IFRS 9.
You can review this topic area in the study guide under the section titled IntroductionScope of
IAS 37.

Question 3.7
Correct answer: A
The correct answer is Option A. A provision should be recognised as the legislation has
been enacted.
Option B is incorrect. A present obligation exists because an obligating event (previous
transactions with the customers) has occurred.
Option C is incorrect. As the legislation is enacted, there will be a legal obligation for the future
sacrifice of economic benefits, irrespective of any intention of the company to act illegally.
Option D is incorrect. On enactment of the legislation, the company will have a legal obligation,
irrespective of its intention to lobby against it.
You can review this topic area in the study guide under the sections titled Recognition of Provisions
and Contingent liabilities.

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| FINANCIAL REPORTING

Question 3.8
Correct answer: C and D
Both Options C and D are correct as they result in a contingent liability. They do not meet
the Frameworks definition of liabilities, but disclosure is required to explain the details in
a contingent liability note.
Option A is incorrect, as it is not a liability nor contingent liability that requires disclosure
because the sacrifice of economic benefits is remote.
Option B is incorrect, as it results in a liability, not a contingent liability.
You can review this topic area in the study guide under the section titled Contingent liabilities.

Question 3.9
Correct answer: B
The correct answer is Option B. Provisions to perform land rehabilitation activity are not
addressed by another Standard. Accordingly, these provisions are within the scope of IAS 37
(refer para. 1 and 5 of IAS 37).
Option A is incorrect. Recognition means that an item is included in the financial statements.
Option C is incorrect. IAS 37 does not apply to such contingent liabilities and contingent assets
(since they result from insurance contacts, they are covered by IFRS 4).
Option D is incorrect. For present obligations to exist, the entity must have no realistic alternative
but to make the future sacrifice of economic benefit.
You can review this topic area in the study guide under the section titled Scope of IAS 37,
Recognition of Provisions, Contingent Assets, and Contingent Liabilities.

Question 3.10
Correct answer: C
The correct answer is Option C. Paragraph 47 of IAS 37 specifies that the discount rate (or rates)
is to be a pre-tax rate (or rates) that reflect(s) current market assessments of the time value of
money and the risks specific to the liability.
Option A and Option B are incorrect as these are discount rates used to discount long-term
employee benefit obligations, which are outside the scope of IAS 37 (see para. 5 of IAS 37 and
IAS 19).
Option D is incorrect as it incorporates risks specific to the entity, rather than to the liability.
You can review this topic area in the study guide under the section titled Measurement of provisions.

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 3.11
Correct answer: B and D
Option B is correct. The expected value is the sum of probability-weighted amounts in a range of
possible consideration amounts (see IFRS 15, para. 53). This is calculated as $500 + $450 + $2550
+ $600 + $175 = $4275.
Option D is correct. Under the most likely amount method, the transaction price is the
consideration amount the entity is entitled to under the most likely possible outcome of a
contract (see IFRS 15, para.53). The most likely outcome is that 15 widgets will be returned.
Accordingly, the consideration amount the entity is entity to under this method is 85 widgets
$50 = $4250.
Option A is incorrect. This option assumes that only the probability weighted consideration
associated with the outcome with the highest probability of occurring is included in the
transaction price. Under the expected value method, the transaction price is determined as the
sum of probability-weighted amounts in a range of possible consideration amounts (see IFRS 15,
para. 53).
Option C is incorrect. This option assumes that the probability weighted consideration
associated with the outcome with the highest probability of occurring is included in the
transaction price. Under the most likely amount method, the transaction price is the
consideration amount the entity is entitled to under the most likely possible outcome of a
contract, without adjustment for the probability of that outcome (see IFRS 15, para. 53).
You can review this topic area in the study guide under the section titled Recognition of revenue
Step 3: Determine the transaction price of the contract

Question 3.12
Correct answer: B
Option B is correct, as there is a possible obligation whose existence will be confirmed only by
the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the entity. The possible liability must be disclosed as a contingent liability as the
possibility of an outflow in settlement is more than remote. Option A is incorrect because
disclosure of the contingent liability is required by IAS 37 as the possibility of the outflow in
settlement is more than remote.
Option C incorrectly identifies the obligation as a provision rather than as a contingent liability.
On the basis of the information available at year end 30 June 20X8, STU Ltd does not have a
present obligation as a result of a past event.
Option D is incorrect as contingent liabilities are not recognised in general purpose financial
statements.
You can review this topic area in the study guide under the section titled Contingent liabilities.

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| FINANCIAL REPORTING

Module 4
Question 4.1
Correct answer: A
The correct answer is Option A. A reconciliation between accounting profit before tax and
taxable profit is as follows.
Reconciliation between accounting profit before tax and taxable profit:
$
100 000

Accounting profit before tax

Adjustments for non-temporary differences
Impairment of goodwill

15 000

Accounting profit before tax adjusted for non-temporary differences

115 000

Adjustments for movements in temporary differences

Plus : Increase in unearned insurance premiums not recognised as revenue
Less : Excess of tax depreciation over accounting depreciation
Taxable profit

4 000
(10 000)
109 000

Tax payable = Taxable profit ($109 000) Tax rate (0.30) = $32 700
Current tax expense
Current tax, the amount of income taxes payable in respect of taxable profit for the period
(IAS 12, para. 5) is $32 700 ($109 000 0.30). According to the reconciliation given above,
taxable profit is $109 000.
Current tax is the product of this amount and the tax rate of 30 per cent. The whole of the
current tax is recognised as an expense (IAS 12, para. 58).
Deferred tax expense (income)
Deferred tax is to be recognised in the statement of profit or loss and other comprehensive
income as an expense or as income, except to the extent that it was recognised in equity (IAS 12,
para. 58). In our example, deferred tax for the period arose as a result of movements in temporary
differences. None of these were associated with transactions that were recognised in equity.
Movements in temporary differences give rise to adjustments to the amounts of deferred tax
assets and deferred tax liabilities, and to deferred tax. The total amount of deferred tax for the
period is recognised in the statement of profit or loss and other comprehensive income as
income or expense. Deferred tax expense for the period is comprised of the following:
Deferred tax expense (Table 1 below)
Increase in deferred tax liability
Less : Deferred tax income (Table 2 below)
Increase in deferred tax asset
Net deferred tax expense

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$
3 000
(1 200)
1 800

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Table 1: Deferred tax expense-depreciable asset

Taxable
temporary
difference
$
10 000
0

30 June 20Y0
30 June 20X9
Movement in temporary difference
(Excess of tax depreciation over
accounting depreciation)

10 000
0.30
3 000

Deferred tax expense/increase in deferred tax liability

Taxable temporary difference 20Y0

Carrying amount
Cost
Less: Accumulated depreciation
Less: Tax base
Cost
Cumulative tax depreciation
Taxable temporary difference

20Y0
$

100 000
(15 000 )

85 000

100 000
(25 000 )

(75 000)
10 000

Taxable temporary difference 20Y9

As the depreciable asset was not acquired until the next reporting period, there was no temporary
difference as at 30 June 20X9.

Table 2: Deferred tax income-unearned insurance premiums

Deductible
temporary
difference
$
31 000
(27 0001)

30 June 20Y0
Less : 30 June 20X9
Movement in temporary difference
(Insurance premiums received not recognised
in accounting profit before tax)

4 000
0.30
1 200

Deferred tax income/increase in deferred tax asset

Deductible temporary differences

Carrying amount insurance premiums

Tax base
Deductible temporary difference

20X9
$
27 000
0
27 000

20Y0
$
31 000
0
31 000

Increase in deferred tax asset: Table 2

The increase in the deferred tax asset is the product of the movement (increase) in the
deductible temporary difference and the tax rate = $4000 0.30 = $1200.

