FA2 Question Book

CHAPTER 1 IAS 23: BORROWING COST
Objectives of IAS 23
1. Determine commence date, suspense period of time, date that asset ready for
intended use
2. Difference between effective and nominal interest rate in choosing interest
rate for capitalization with specific loan for construction
3. Determine weighted average cost of capital with general loan for construction
4. Determine and explain amount borrowing cost capitalized
5. Determine and explain how to account for interest income for unused
borrowing cost before and during construction period.
6. Describe criteria for capitalization of borrowing cost
PART 1: THEORY QUESTION

Question 1: Defined qualified asset? Give some example of qualified asset? (5 marks)
Question 2: Define borrowing cost? Give some example of borrowing cost? (5 marks)
Question 3: List criteria for commence capitalize borrowing cost?
Question 4: What are the main difference between nominal interest rate and effective
interest?
PART 2: PRACTICE QUESTION

Question 1 (15 marks)
Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1
April 2009. The loan is redeemable at a premium which means the loan has an effective
finance cost of 7·5% per annum. The loan was specifically issued to finance the building of
the new store which meets the definition of a qualifying asset in IAS 23. Construction of the
store commenced on 1 May 2009 and it was completed and ready for use on 28 February
2010, but did not open for trading until 1 April 2010. During the year trading at Apex’s other
stores was below expectations so Apex suspended the construction of the new store for a
two-month period during July and August 2009. The proceeds of the loan were temporarily
invested for the month of April 2009 and earned interest of $40,000.
Required: Calculate the net borrowing cost that should be capitalized as part of the cost of
the new store and the finance cost that should be reported in the income statement for
the year ended 31 March 2010. (15 marks)
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Capita had the following bank loans outstanding during the whole of 20X8:
$m
9% loan repayable 20X9 15
11% loan repayable 20Y2 24
Capita began construction of a qualifying asset on 1 April 20X8 and withdrew funds of $6
million on that date to fund construction. On 1 August 20X8 an additional $2 million was
withdrawn for the same purpose.
Required: Explain, with journals, the accounting treatment for the borrowing cost for the
year ended 31 December 20X8. (10 marks)
Question 3
Leclerc has borrowed $2.4 million to finance the building of a factory. Construction is
expected to take two years. The loan was drawn down and incurred on 1 January 20X9 and
work began on 1 March 20X9. $1 million of the loan was not utilised until 1 July 20X9 so
Leclerc was able to invest it until needed. Leclerc is paying 8% on the loan and can invest
surplus funds at 6%.
A company has the following loans in place throughout the year ended 31 December 20X8.
$m
10% bank loan 140
8% bank loan 200
On 1 July 20X8 $50 million was drawn down for construction of a qualifying asset which was
completed during 20X9.
Apex is a publicly listed supermarket chain. During the current year it started the building of
a new store. The directors are aware that in accordance with IAS 23 Borrowing costs certain
borrowing costs have to be capitalized.
Details relating to construction of Apex's new store:
Apex issued a $10 million unsecured loan with a coupon (nominal) interest rate of 6% on 1
April 20X8. The loan is redeemable at a premium which means the loan has an effective
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finance cost of 7.5% per annum. The loan was specifically issued to finance the building of
the new store which meets the definition of a qualifying asset in IAS 23.
Construction of the store commenced on 1 May 20X8 and it was completed and ready for
use on 28 February 20X9, but did not open for trading until 1 April 20X9.
Required:
a. Explain, with journals, the accounting treatment for the borrowing cost for the year
ended 31 March 20X8. (12 marks)
b.
Rather than take out a loan specifically for the new store Apex could have funded the store
from existing borrowings which are:
(i) 10% bank loan $50 million
(ii) 8% bank loan $30 million
In this case it would have applied a 'capitalisation rate' to the expenditure on the asset.
Required:
What would that rate have been captalized (show working)? (3 marks)
c.
If Apex had been able to temporarily invest the proceeds of the loan from 1 April to 1 May
when construction began at interest rate of 5% per annum
Required:
Explain, with journals, the accounting treatment the proceeds be accounted for? (5 marks)
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CHAPTER 2: IFRS 05 NON-CURRENT ASSET HELD FOR SALE
Objectives of IFRS 05 Non-current asset held for sale
1. Describe criteria to classified non-current asset to non-current asset held for
sale
2. How to account the asset at point the asset transfer non-current asset held
for sale
3. Describe how to record non-current asset held for sale after classification
4. Describe how to record non-current asset held for sale at year end