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| FINANCIAL REPORTING

Increase in deferred tax liability: Table 1

The increase in the deferred tax liability is the product of the movement in the taxable
temporary difference and the tax rate = $10 000 0.30 = $3000.
Option B is incorrect. Under this alternative taxable profit has been wrongly calculated as
$121 000, arising from treating the depreciable asset as giving rise to a deferred tax asset and
the unearned insurance premiums as giving rise to a deferred tax liability.
Option C is incorrect. It is based on the following reconciliation:
Reconciliation between accounting profit before tax and taxable profit

Accounting profit before tax

$
100 000

Adjustments for movements in temporary differences

Plus :
Insurance premiums received not recognised in
accounting profit before tax
Impairment of goodwill
Less : Excess of tax depreciation over accounting depreciation
Taxable profit

4 000
15 000
(10 000)
109 000

This reconciliation implies:

Tax payable $109 000 0.3
Deferred tax asset:
Excess tax insurance premiums $4 000 0.3 = $1 200
Impairment of goodwill $15 000 0.3 = $4 500
Deferred tax liability:
Excess tax depreciation $10 000 0.3 = $3 000

$32 700

$5 700

Option D is incorrect. This alternative uses the reconciliation in C above, but treats the insurance
premiums and impairment of goodwill as giving rise to a deferred tax liability and excess
depreciation as giving rise to a deferred tax asset.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

Question 4.2
Correct answer: B
The correct answer is Option B.
The correct answer is Option B. Paragraph 5 of IAS 12 defines tax expense as the aggregate
amount included in the determination of profit or loss for the period in respect of current tax and
deferred tax.
Option C is incorrect. Deferred tax liabilities do not arise from deductible temporary differences
but from taxable temporary differences.
Option D is incorrect. The movements in deferred tax assets and liabilities could be included
directly in equity (see para. 61A of IAS 12).
You can review this topic area in the study guide under the section titled Calculating tax expense.

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.3
Correct answer: D
The correct answer is Option D. Refer to the discussion relating to Determining the tax base.
As this liability does not relate to revenue received in advance, the tax base for the employee
benefit liability would be:
Carrying amount of liability Future deductible amounts + Future assessable amounts

Option A is incorrect. Formula has not allowed for future deductible amounts.
Option B is incorrect. The formula is for a liability involving revenue received in advance.
Option C is incorrect. The formula is for the tax base of an asset.
You can review this topic area in the study guide under the section titled Deferred tax assets
and deferred tax liabilities.

Question 4.4
Correct answer: B
The correct answer is Option B. The carrying amount of the asset is greater than the tax base.
In the future, the entity will recover $100 000 from the asset (assessable income) but will only be
able to deduct $80 000 against this income. Hence, at 30 June 20X3 there is a taxable temporary
difference of $20 000, which results in a deferred tax liability of $6000 ($20 000 0.30). See also
relationships in Table 4.1.
Option A is incorrect. The asset does not lead to a deductible temporary difference and,
therefore, a deferred tax asset does not result.
Option C is incorrect. It is not a deductible temporary difference and the amount is not based
on the tax base.
Option D is incorrect. The amount of the deferred tax liability is based on the taxable temporary
difference, not the tax base of the asset.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

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| FINANCIAL REPORTING

Question 4.5
Correct answer: B
The correct answer is Option B. Deferred tax expense is based on the movements in deferred tax
assets and deferred tax liabilities.
The deferred tax asset has increased by $14 000this will result in a decrease in deferred
tax expense, that is, debit deferred tax asset for $14 000 and credit deferred tax expense
for $14 000.
The deferred tax liability has decreased by $6000this will result in a decrease in deferred
tax expense, that is, debit deferred tax liability for $6000 and credit deferred tax expense
for $6000.
Therefore, there is a total credit to deferred tax expense of $20 000 and the amount of tax
expense is therefore:
($230 000 0.3) $20 000 = $69 000 $20 000 = $49 000.
Option A is incorrect. It reflects only the amount of deferred tax and has been treated as a debit
and not as a credit.
Option C is incorrect. The increase in deferred tax liability has been treated as resulting in a debit
to deferred tax expense. Therefore, we have deducted $8000 ($14 000 $6000) from the current
tax expense of $69 000.
Option D is incorrect. This amount represents current tax expense with no adjustment for the
deferred tax expense.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

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15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.6
Correct answer: B
The correct answer is Option B.
Tax expense = Current tax expense + Deferred tax expense. The current tax expense for the year
ended 30 June 20X7 is $51 000 (taxable profit $170 000 30%). Tax expense is given as $60 000.
Therefore, the deferred tax expense = Tax expense ($60 000) Current tax expense ($51 000) =
$9000.
The increase in the deferred tax expense would be reflected in the closing deferred tax liability.
Hence, the opening deferred tax liability is the closing deferred tax liability ($27 000) less
deferred tax expense for the period ($9000), which is equal to $18 000.
Option A is incorrect. The deferred tax liability at 30 June 20X6 was $18 000 (see correct answer
above). This answer assumes a deferred tax expense for the year ended 30 June 20X7 of $27 000.
Option C is incorrect. The current tax expense is $51 000 (taxable profit $170 000 30%).
This answer is calculated as tax expense ($60 000) less amount of deferred tax liability ($27 000).
The opening amount of the deferred tax liability has not been taken into account.
Option D is incorrect. The opening deferred tax liability has not been taken into account.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

Question 4.7
Correct answer: A
The correct answer is Option A.
The tax base of an asset = Carrying amount + Future deductible amounts Future assessable
amounts.
Tax base of accounts receivable = $9500 + $500 $0 = $10 000.
As the tax base ($10 000) is greater than the carrying amount of the asset ($9500), there is a
deductible temporary difference of $500. This would result in the recognition of a deferred tax
asset of $150 ($500 0.30).
Option B is incorrect. The temporary difference has been treated as taxable, not as deductible.
Options C and D are incorrect. The tax base for both C and D has been calculated based on
the assumption that the receivables will be assessable in the future: that is, Tax base of the
receivables = Carrying amount ($9500) + Future deductible amounts ($500) Future assessable
amounts ($10 000) = $0. This incorrect calculation gives rise to a taxable temporary difference of
$9500 (carrying amount $9500 > tax base $0), which would result in the recognition of a deferred
tax liability of $2850 ($9500 0.30). For C, not only is the amount of the temporary difference
incorrect, but it has also been treated as a deductible temporary difference.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

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15b

02-06-16

| FINANCIAL REPORTING

Question 4.8
Correct answer: A
The correct answer is Option A.
The tax base of a liability = Carrying amount Future deductible amounts + Future assessable
amounts
Tax base of provision for employee benefits = $1 200 000 $1 200 000 + $0 = $0
Tax base of foreign currency loan = $180 000 $0 + $20 000 = $200 000
As the carrying amount of the provision for employee benefits ($1 200 000) is greater than its tax
base ($0), this gives rise to a deferred tax asset of $360 000 ($1 200 000 0.30). That is, in the future
when employee benefits are paid, a tax deduction will be received and a smaller amount of tax
would be paid than if settlement of the liability did not have any tax consequences. As the carrying
amount of the foreign currency loan ($180 000) is less than its tax base ($200 000), this gives rise to
a deferred tax liability of $6000 ($20 000 0.30). That is, in the future when the foreign currency
loan is settled, a $20 000 foreign currency gain will be included in taxable profit and an additional
$6000 of tax would be paid than if settlement of the liability did not have any tax consequences.
Hence, there is a net deferred tax asset of $354 000 ($360 000 DTA $6000 DTL).
Option B is incorrect. The foreign currency loan has been treated as giving rise to a deferred
tax asset.
Option C is incorrect. This answer treats the provision for employee benefits as giving rise to a
deferred tax liability and the foreign currency loan as giving rise to a deferred tax asset.
Option D is incorrect. The provision for employee benefits has been treated as giving rise to
a deferred tax liability.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.9
Correct answer: B
The correct answer is Option B. The current tax expense for the year ended 30 June 20X8 was
$30 000 (taxable profit of $100 000 tax rate of 30%).
Deferred tax expense/income is determined by the movement in the deferred tax assets and
deferred tax liabilities of Alpha Ltd. This can be calculated as follows.
20X7
$22 500
$6 000
$16 500

20X8
$28 500
$9 000 ||
$19 500

Movement
$6 000 increase in deferred tax assets
$3 000 increase in deferred tax liabilities
$3 000 increase in net deferred tax assets

Total of deductible temporary differences Tax rate = $75 000 0.30

Total of deductible temporary differences Tax rate = $95 000 0.30
Taxable temporary difference Tax rate = $20 000 0.30
Taxable temporary difference Tax rate = $30 000 0.30

As there is increase in the net deferred tax asset for the year ended 30 June 20X8 of $3000,
there will be deferred tax income of $3000. Tax expense = current tax expense $30 000 less
deferred tax income $3000 = $27 000.
Option A is incorrect. The movement in the taxable temporary difference has been ignored.
Only the change in the deferred tax asset has been included in the calculation.
Option C is incorrect. The answer does not take into account the deferred tax expense.
Option D is incorrect. The increase in the deferred tax asset has been treated as a deferred tax
expense and the increase in the deferred tax liability treated as deferred tax income, hence,
the net movement in the deferred tax balances of $3000 has been added to the current tax
expense of $30 000.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

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| FINANCIAL REPORTING

Question 4.10
Correct answer: D
The correct answer is Option D.
Deferred tax liability
As at the date of sale, there was a taxable temporary difference of $30 000, the difference
between the book- carrying amount of the asset $90 000 and the tax base of the asset (the tax
written-down amount): $60 000.
This taxable temporary difference and the related deferred tax liability of $9000 ($30 000 0.30)
reverses on the sale of the asset. The analysis of the reversal of the taxable temporary difference
and of the related deferred tax liability is as follows.