List factor to determine whether the non-current asset is classified as held for sale?
Explain how to account the non-current asset as 'held for sale'?
How to measure the “asset held for sale” at reporting date?
PART 2: PRACTISE QUESTION

Maykorn Co prepares its financial statements to 30 September each year. Maykorn Co's
draft financial statements were finalised on 20 October 20X3. They were authorised for
issue on 15 December 20X3 and the annual general meeting of shareholders took place on
23 December 20X3.
On 30 September 20X3, Maykorn Co moved out of one of its properties and put it up for
sale. The property met the criteria as held for sale on 30 September 20X3. On 1 October
20X2, the property had a carrying amount of $2.6m and a remaining life of 20 years. The
property is held under the cost model. The property was expected to sell for a gross amount
of $2.5m with selling costs estimated at $50,000.
Maykorn Co decided to sell an item of plant during the year ended 30 September 20X3. On 1
October 20X2, the plant had a carrying amount of $490,000 and a remaining useful life of
seven years. The plant met the held for sale criteria on 1 April 20X3. At 1 April 20X3, the
plant had a fair value less costs to sell of $470,000, which had fallen to $465,000 at 30
September 20X3.
Required:
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Explain, with journals, the accounting treatment for the PPE and NCA held for sale for the
year ended 30 September 20X3 (15 marks)
October 20X2, the plant had a carrying amount of $490,000 and a remaining useful life of 5
years. The plant met the held for sale criteria on 1 April 20X3. At 1 April 20X3, the plant had
a fair value less costs to sell of $420,000, which had fallen to $485,000 at 30 September
20X3.
Required:
Explain the accounting treatment for the PPE and NCA held for sale for the year ended 30
September 20X3 and prepare extracted financial statement for the year ended 30.9.20X3
(15 marks)
October 20X2, the plant had a carrying amount of $490,000 with accumulated impairment
loss of $50,000 and a remaining useful life of 8 years. The plant met the held for sale criteria
on 1 April 20X3. At 1 April 20X3, the plant had a fair value less costs to sell of $400,000,
which had increased to $485,000 at 30 September 20X3.
Required:
(15 marks)
Maykorn Co decided to sell an item of investment property (under fair value model) during
the year ended 30 September 20X3. On 1 October 20X2, the investment property had a fair
value of $490,000 and a remaining useful life of 8 years. The investment property met the
held for sale criteria on 1 April 20X3. At 1 April 20X3, the plant had a fair value $450,000 and
cost to sell $50,000. At end of the year, FV less cost to sell of investment property which had
increased to $485,000 at 30 September 20X3.
Required:
(15 marks)
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CHAPTER 3: IAS 20 GOVERNMENT GRANT
Objectives of IAS 20: Government grant
1. Describe how to criteria for recognition of government grant
2. Describe how to recognize government grant related to non-current asset in
accordance deferred income method
3. Recognition government grant related to non-current asset in accordance
deducing value of non-current asset method
4. Recognition in case grant become payable

What is the government grant? List 3 example of government grant?
What are criteria for recognition of government grant?
Explain TWO acceptable methods of accounting for a government grant relating to an asset
in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance?