Deferred tax liability after sale

Less : Opening deferred tax liability ($30 000 0.30)
Reduction in deferred tax liability relating to the reversal
of temporary differences/deferred tax income

$
0
(9 000)
9 000

Tax payable and current tax expense

Taxable profit for the period was $75 000, calculated as follows:
$
160 000
(60 000)
100 000
(25 000)
75 000

Proceeds from sale of asset

Less : Tax written-down carrying amount
Less : Exempt capital gain
Taxable profit

Comprises:
Taxable capital gain
Depreciation recouped

Exempt taxable gain

Sale proceeds
Less: Purchase price
Capital gain
Less: Taxable capital gain
Sale proceeds
Less: Capital gains tax cost base
Exempt capital gain

Tax depreciation recouped

Cost of asset
Less: Tax written-down amount
Depreciation recouped

$
35 000
40 000
75 000
$
160 000
(100 000 )

60 000
160 000
(125 000 )

(35 000 )
25 000

100 000
(60 000 )
40 000

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Tax payable is $22 500 (30% of taxable profit of $75 000) and, by definition (IAS 12, para. 5),
current tax expense is equal to this amount.
We can also use a reconciliation between accounting profit before tax and taxable profit to
analyse the tax consequences. All of the transactions that have tax consequences for the period
affect either taxable profit or accounting profit before tax. The reconciliation is as follows.
Reconciliation between accounting profit before tax and taxable profit

Proceeds of sale of depreciable asset

Less : Book carrying amount
Accounting profit before tax
Adjustments for non-temporary differences and
excluded temporary differences:
Exempt capital gain

$
160 000
(90 000)
70 000

(25 000)

Accounting profit before tax, adjusted for non-temporary

differences and excluded temporary differences

45 000

Adjustments for movements in temporary differences

Plus : Excess of tax depreciation recouped over accounting
depreciation recouped
Taxable profit

30 000
75 000

Note that this amount is equal to:

Taxable capital gain
Accounting depreciation recouped
($100 000 $90 000)

$
35 000
10 000
45 000

Looking at the reconciliation we note that:

Tax payable and current tax expense, based on taxable profit, is $22 500 ($75 000 0.30).
The movement in the temporary difference is a reversal of the deductible temporary difference,
which gives rise to a reduction in the deferred tax liability of $9000 ($30 000 0.30) and to
deferred tax income of an equal amount.

As there are no recoupments of tax losses reducing tax expense, tax expense is numerically
equal to the product of the tax rate and accounting profit before tax, adjusted for non-temporary
differences and excluded temporary differences.
Option A is incorrect. This alternative confuses the exempt and taxable portions of the capital
gains. The reconciliation for this alternative is as follows.

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02-06-16

| FINANCIAL REPORTING

Reconciliation between accounting profit before tax and taxable profit

Proceeds of sale of depreciable asset

Less : Book carrying amount
Accounting profit before tax

$
160 000
(90 000)
70 000

Adjustments for non-temporary differences and

excluded temporary differences:
Exempt capital gain

(35 000)

Accounting profit before tax, adjusted for non-temporary

differences and excluded temporary differences

35 000

Adjustments for movements in temporary differences

Plus : Excess of tax depreciation recouped over accounting
depreciation recouped
Taxable profit

30 000
65 000

Looking at the reconciliation we note that the following.

Tax payable and current tax expense, based on taxable profit, is $19 500 ($65 000 0.30).
The movement in the temporary difference is a reversal of the deductible temporary
difference, which gives rise to a reduction in the deferred tax liability of $9000
($30 000 0.30) and to deferred tax income of an equal amount.

Option B is incorrect. This alternative confuses the exempt and taxable portions of the capital
gain and adds, instead of subtracts, the supposed exempt capital gain, and treats the reversal
of the taxable temporary difference as if it is an originating taxable temporary difference.
The reconciliation for this alternative is as follows.
Reconciliation between accounting profit before tax and taxable profit

Proceeds of sale of depreciable asset

Less : Book carrying amount
Accounting profit before tax
Adjustments for non-temporary differences and
excluded temporary differences:
Exempt capital gain
Adjustments for movements in temporary differences
Less : Excess of tax depreciation recouped over accounting
depreciation recouped
Taxable profit

$
160 000
(90 000)
70 000

35 000
105 000

(30 000)
75 000

Looking at the reconciliation we note the following.

Tax payable and current tax expense, based on taxable profit, is $22 500 ($75 000 0.30).
The movement in the temporary difference is treated as an originating deductible temporary
difference which gives rise to an increase in the deferred tax liability of $9000 ($30 000 0.30)
and to deferred tax expense of an equal amount.

Option C is incorrect. This alternative treats the reversing temporary difference as if it is an

originating temporary difference. The reconciliation for this alternative is as follows.

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2nd set

15b

02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Reconciliation between accounting profit before tax and taxable profit

Proceeds of sale of depreciable asset

Less : Book carrying amount
Accounting profit before tax

$
160 000
(90 000)
70 000

Adjustments for non-temporary differences and excluding

temporary differences:
Exempt capital gain

(25 000)

Accounting profit before tax, adjusted for non-temporary

differences and excluded temporary differences

45 000

Adjustments for movements in temporary differences

Less : Excess of tax depreciation recouped over accounting
depreciation recouped
Taxable profit

(30 000)
15 000

Looking at the reconciliation we note the following.

Tax payable and current tax expense, based on taxable profit, is $4500 ($15 000 0.30).
The movement in the temporary difference is regarded as an originating temporary
difference, which gives rise to an increase in the deferred tax liability of $9000 ($30 000 0.30)
and to deferred tax expense of an equal amount.

You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities and Recognition of deferred tax on revaluationRecovery of assets through
use or through sale.

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02-06-16

| FINANCIAL REPORTING

Question 4.11
Correct answer: C
The correct answer is Option C. If the carrying amount of the asset is recovered by use, the tax
written-down amount of the asset is deductible for tax purposes against the taxable economic
benefits recovered. Therefore, as indicated in the figure below, after the revaluation, the total
taxable temporary difference is $85 000. Of this amount, $15 000 relates to the temporary
difference in existence prior to the revaluation, and $70 000 is the additional taxable temporary
difference attributable to the revaluation increment. Therefore, the additional deferred tax that is
to be recognised as a consequence of recognising the revaluation is $21 000 ($70 000 0.30).
This is reflected in the following figure.

An alternative way of presenting these data is set out in the following table.

1
2
3
4

Carrying amount
Tax base
Taxable temporary difference
Deferred tax liability (row 3 0.30)

Before
revaluation
$
(1)
90 000
75 000
15 000
4 500

After
revaluation
$
(2)
160 000
75 000
85 000
25 500

Attributable
to revaluation
$
(3)
70 000
0
70 000
21 000

The entity should recognise an increase in the deferred tax liability of $21 000 ($70 000 0.30).
Since the additional deferred tax relates to an item that was recognised in other comprehensive
income (and accumulated in the revaluation surplus), the deferred tax should be recognised in
other comprehensive income (and reduce the revaluation surplus (IAS 12, para. 61A)).

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Option A is incorrect. This alternative arrives at the taxable amount by comparing the cost of the
asset with the pre-revaluation carrying amount, as follows.