Question 1
Broom Co successfully receives a government grant of $1.5m on 1 January 20X5 allowing to
purchase an asset which costs $5,000,000 also at 1 January 20X5. The asset a ten year useful
life and its depreciated on 20% reducing balance basis. Company is to account for all grant
received as deferred income.
Required:
Prepare extract financial statement for year ended 31.12.20X6, 31.12.20X7, 31.12.20X8
(18 marks)
Question 2
Broom Co successfully receives a government grant of $2m on 1 January 20X5 allowing to
purchase an asset which costs $5,000,000 also at 1 January 20X5. The asset a five year
useful life and its depreciated on straight line basis. Company is to account for all grant
received as reducing in carrying amount of the asset.
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Required:
a. Prepare extract financial statement for year ended 31.12.20X5, 31.12.20X6,
31.12.20X7. (6 marks)
b. If at 31.12.20X7, the entity break the regulation of the government and the
government require the entity repay the grant. What is the journal entry to record this
transaction. (4 marks)
Question 3:
Broom Co successfully receives a government grant of $2m on 1 January 20X5 allowing to
purchase an asset which costs $5,000,000 also at 1 January 20X5. The asset a five year
useful life and its depreciated on straight line basis. Company is to account for all grant
received as deferred income.
Required:
a. Prepare extract financial statement for year ended 31.12.20X6, 31.12.20X7,
31.12.20X8 (15 marks)
b. If at 31.12.20X8, the entity break the regulation of the government and the
government require the entity repay the grant. What is the journal entry to record this
transaction. (3 marks)
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CHAPTER 4: IAS 37 PROVISION
Objectives of IAS 37 Provision
1. Definition of provision, contingent asset, and contingent liability
2. Describe criteria for recognition of provision
3. Describe criteria for recognition of special case of provision related to warranty
provision and provision related to reconstruction
4. Describe criteria for recognition of contingent liabitiy
5. Describe criteria for recognition of contingent asset
6. Describe the differences between virtually, probable, possible, and remote

Question 1:
List criteria for recognize provision in accordance to IAS 37
Question 1:
List criteria for recording provision related to reorganization?

Question 1
Candel is being sued by a customer for $2 million for breach of contract over a cancelled
order. Candel has obtained legal opinion that there is a 20% chance that Candel will lose the
case. The unrecoverable legal costs of defending the action are estimated at $100,000.
These have not been provided for as the case will not go to court until next year.
Required:
Explain, with journals, the accounting treatment for the provision that should be made by
Candel in accordance with IAS 37 Provisions, contingent liabilities and contingent assets?
(6 marks)
Question 2
At 1.1.2010, Peterlee acquired an iron ore mine at a cost of $6 million. In addition, when all
the ore has been extracted (estimated ten years' time) the company will face estimated
costs for landscaping the area affected by the mining that have a present value of $2 million.
These costs would still have to be incurred even if no further ore was extracted. Cost of
capital 10%
Required:
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a. Explain, with journals, the accounting treatment for the transactions above for the
financial statement ended 31.12.2010 ? (10 mark)
b. Prepare extract financial statement for year ended 31.12.2010? (5 marks)
Question 3
Hopewell sells a line of goods under a six-month warranty. Any defect arising during that
period is repaired free of charge. Hopewell has calculated that if all the goods sold in the last
six months of the year required repairs the cost would be $2 million. If all of these goods
had more serious faults and had to be replaced the cost would be $6 million.
The normal pattern is that 80% of goods sold will be fault-free, 15% will require repairs and
5% will have to be replaced.
Required:
Explain, with journals, the accounting treatment for the provision required? (5 marks)
Question 4
Rainbird gives a one-year warranty with all products and the rate of returns under warranty
is 12%. 5% of the returned items can be repaired at a cost of $5 (free of charge to the
customer). The other 95% are scrapped and a full refund of $30 is given. Rainbird sold
525,000 units during the year to 31 December 20X1.
Rainbird's accountant is preparing the financial statements for the year to 31 December
20X1 and is not too sure about the provisions set up for the reorganisation of the facility and
the staff training.
Required:
Explain, with journals, the accounting treatment for the provision of product guarantee
required for the year ended 31.12.20X1? (8 marks)
Question 5:
In five years' time Rainbird will have to dismantle its factory and return the site to the local
authority. A provision was set up for the present value of the dismantling costs when the
factory was first acquired. The opening balance on the provision at 1 January 20X1 was
$2.63 million. Rainbird has a cost of capital of 8%.
Rainbird's accountant is preparing the financial statements for the year to 31 December
20X1
Required:
a. Explain, with journals, the accounting treatment for the provision of product
guarantee required for the year ended 31.12.20X1? (8 marks)
b. Prepare extract financial statement (statement of financial position) for the year
ended 31 December 20X1.(5 marks)
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CHAPTER 5: FINANCIAL INSTRUMENT
KEY TOPIC:
Financial asset:
1. Equity instrument held for sale
2. Equity instrument not held for sale
3. Debt instrument under amortized cost
Financial liability
1. Financial liability under amortized cost
KEY OBJECTIVES:
1. Describe the main differences between types of financial instrument: financial
asset (equity and debt instrument), financial liability and equity
2. Describe initial and subsequent recognition of equity instrument held for
trading (Fair value through profit or loss)
3. Describe initial and subsequent recognition of equity instrument not held for
trading (Fair value through other comprehensive income)
4. Describe initial and subsequent recognition of debt instrument with purpose of
collect contractual cash flow (amortized cost)
5. Describe initial and subsequent recognition of financial liability under
amortized cost