Cost
Carrying amount before revaluation
Taxable temporary difference

$
101 250
(90 000)
11 250

This alternative also incorrectly recognises the deferred tax in the statement of profit or loss
and other comprehensive income as tax expense.
Option B is incorrect. This alternative incorrectly presumes that, since capital gains are non-taxable,
any amount in excess of cost that is recovered is not taxable, regardless of whether or not recovery
is by means of using the asset. The calculation of the taxable temporary difference was:

Cost
Tax base
Taxable temporary difference

$
101 250
(75 000)
26 250

Option D is incorrect. This alternative incorrectly attributes the whole of the post-revaluation
deferred tax liability to the revaluation increment. This alternative also incorrectly recognises the
deferred tax in the statement of profit or loss and other comprehensive income as tax expense.
You can review this topic area in the study guide under the section titled Assets carried at fair value
or revalued amounts.

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2nd set

15b

02-06-16

| FINANCIAL REPORTING

Question 4.12
Correct answer: D
Option D is the correct answer based on the following table of calculations.
Statement of financial position item

1
2
3
4
5
6
7
8
9
10
11
12
13
14

Rental revenue received in advance

Provision for employee benefits
Interest revenue receivable
Development costs carried forward
Plant and equipment less
accumulated depreciation
Temporary differences
Unused tax losses

Carrying
amount
$
(1)
80 000
20 000
50 000
40 000

Tax
base
$
(2)
0
0
0
0

100 000

40 000

Taxable
temporary
differences
$
(3)

Deductible
temporary
differences
$
(4)
80 000
20 000

50 000
40 000
60 000
150 000

Deferred tax liability before change

in tax rate (row 6, col. 3 0.30)
Deferred tax asset before change
in tax rate (row 8, col. 4 0.30)
Deferred tax liability after change
in tax rate (row 6, col. 3 0.35)
Deferred tax asset after change
in tax rate (row 8, col. 4 0.35)
Increase in deferred tax balance
Debit/(Credit) tax expense (income)

100 000
120 000
220 000

45 000
66 000
52 500

7 500
7 500

77 000
11 000
(11 000)

Option A is incorrect. The answer treats the temporary differences as deductible differences
and vice versa.
Option B is incorrect. This answer excludes the consequences of the unused tax losses from
the entry. Therefore, the deferred tax asset after and before the change in the tax rate are
assumed to be:

Deferred tax asset after

Deferred tax asset before
Change in deferred tax asset

$100 000 0.35

$100 000 0.30

=
=

$
35 000
30 000
5 000

Option C is incorrect. The rental revenue received in advance is regarded as giving rise to a
taxable temporary difference. Therefore, the totals of the deductible and taxable amounts, and
the resulting changes in the deferred tax asset and deferred tax liability, are treated as being:
Change in deferred tax asset:
total deductible amount (0.35 0.30) = $140 000 0.05
Change in deferred tax liability:
total taxable amount (0.35 0.30) = $230 000 0.05
Tax expense

$
7 000

=
=

11 500
4 500

You can review this topic area in the study guide under the section titled Recognition of deferred tax
assets and deferred tax liabilities.

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS |

Question 4.13
Correct answer: B
The correct answer is Option B. The tax base of an asset as at the end of 20X1 is the amount that
will be deductible for tax purposes against the taxable benefits that will flow to the entity when the
carrying amount of the asset is recovered (IAS 12, para. 7, first sentence). This amount is the tax
written-down amount of the asset. The difference between accounting profit before tax and
taxable profit for 20X1 implies that the tax written-down amount of the asset, the tax base, is $1000
less than the carrying amount of the asset. This means that the amount deductible from the taxable
benefits recovered is $1000 less than those benefits, giving rise to a taxable temporary difference
of $1000. Therefore, a deferred tax liability of $300 ($1000 0.30) is recognised.
Options A and C are incorrect. They interpret the question as requiring the recognition of a
deferred tax asset. A deferred tax asset would be recognised if the transaction gave rise to
a deductible temporary difference. Option C also assumes the difference between the taxable
profit and accounting profit is the amount of the deferred tax balance.
Option D is incorrect. It assumes the difference between the taxable profit and accounting profit
is the amount of the deferred tax balance.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

Question 4.14
Correct answer: D
Option D is correct because:

A deferred tax liability is initially recognised with respect to the taxable temporary difference
of $1000.
The tax consequences of all subsequent reversals of the temporary difference are recognised
as reductions in the deferred tax liability. The tax written-down amount is always less than
the carrying amount of the asset up until the final reversal.

Options A, B and C are incorrect. From above, a deferred tax asset is never recognised or affected.
You can review this topic area in the study guide under the section titled Deferred tax assets and
deferred tax liabilities.

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02-06-16

100 | FINANCIAL REPORTING

Question 4.15
Correct answer: B
The correct answer is Option B. In general, the amount of tax expense for a period may differ
from the tax that is prima facie payable on accounting profit before tax as a consequence of any,
or all, of the following factors.
a. Non-temporary differences:
i. items that are included in the measurement of either accounting profit before tax or
taxable profit, but never both, and which arise on the initial recognition of an asset
or liability, and
ii. allowable deductions that do not affect the measurement of an asset or liability; and
b. Temporary differences for which IAS 12 precludes recognition of a deferred tax asset or
deferred tax liability; and
c. Reductions in current tax expense or deferred tax expense arising from previously
unrecognised tax losses, tax credits or temporary differences.
Examples of these items that are included in the data for this question are non-temporary
differencesstatutory fines payable and dividends receivable.
A is incorrect. These items do not cause tax expense to differ from the amount of tax that is
prima facie payable with respect to accounting profit before tax.
C is incorrect. The effect attributable to the items that cause tax expense to differ from prima
facie tax is in the opposite direction to the actual effect.
D is incorrect. None of the items included in this reconciliation as causes of the difference
between tax expense and prima facie tax should have been taken into account. Note particularly
that, as a deferred tax asset has previously been recognised for the unused tax losses, the benefit
of the recoupment is a reduction in the deferred tax asset, not a reduction in tax expense.
The following reconciliation between accounting profit before tax and taxable profit shows how
the case data affects (or is excluded from) the determination of tax expense for the period.
Reconciliation between accounting profit
before tax and taxable profit
Accounting profit before tax
Adjustments for non-temporary differences and
excluded temporary differences
Statutory fines
Dividends

$
100 000

5 000
(8 000)

Adjustments for non-temporary differences and

excluded temporary differences
Adjustments for movements in temporary differences
Plus : Inventory write-down
Less : Foreign currency exchange gain
Taxable profit before utilising unused tax losses
Less : Tax losses recouped this period
Taxable profit after utilising tax losses

(3 000)

97 000
4 000
(10 000)
91 000
(60 000)
31 000

5 000 0.3 = 1 500

(8 000) 0.3 = (2 400)
97 000 0.3 = 29 100

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS | 101

You can review this topic area in the study guide under the sections titled Calculating tax expense
and Relationship between tax expense (income) and accounting profit.

Question 4.16
Correct answer: C
Option C, the correct answer, is based on the following worksheet.
Tax Loss Ltd
Taxable
profit
$
(2)

Item
(1)
1
Pre-tax operating
profit (loss)
100 000
2
Movements in non-temporary
differences and excluded temporary
differences
Statutory fines
5 000
Exempt dividends
(8 000)
3
Pre-tax operating profit (loss)
adjusted for non-temporary
differences and excluded
temporary differences
97 000
4
Movements in temporary
differences
Inventory write-down
4 000
Foreign currency
exchange gain
(10 000)
5
Taxable profit (loss)
before utilising tax losses
91 000
6
Tax losses recoupeddeferred
tax asset not previously recognised
7
Tax losses recoupedutilisation
of deferred tax asset previously
recognised
(60 000)
8
Previously unrecognised tax losses
benefit, recognised as deferred
tax asset this period
9
Taxable profit (loss) after utilising
tax losses
31 000
10 Totals

Current tax
expense/
(income)
$
(3)

Deferred
tax expense/
(income)
$
(4)

Deferred
tax
liability
$
(6)

Deferred
tax asset
$
(5)

Tax
payable
$
(7)
30 000

1 500
(2 400)

29 100

1 200 Credit

1 200 Debit

3 000 Debit

1 200
3 000 Credit

(3 000)
27 300

18 000 Debit 18 000 Credit

9 300 Debit
9 300 Debit

(18 000)

9 300 Credit
19 800 Debit 16 800 Credit 3 000 Credit 9 300 Credit

Option A is incorrect. This alternative incorrectly deals with the benefit of the tax losses
recouped.
Option B is incorrect. This alternative is based on the following reconciliation between
accounting profit before tax and taxable profit. The reconciliation incorrectly deducts the
inventory write-down and incorrectly adds the foreign currency exchange gain.

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102 | FINANCIAL REPORTING

Reconciliation between accounting profit

before tax and taxable profit
Accounting profit before tax
Adjustments for non-temporary differences
and excluded temporary differences
Statutory fines
Dividends

$
100 000

5 000
(8 000)

Accounting profit before tax adjusted for

non-temporary differences and excluded
temporary differences
Adjustments for movements in temporary differences
Less : Inventory write-down
Plus : Foreign currency gain
Taxable profit before utilising unused tax losses
Less : Tax losses recouped this period
Taxable profit

(3 000)

97 000
(4 000)
10 000
103 000
(60 000)
43 000

Option D is incorrect. This alternative is based on the following reconciliation, which excludes
movements in temporary differences.
Reconciliation between accounting profit before tax and taxable profit

Accounting profit before tax

Adjustments for non-temporary differences
and excluded temporary differences:
Statutory fines
Dividends
Taxable profit before utilising unused tax losses
Less : Tax losses recouped this period
Taxable profit

$
100 000

5 000
(8 000)

(3 000)

97 000
(60 000)
37 000

You can review this topic area in the study guide under the sections titled alculating tax expense,
Deferred tax assets and deferred tax liabilities and Recognition of deferred tax assets and deferred
tax liabilities.

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02-06-16

KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS | 103

Question 4.17
Correct answer: A
The correct answer is Option A.
Reconciliation between accounting profit before tax and taxable profit

Loss on sale of non-depreciable asset

Royalty revenue earned
Accounting loss before tax
Adjustments for movements in temporary differences
Increase in unearned royalty revenue (excess of
royalties received over royalty revenue
recognised in accounting profit)
Taxable profit

$
(100 000)
70 000
(30 000)

80 000
50 000

Deferred tax asset$24 000

Epsilon Ltd has recognised $70 000 of royalty revenue and a liability of $80 000 for unearned
royalty revenue. The tax base of the liability for unearned royalties is nil (IAS 12, para. 8) giving
rise to a deductible temporary difference of $80 000 and a deferred tax asset of $24 000
($80 000 0.30). Alternatively, as the revenue will not be taxed when the liability is settled,
future tax payments will be smaller than in the absence of this tax consequence. Therefore,
a deferred tax asset is recognised. This transaction also gives rise to deferred tax income
of $24 000.
Tax payable$15 000
According to the above reconciliation, taxable profit for the year is $50 000.
The related tax payable is $15 000 ($50 000 0.30).
Current tax expense$15 000
Current tax is equal to tax payable on taxable profit for the period (IAS 12, para. 5). The whole of
the current tax of $15 000 is recognised as an expense in the statement of profit or loss and other
comprehensive income for the current period.
Deferred tax income
Deferred tax income is equal to the $24 000 increase in the deferred tax asset.
Option B is incorrect. It was based on the following calculations.
Reconciliation between accounting profit before tax and taxable profit

Loss on sale of non-depreciable asset

Accounting loss before tax
Adjustments for movements in temporary differences
Excess of royalties received over royalty revenue
recognised in accounting profit
Taxable profit

R:\Workgroups\CPA-Production\CPA Digitisation\2nd Semester 2015\FR\FR-Knowledge-check-MCQ_15b.docx

$
(100 000)
(100 000)

(80 000)
(180 000)

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104 | FINANCIAL REPORTING

This option ignores royalty revenue and treats excess royalties incorrectly. The deferred tax asset
was calculated as follows:
Deferred tax asset relating to tax losses

$180 000 0.30 = $54 000

Option C is incorrect. It was based on the following calculations.

Reconciliation between accounting profit before tax and taxable profit

Loss on sale of non-depreciable asset

Royalty revenue
Accounting loss before tax
Adjustments for movements in temporary differences
Excess of royalties received over royalty revenue
recognised in accounting profit
Taxable profit

$
(100 000)
70 000
(30 000)

(80 000)
(110 000)

This option treats excess royalties incorrectly. The deferred tax asset was calculated as follows:
Deferred tax asset relating to tax losses

$110 000 0.30 = $33 000

Option D is incorrect. It was based on the following calculations.

Reconciliation between accounting profit before tax and taxable profit

Loss on sale of non-depreciable asset

Royalty revenue
Accounting loss before tax
Adjustments for non-temporary differences
and excluded temporary differences:
Loss on sale of non-depreciable asset
Accounting profit before tax adjusted for
non-temporary differences and excluded
temporary differences
Adjustments for movements in temporary differences
Excess of royalties received over royalty revenue
recognised in accounting profit
Taxable profit

$
(100 000)
70 000
(30 000)

100 000

70 000

80 000
150 000

This option incorrectly treats the loss on equipment as a non-temporary difference.

You can review this topic area in the study guide under the sections titled Calculating tax expense
and Deferred tax assets and deferred tax liabilities.

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KNOWLEDGE CHECKS: MULTIPLE CHOICE QUESTIONS AND SOLUTIONS | 105

Question 4.18
Correct answer: C
The correct answer is Option C. Looking at the reconciliations in the question data for each year,
and focusing on the prominent figures, we have the following.
Year ended 30 June 20X8
Decrease in liability for product warranties $20 000this leads to a decrease of an equivalent
amount in a deductible temporary difference, causing a reduction of $6000 ($20 000 0.30) in a
deferred tax asset. The journal entry is:
$
$
Deferred tax expense
6 000
Deferred tax asset
6 000
Tax loss $50 000as the probability recognition criterion is satisfied, a deferred tax asset of
$15 000 should be recognised. The journal entry is:
$
$
Deferred tax asset
15 000
Current tax income
15 000
Combining these entries gives:
Deferred tax asset
Deferred tax expense
Current tax income

$
9 000
6 000

15 000

Year ended 30 June 20X9

Increase in liability for product warranties $10 000this leads to an increase of an equivalent
amount in a deductible temporary difference, causing an increment of $3000 ($10 000 0.30) in a
deferred tax asset. The journal entry is:
$
$
Deferred tax asset
3 000
Deferred tax income
3 000
Taxable profit before utilising tax losses $35 000the journal entry to recognise the benefit of
this recoupment of $35 000 of the previous period tax losses is:

Deferred tax expense ($35 000 0.30)

Deferred tax asset

$
10 500

Taxable profit after utilising tax losses is nil; accordingly, there is no current tax expense/liability
to recognise.
Combining these entries gives:
Deferred tax expense
Deferred tax asset

$
7 500

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$
7 500

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106 | FINANCIAL REPORTING

Year ended 30 June 20Y0

Increase in liability for product warranties $20 000this leads to an increase of an equivalent
amount in a deductible temporary difference, causing an increment of $6000 ($20 000 0.30) in a
deferred tax asset. The journal entry is:
$
$
Deferred tax asset
6 000
Deferred tax income
6 000
Taxable profit before utilising tax losses $60 000this amount is sufficient to absorb the $15 000
balance of the unused tax losses. The journal entry to recognise the benefit of the recoupment of
the remaining unused tax losses is:
$
$
Deferred tax expense ($15 000 0.30)
4 500
Deferred tax asset
4 500
Taxable profit after utilising tax losses $45 000 ($60 000 $15 000)this gives rise to a liability for
tax currently payable and to a current tax expense of $13 500. The journal entry is:

Current tax expense

Tax payable

$
13 500

Combining these entries gives:

Deferred tax asset
Deferred tax income
Current tax expense
Tax payable

$
1 500

13 500
13 500

Question 5.5
Correct answer: B
The correct answer is Option B. Under IAS 32, the redeemable preference shares are classified
as a liability from the date of issue because the holder has the right to demand redemption.
Therefore, the instruments are a liability and the payment for the year is classified as interest.
The probability of conversion makes no difference to the classification of the instruments.
Option A is incorrect, as it assumes that the shares are equity.
Options D and C are incorrect, as they assume that the shares are reclassified during the year,
but this is not permitted according to paragraph 30 of IAS 32 Financial Instruments: Presentation.
You can review this topic area in the study guide under the section titled Presentation issues
Classification of interest, dividends, gains and losses and Classification as liabilities or equity.