Explain how financial liability to be measured and accounted for (in the absence of any
election at initial recognition) in accordance with IFRS 09: Financial instrument?
List and explain 2 types of financial assets?
Explain how investments in debt instruments to be measured and accounted for (in the
absence of any election at initial recognition) in accordance with IFRS 09: Financial
instrument?
Explain how investments in equity instruments to be measured and accounted for (in the
absence of any election at initial recognition) in accordance with IFRS 09: Financial
instrument?
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A 5% loan note was issued on 1 April 20X0 at its face value of $20 million. Direct costs of the
issue were $500,000. The loan note will be redeemed on 31 March 20X3 at a substantial
premium. The effective interest rate applicable is 10% per annum.
Required: Advise how the above transactions should be correctly dealt with in its financial
statements as at 31 March 20X2 in respect of financial instrument above (prepare extract
financial statement for year end 31 March 20X2? (10 marks)
On 1 January 20X1 Penfold purchased a debt instrument for its fair value of $500,000. It had
a principal amount of $550,000 and was due to mature in five years. The debt instrument
carries fixed interest of 6% paid annually in arrears and has an effective interest rate of 8%.
It is held at amortised cost.
statements as at 31 December 20X2 in respect of financial instrument above? (12 marks)
Dexon's draft statement of financial position as at 31 March 20X8 shows financial assets at
fair value through profit or loss with a carrying amount of $12.5 million as at 1 April 20X7.
These financial assets are held in a fund whose value changes directly in proportion to a
specified market index. At 1 April 20X7 the relevant index was 1,200 and at 31 March 20X8 it
was 1,296.
statements as at 31 March 20X8 in respect of financial instrument above? (7 marks)
On 1 January 20X8 a company purchased 40,000 $1 listed equity shares at a price of $3 per
share. An irrevocable election was made to recognise the shares at fair value through other
comprehensive income. Transaction costs were $3,000. At the year end of 31 December
20X8 the shares were trading at $6 per share.
On 1 January 20X8 a company purchased 40,000 $1 listed equity shares at a price of $3 per
share. An irrevocable election was made to recognise the shares at fair value through profit
or loss. Transaction costs were $3,000. At the year end of 31 December 20X8 the shares
were trading at $6 per share.
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The 5% loan notes were issued for $9m on 1 July 20X8. Diaz Co incurred issue costs of $0·5m
associated with this, which have been expensed within finance costs. The loan note interest
is payable each 30 June and the loan note is repayable at a premium, giving them an
effective interest rate of 8%.
Required:
Advise how the above transactions should be correctly dealt with in its financial
On 1 May 20X8 a company purchased 40,000 $1 listed equity shares at a price of $3 per
share with purpose of selling in case share increased by 10%. Transaction costs were $0.2
per share purchased. At 1 December 20X8, share increased to $5 per share and the entity
sell 15,000 with transaction of $2,000. At the year end of 31 December 20X8 the shares
were trading at $2.8 per share.
Required: Advise how the above transactions should be correctly dealt with in its
financial statements as at 31 December 20X8 in respect of financial instrument above? (15
marks)
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CHAPTER 7: IAS 21 FOREIGN EXCHANGE RATE
KEY OBJECTIVES:
1. Describe the main differences between functional currency, presentation currency?
2. Describe how to determine functional currency?
3. Describe the main differences between monetary and non-monetary items
4. Describe how to record monetary items at initial and at year end
5. Describe how to record non-monetary items at initial and at year end

Question 1:
Define monetary items? List 3 types of monetary items?
Question 2:
What is functional currency, presentation currency?
Question 3:
How to determine function currency of an entity in accordance with IAS 21?
Question 4:
Describe the main differences between monetary and non-monetary items?
Question 5:
Describe how to record monetary items at initial and at year end?
Question 6:
Describe how to record non-monetary items at initial and at year end?