Question 5.6
Correct answer: A
The correct answer is Option A. The fair value declines from $100 000 to $85 000. Thus, a loss of
$15 000 should be recognised. In year 1, a gain of $10 000 would be recognised, and the financial
assets carrying amount at the start of year 2 would be $100 000.
Option B is incorrect as it reflects the difference between the fair value of the derivative financial
asset at the end of year 2 and its cost ($85 000 $90 000), and not the movement in the fair value
of the derivative between the start of year 2 and the end of year 2.
Option C is incorrect as it assumes that the fair value of the instrument has not changed since
year 0.
Option D is incorrect as it reflects the difference between the fair value of the derivative financial
asset at the end of year 1 and its fair value at year 0 ($100 000 $90 000), and not the movement
in the fair value of the derivative between the start of year 2 and the end of year 2.
You can review this topic area in the study guide under the section titled Impairment of financial
assets and hedge accountingHedging.

Question 5.7
Correct answer: B and D
Market risk is defined in Appendix A in IFRS 7 as the risk that the fair value or future cash flows of
a financial instrument will fluctuate because of changes in market prices. Market risk comprises
three types of risk: currency risk, interest rate risk and other price risk. Therefore Options B and D
are correct.
Options A and C are incorrect because credit risk and liquidity risk are other risks that arise from
financial instruments, but are not part of market risk.
You can review this topic area in the study guide under the section titled Disclosure issues
Collateral and other credit enhancements.

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Question 5.8
Correct answer: B
The correct answer is Option B. The issuer does not currently have a present obligation to
transfer financial assets (cash) to the shareholders as the redemption of the shares is solely at
the discretion of the issuer, and the issuer has not exercised its option to redeem those shares
(see para. AG 25 of IAS 32).
Option A is incorrect as a preference share that provides for redemption on a specific date
contains a financial liability because the issuer has an obligation to transfer financial assets (cash)
to the holder of the share at the redemption date (see para. AG25 of IAS 32).
Option C is incorrect as a preference share that provides for redemption at the option of the
holder contains a financial liability because the issuer has an obligation to transfer financial assets
(cash) to the holder of the share when requested by the holder (see para. AG25 of IAS 32).
Option D is incorrect as the issuer has a present obligation to transfer financial assets (cash) to
the shareholders as the issuer of the shares has formally notified shareholders of its intention
to redeem the shares (see para. AG25 of IAS 32). Therefore, the redeemable preference shares
should be classified as a financial liability.
You can review this topic area in the study guide under the section titled Presentation
issuesClassification as liabilities or equity.

Question 5.9
Correct answer: D
The correct answer is Option D. With all of the information already contained in the financial
statements, a user can determine that the maximum credit risk is $74m. Paragraph 36(a) of IFRS 7
states that disclosure of the amount that best represents the maximum exposure to credit risk at
the end of the reporting period without taking account of any collateral held or other credit
enhancements is not required for financial instruments whose carrying amount best represents
the maximum exposure to credit risk.
Options A and C are incorrect. The maximum credit risk is $74m, not $80m. Moreover, further
disclosure in the notes to comply with paragraph 36(a) of IFRS 7 is not required as the maximum
credit risk is already recognised in the financial statements (net carrying amount of receivables).
Option B is incorrect. Paragraph 36(a) of IFRS 7 (which requires disclosure of the maximum credit
risk exposure by class of financial instrument) does not apply to financial instruments whose
carrying amount best represents the maximum exposure to credit risk.
You can review this topic area in the study guide under the section titled Disclosure issues
Statement of profit and loss and other comprehensive income.

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114 | FINANCIAL REPORTING

Question 5.17
Correct answer: B
The correct answer is Option B. Paragraphs 4.1.4 and 4.2.1 of IFRS 9 require the derivative to be
measured at fair value through profit or loss. Accordingly, Options A, C and D are incorrect.
Note, as the derivative is designated as the hedging item in a fair value hedge of a receivable,
gains and losses on changes in the fair value of the derivative are recognised in profit or loss
in accordance with paragraph 6.5.8 of IFRS 9.
You can review this topic area in the study guide under the sections titled Measurement
and Hedging.

Question 5.18
Correct answer: C
The correct answer is Option C. XYZ is still exposed to substantially all the risks and rewards of
ownership as it has agreed to repurchase the financial asset in three months time for a price that
resembles a lenders return (para. 3.2.7 of IFRS 9). Accordingly, in accordance with paragraph 3.2.6
of IFRS 9, XYZ continues to recognise the financial asset as the criteria for derecognition is not met.
The transaction is treated as a borrowing and not a sale in accordance with paragraph 3.2.15 in
IFRS 9. XYZ will record a $15 000 interest expense when it repays the loan in three months.
Options A and D are incorrect because the transaction is not a sale.
Option B is incorrect because it treats only part of the transaction as a borrowing and derecognises
the financial asset. The criteria for derecognition is not met as XYZ is still exposed to substantially
all the risks and rewards of ownership. Paragraph 3.2.15 requires the entire amount to be treated as
a borrowing.
You can review this topic area in the study guide under the section titled Derecognition of financial
assets and financial liabilities.

Question 5.19
Correct answer: B
The correct answer is Option B. The increase in value of the forward FX contract is a gain.
Paragraph 6.5.8 of IFRS 9 requires the gain or loss on remeasurement of the forward FX contract
designated as part of a fair value hedge to be recognised in profit or loss.
Option A is incorrect, as the forward contract has increased in value and so, there is no loss on
the forward contract.
Option C is incorrect, as the gains on the forward FX contract are recognised in profit or loss and
not in comprehensive income in accordance with paragraph 6.5.8 of IFRS 9. Gains and losses on
a hedging instrument designated as part of a fair value hedge are recognised in profit or loss,
except where the hedging instrument hedges an equity instrument for which the entity has
elected to present changes in fair value in other comprehensive income.
Option D is incorrect, as the forward contract has increased and not decreased in value, and as
the gain should be recognised in profit or loss.
You can review this topic area in the study guide under the section titled Hedging.

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Module 6
Question 6.1
Correct answer: B
The correct answer is Option B. Refer to the calculation below.
Consideration transferred has to be calculated by deduction.
Fair value of investees net assets
Fair value of the investees net assets
Add: Goodwill (given)
Consideration transferred

=
=
=

$180 000
$194 000
$10 000
$204 000

+ $20 000 $6 000

Option A is incorrect. This answer has adjusted for the costs directly attributable to the combination.
Acquisition costs are expensed in accordance with paragraph 53 of IFRS 3, with the exception of
costs to issue debt or equity securities, which are recognised in accordance with IAS 32 and IFRS 9.
Option C is incorrect. This answer has not adjusted for the deferred tax liability relating to
the revaluation.
Option D is incorrect. This answer has not taken into account the deferred tax liability relating
to the revaluation and has included the costs directly attributable to the combination.
You can review this topic area in the study guide under the sections titled The acquisition method:
Recognising and measuring goodwill or a gain from a bargain purchase and Deferred tax arising
from a business combination.

Question 6.2
Correct answer: A
The correct answer is Option A. It is the group that has acquired the net assets and goodwill.
The parent has acquired a single asset, an investment in the subsidiary.
Option B is incorrect. The investor would only record the investment in the subsidiary.
Options C and D are incorrect. Goodwill must be recorded in the financial statements of
the group.
You can review this topic area in the study guide under the sections titled Identifying a business
combination and The acquisition method: Recognising and measuring goodwill or a gain from a
bargain purchase.

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Question 6.3
Correct answer: B
The correct answer is Option B. IFRS 3, paragraph 37, requires the consideration transferred in
a business combination to be measured at fair value, which shall be calculated as the sum of:
the acquisition-date fair values of the assets transferred by the acquirer;
the liabilities incurred by the acquirer to former owners of the acquiree; and
the equity interests issued by the acquirer.
The consideration transferred is equal to the fair value of the shares issued by Alpha.

10 000 shares in Alpha @ $2.70

$
27 000

Option A is incorrect. This answer is based on the fair value of Betas shares.
Option C is incorrect. This answer is based on the fair value of Betas shares, plus the acquisition
costs. Acquisition costs are expensed in accordance with paragraph 53 of IFRS 3, with the
exception of costs to issue debt or equity securities, which are recognised in accordance with
IAS 32 and IFRS 9.
Option D is incorrect. This answer takes into account the acquisition costs. Acquisition costs are
expensed in accordance with paragraph 53 of IFRS 3, with the exception of costs to issue debt
or equity securities, which are recognised in accordance with IAS 32 and IFRS 9.
You can review this topic area in the study guide under the section titled The acquisition method:
Recognising and measuring goodwill or a gain from a bargain purchase.

Question 6.4
Correct answer: C
The correct answer is Option C. Paragraph B63(a) of IFRS 3 Business Combinations notes that
AASB 138 Intangible Assets requires the acquirer to measure goodwill at the amount recognised
at the acquisition date less any accumulated impairment losses.
Options A and B are incorrect, as amortisation is not permitted by IFRS 3.
Option D is incorrect. Goodwill must be tested for impairment annually, not just when
circumstances indicate that impairment may have occurred.
You can review this topic area in the study guide under the section titled The acquisition method:
Recognising and measuring goodwill or a gain from a bargain purchase.

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Question 6.5
Correct answer: C
The correct answer is Option C. The cost of the combination is measured primarily by reference
to the consideration transferred, which reflects what was given, not what was received.
Option A is incorrectto apply the acquisition method, one of the combining entities must be
identified as the acquirer (see para. 6 of IFRS 3).
Option B is incorrectparagraph 18 of IFRS 3 requires the acquirer to measure the identifiable
assets acquired and the liabilities assumed at acquisition-date fair values.
Option D is incorrectparagraph 32 of IFRS 3 require goodwill to be measured as the excess
between the aggregate of the consideration transferred, the amount of any non-controlling
interest in the acquire and the fair value of any previously held equity interest in the acquire,
less the fair value of the net assets acquired.
You can review this topic area in the study guide under the section titled The acquisition method.

Question 6.6
Correct answer: A
The correct answer is Option A.
Fair value of consideration transferred ($400 000 cash + 1 million shares @ $1.20) =
$1 600 000.
Goodwill = Consideration transferred Fair value of identifiable net assets acquired
= $1 600 000 $1 390 000
= $210 000
Option B is incorrect. This answer has included the costs attributable to the combination in the
determination of the consideration transferred and, hence, the goodwill.
Option C is incorrect. This answer has used the book value of the net assets acquired.
Option D is incorrect. This answer has used the book value of the assets acquired and included
the acquisition costs in measuring the consideration transferred.
You can review this topic area in the study guide under the section titled The acquisition method:
Recognising and measuring goodwill or a gain from a bargain purchase.

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Question 6.7
Correct answer: A
The correct answer is Option A. The owners equity of Sub after the revaluation of the
non-current assets was $850 000.
If Parent acquired 70 per cent of the shares in Sub, 70 per cent of the fair value of the identifiable
net assets, $595 000, plus the goodwill of $100 000, must be equal to the consideration
transferred by Parent, by deduction, $695 00.
In accordance with paragraph B86(b) of IFRS 10, the investment in the subsidiary must be
eliminated along with the parents share of the equity of the subsidiary. The entry reflects the
following calculation.

Issued capital
General reserve
Retained earnings
Asset revaluation reserve
Owners equity
Goodwill
Cost of inves tment

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Option C is incorrect. It assumes all of inventory remained on hand as at 30 June 20X1.

Option D is incorrect. It assumes the tax expense of the group was increased in 20X1.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsTransactions within the group.

Question 6.21
Correct answer: B
The correct answer is Option B.

The depreciation expense recorded in the financial statements of Big is overstated by $1000
annually from the groups perspective. Consequently, the depreciation expense for 20X5
needs to be reduced (credited) and the accumulated depreciation reduced (debited) to allow
for 20X4 and 20X5 ($2000).
Reducing the depreciation expense of the group, as compared with the sum of Big and Little,
reflects the groups realisation in 20X5 of a further $1000 of the profit previously considered
unrealised on the transfer of the equipment within the group. Hence, the income tax expense
of the group has to be increased (debited) by $300 (30 per cent of $1000).
In 20X4, when the equipment was sold internally, a deferred tax asset of $3000 was raised
on consolidation (30% of $10 000). The 20X4 consolidation entries would also have reflected
a reduced depreciation expense of $1000 and a consequent realised profit of $1000 and
related decrease in deferred tax asset of $300. In 20X5, a further $1000 of profit has been
realised and, as a result, an additional $300 of the tax asset has been realised. Therefore,
a net debit of $2400 ($3000 $300 $300) to deferred tax asset is required.
In 20X4, the profit of the group was reduced by the unrealised profit on the internal sale of
the equipment ($7000 net of tax). During 20X4, $700 of the profit net of tax was realised.
The effect of the 20X4 consolidation entries reflecting these events flowed through to
reduce the closing groups retained earnings by $6300. Therefore, a debit entry to reduce
the opening retained earnings must be processed.
The equipment is overstated from the point of view of the group. The cost to the group is
$30 000, not $40 000 as recorded in the financial statements of Big, hence the credit entry to
equipment for $10 000.

Option A is incorrect. Only one year of depreciation has been taken into account, and the tax
effect of the unrealised profit in 20X4 has been ignored.
Option C is incorrect. The realisation of $1000 of profit (including the tax effect) by the group in
20X4 has been ignored.
Option D is incorrect. The depreciation expense is incorrectboth years have been allowed for
as an adjustment to the current years profit.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsTransactions within the group.

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Question 6.22
Correct answer: C
The correct answer is Option C. Twenty per cent of: Profit for the year of subsidiary (+) any
unrealised (realised) after-tax profits made by the subsidiary.
= 20% of ($20 000 + ($1000 $300))
= 20% of $20 700
= $4140
Notes:

The unrealised profit on the sale of the land was recorded in the financial statements of Big Ltd. Hence,
no non-controlling interest is involved.

$700 of the profit (net of tax) relating to the equipment has been realised by the group. This sale of
equipment was originally recorded by Little Ltd and, therefore, the non-controlling interest is affected.

Option A is incorrect. The unrealised profit after tax on the land has been included in the calculation.
Option B is incorrect. Twenty per cent of the book profit of the subsidiary with no adjustments for
profits, realised or unrealised.
Option D is incorrect. No allowance for the tax effect of the $1000 of profit realised.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsNon-controlling interest.

Question 6.23
Correct answer: C
The correct answer is Option C. Twenty per cent of: Closing retained earnings in the financial
statements of the subsidiary +() any realised (unrealised) profit net of tax made by the subsidiary
over preceding periods and the current period
= 20% of ($10 000 ($10 000 $3000) + ($2000 $600))
= 20% of $4400
= $880
Option A is incorrect. Unrealised profit on the sale of land has been included in the calculation:
relates to the parent entity and not the subsidiary.
Option B is incorrect. It has not allowed for the tax effect of unrealised and realised profits.
Option D is incorrect. No adjustments are made for unrealised or realised profits.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsNon-controlling interest.

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Question 6.24
Correct answer: A, B and C
The correct answer is Options A, B and C. The realisation of loss via depreciation charges
(transaction 1), the elimination of intra-group dividend revenue included in the statement of
profit or loss and other comprehensive income of Parent (transaction 2), and the elimination
of the unrealised profit on sale of inventory (transaction 3) will all decrease consolidated profits
for the year as compared with the sum of the profits for the year of Parent and Sub.
Option D is incorrect. The elimination of the intra-group borrowing (transaction 4) will have no
impact on the consolidated profit, as compared with the sum of the profits of Parent and Sub,
as no unrealised profit or loss arises on the transaction.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsTransactions within the group.

Question 6.25
Correct answer: A and C
The correct answer is Options A and C. A tax effect relates to the situation where there is
unrealised or realised profit (or loss). Even though the plant was sold in a prior reporting period,
the consolidated profit will be affected via depreciation adjustments and the related tax effects
(Option A, transaction 1). The intra-group sale of inventory will give rise to a tax effect as the
inventory has been sold for a profit and the inventory is still held by the group at the period end
(Option C, transaction 3).
Option B (transaction 2) is incorrect as Parent treats the dividends as tax free in their own
tax-effect entries; accordingly, there are no tax-effect adjustments required in the consolidation
worksheet.
Option D (transaction 4) is incorrect because no unrealised profit or loss arises in relation to the
intra-group interest; accordingly, there are no associated net tax effects from elimination of
the intra-group interest.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsTransactions within the group.

Question 6.26
Correct answer: A
The correct answer is Option A. To affect the non-controlling interest in the consolidated profit,
the transaction must involve a sale of inventory or non-current asset (as transactions involving
unrealised or realisation of profit or loss) from Sub to Parent.
Option B is incorrect as transaction 2 does not give rise to any unrealised profits or losses.
Option C is incorrect as transaction 3 relates to an intra-group sale from Parent to Sub.
Option D is incorrect as the intra-group loan between Sub and Parent does not result in any
unrealised profit or loss and, therefore, has no non-controlling interest implications.
You can review this topic area in the study guide under the section titled Preparation of consolidated
financial statementsNon-controlling interests3. Measurement of non-controlling interest.

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Question 6.27
Correct answer: C
The correct answer is Option C. Share of associates profit is calculated as follows.

Share of book value of profit

Add: Gain
Less: Share of unrealised profit after tax

$
33 600
5 000
38 600
(1 400)
37 200

40% of $84 000.

40% of fair value of net assets = 40% of $200 000 ($180 000 + $20 000 revaluation) = $80 000.
Cost of investment = $75 000. Resulting gain of $5000 is included in the share of profit of associate
in the period in which the investment is acquired (para. 32(b) of IAS 28).
Half of unrealised profit after tax = $3500; 40% of $3500 = $1400.

Option A is incorrect. The entitys share of dividends from the associate does not affect the
determination of its share of associates profit.
Option B is incorrect. Gain on the bargain purchase has not been included in the share of
associates profit.
Option D is incorrect. The investors share of unrealised profits of the associate has not
been eliminated.
You can review this topic area in the study guide under the section titled Application of the
equity method.

Question 6.28
Correct answer: B
The correct answer is Option B. Equity-accounted amount of investment in consolidated
financial statements is calculated as follows.
$
Original investment
Add: Share of prima facie profit of associate
Gain*
Less: Share of unrealised profit after tax
Share of interim dividend
Share of declared dividend
Equity amount of investment

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$
75 000

33 600
5 000
(1 400)
(8 000)||
(12 000)#

38 600
113 600

(21 400)
92 200

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Question 7.10
Correct answer: B
The correct answer is Option B. CGU B has an impairment loss of $400 000 ($2 200 000 $1 800 000)
and CGU C has an impairment loss of $500 000 ($4 350 000 $3 850 000). These impairment losses
would be allocated as follows.
CGU B
Building
Assets in CGU

200 / 2 200 $400 000 = $36 000

2 000 / 2 200 $400 000 = $364 000

CGU C
Building
Assets in CGU

350 / 4 350 $500 000 = $40 000

4 000 / 4 350 $500 000 = $460 000

Hence, the impairment loss allocated to the building (corporate asset) = $36 000 + $40 000 =
$76 000.
Option A is incorrect. This assumes that the impairment losses are not allocated to the
corporate asset.
Option C is incorrect. The total impairment loss has been allocated in proportion to the total
amount of all CGUs. That is, 700 / 7 700 $900 000 = $82 000
Option D is incorrect. The impairment loss has been allocated using the original carrying
amount. That is,
CGU B
Building

200 / 2 000 $400 000 = $40 000

CGU C
Building

350 / 4 000 $500 000 = $44 000

You can review this topic area in the study guide under the section titledRecoverable amount and
carrying amount of a CGU.

Question 7.11
Correct answer: D
The correct answer is Option D. Paragraph 104 of IAS 36 requires the impairment loss to first be
allocated against goodwill and then to the other assets of the CGU pro rata on the basis of the
carrying amount of each asset in that CGU.
Option A is incorrect. The impairment loss must be used to first reduce goodwill and then is
attributed on a pro rata basis to the other identifiable assets in the CGU.
Option B is incorrect. The impairment loss must first be allocated to goodwill, not on a pro rata
basis across all assets.
Option C is incorrect. The impairment loss must first be allocated to goodwill.
You can review this topic area in the study guide under the section titled Recoverable amount and
carrying amount of a CGU.

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Question 7.12
Correct answer: D
The correct answer is Option D. There is an impairment loss of $600 000 ($2 400 000 $1 800 000).
In accordance with paragraph 104 of IAS 36, the impairment loss is first allocated to goodwill
($400 000). The remaining $200 000 is then allocated to the identifiable assets on a pro rata basis,
using the carrying amount of each identifiable asset as follows.
Machinery
Other plant
Land

(400 000 / 2 000 000) $200 000

=
(600 000 / 2 000 000) $200 000
=
(1 000 000 / 2 000 000) $200 000 =

$40 000
$60 000
$100 000

The carrying amounts of the assets after this allocation would be as follows.
Machinery
Other plant
Land

=
=
=

$400 000 $40 000

$600 000 $60 000
$1 000 000 $100 000

=
=
=

$360 000
$540 000
$900 000

Option A is incorrect. The $600 000 impairment loss is allocated evenly over the identifiable
assets and goodwill ($600 000 / 4 = $150 000 per asset).
Option B is incorrect. The $600 000 impairment loss is allocated over the identifiable assets
and goodwill pro rata. For example, the impairment loss allocated to the machinery would be
as follows.
($400 000 / $2 400 000) $600 000 = $100 000. Therefore, the carrying amount of the machinery
would be $300 000 ($400 000 $100 000).
Option C is incorrect. After allocating $400 000 of the impairment loss to goodwill, the remaining
$200 000 is allocated evenly over the identifiable assets ($200 000 / 3 = $66 666).
You can review this topic area in the study guide under the section titled Recoverable amount and
carrying amount of a CGU.

Question 7.13
Correct answer: D
The correct answer is Option D. Paragraph 56 of IAS 36 notes that the discount rate(s) used to
measure an assets value in use should not reflect risks for which the future cash flow estimates
have been adjusted as the effect of some assumptions would otherwise be double-counted.
Option A is incorrect. The cost of reorganising a business following the disposal of an asset is not
regarded by IAS 36 as a cost of disposal (para. 28).
Option B is incorrect. Paragraph 28 of IAS 36 identifies legal costs as an example of a cost of
disposal included in measuring fair value less costs of disposal.
Option C is incorrect. Cash flow projections should cover a maximum of five years, unless a
longer period can be justified (IAS 36, para. 33(b)).
You can review this topic area in the study guide under the section titled Impairment of
individual assets.

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Question 7.14
Correct answer: A
The correct answer is Option A. Paragraph 70 of IAS 36 requires a group of assets to be
identified as a cash-generating unit where an active market exists for the output produced by
that group of assets. This applies even if some or all of the output is used internally by the entity.
Option B is incorrect. See the definition of cash-generating unit, which is the smallest group of
assets that generate cash inflows largely independently of the cash inflows of other assets or
groups of assets. A CGU is not necessarily a business unit.
Option C is incorrect. If the recoverable amount of an asset can be determined, the impairment
test would be applied to the asset. If the cash inflows are not largely independent of those from
other assets, the impairment test is applied to the CGU to which the asset belongs (IAS 36,
paras 66 and 67).
Option D is incorrect. The cash inflows are not largely independent of the cash inflows of other
assets and, hence, the impairment test is applied to the CGU (IAS 36, para. 67).
You can review this topic area in the study guide under the section titled Impairment of CGUs.

Question 7.15
Correct answer: B and D
Option B is correct. Paragraph 101 of IAS 36 notes that the recoverable amount of an individual
corporate asset cannot be determined unless management has decided to dispose of the asset,
because corporate assets do not otherwise generate separate cash inflows.
Option D is correct. Paragraph 102(a) of IAS 36 requires an entity to, if a portion of the carrying
amount of a corporate asset can be allocated on a reasonable and consistent basis to a
cash-generating unit, compare the carrying amount of the unit (including the portion of the
carrying amount of the corporate asset allocated to the unit) with its recoverable amount to
determine any impairment loss.
Option A is incorrect. A distinctive characteristic of a corporate asset is that it does not generate
cash inflows largely independently of other assets (refer IAS 36, para. 100).
Option C is incorrect. If a portion of a corporate asset cannot be allocated on a reasonable and
consistent basis to a CGU, for the purposes of impairment testing, it is necessary to identify the
smallest group of CGUs to which a portion of the carrying amount of the corporate asset can be
allocated on a reasonable and consistent basis (refer to para. 102(b)(ii)).
You can review this topic area in the study guide under the section titled Impairment of CGUs.

R:\Workgroups\CPA-Production\CPA Digitisation\2nd Semester 2015\FR\FR-Knowledge-check-MCQ_15b.docx

DTP: Jen, Leigh, Mira

2nd set

15b

02-06-16

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