Question 1:
Seattle Co, whose year-end is 31 December, buys some goods from Telomere SA of France
on 30 September 20X1. The invoice value is €60,000 and is due for settlement in equal
instalments on 30 November and 31 January. The exchange rate moved as follows.
€= $1
30-Sep 1.6
30-Nov 1.8
31-Dec 1.9
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31-Jan 1.85
Required
a. Explain, with journals, the accounting treatment for the transaction above that should
be made in accordance with IAS 21. (16 marks)
b. Prepare extract financial statement as at 31 December 20X1 of the entity. (2 marks)
Question 2
Steeplechase sold a machine to a Greek company which it agreed to invoice in €. The sale
was made on 1 October 20X6 for €250,000. €125,000 was received on 1 November 20X6
and the balance is due on 1 January 20X7.
The exchange rate moved as follows:
1 October 20X6 – €0.91 to $1
1 November 20X6 – €0.95 to $1
31 December 20X6 – €0.85 to $1
Required:
a. Explain, with journals, the accounting treatment for the transaction above that
should be made in accordance with IAS 21. (13 marks)
b. Prepare extract financial statement as at 31 December 20X6? (2 marks)
Question 3
Steeplechase bought a machine to a Greek company which it agreed to invoice in €. The sale
was made on 1 October 20X6 for €350,000 and paid immediate by cash of €50,000 (which
has current exchanger rate of €0.95 to $1. €125,000 was paid on 1 November 20X6 and the
balance is due on 1 January 20X7.
1 October 20X6 – €0.95 to $1
1 November 20X6 – €0.91 to $1
31 December 20X6 – €0.85 to $1
Required: Explain with journal entry how to account transactions above for the year
ended 31.12.20X6 (15 marks)
Question 4
Miston buys goods priced at €50,000 from a Dutch company on 1 November 20X8. The
invoice is due for settlement in two equal instalments on 1 December 20X8 and 1 January
20X9.
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1 November 20X8 - 1.63 to $1
1 December 20X8 – 1.61 to $1
31 December 20X8 – 1.64 to $1
Required:
a. Explain, with journals, the accounting treatment for the transaction above that
should be made in accordance with IAS 21. (13 marks)
b. Prepare extract financial statement as at 31 December 20X8? (to nearest $)
Page 15 of 59
CHAPTER 8 IAS 12 TAXATION
KEY OBJECTIVES:
1. Explain meaning of current tax, under provision of taxation, over provision of
taxation, deferred tax, temporary difference, deductible temporary difference,
taxable temporary difference, tax based?
2. Describe how to determine tax expense on statement of profit or loss?
3. Describe how to determine deferred tax on statement of financial position?

Question 1: Explain meaning of current tax, under provision of taxation, over provision of
taxation, deferred tax, temporary difference, deductible temporary difference, taxable
temporary difference, tax based?
Question 2: Describe how to determine tax expense on statement of profit or loss?
Question 3: Describe how to determine deferred tax on statement of financial position?

Question 1: Recognition of current tax liabilities and assets
In 20X8 Darton Co had taxable profits of $120,000. In the previous year (20X7) income tax
on 20X7 profits had been estimated as $30,000. The corporate income tax rate is 30%.
Required
Explain, with journals, the accounting treatment for tax payable and the charge for 20X8 if
the tax due on 20X7 profits was subsequently agreed with the tax authorities as:
(a) $35,000; or (6 marks)
(b) $25,000. (6 marks)
Prepare extract financial statement for 2 situation above (4 marks for each case)
Question 2:
In 20X7 Eramu Co paid $50,000 in tax on its profits. In 20X8 the company made tax losses of
$24,000. The local tax authority rules allow losses to be carried back to offset against
current tax of prior years. The tax rate is 30%.
Required: Explain, with journals, the accounting treatment for tax charge and tax liability
for 20X8. (5 marks)
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Question 3:
Jonquil Co buys equipment for $50,000 on 1 January 20X1 and depreciates it on a straight-
line basis over its expected useful life of five years. It has no other non-current assets.
For tax purposes, the equipment is depreciated at 25% per annum on a straight-line basis.
Accounting profit before tax for the years 20X1 to 20X5 is $20,000 per annum.
The tax rate is 40%.
Required: Show the calculations of current and deferred tax for the years 20X1 to 20X5.
(10 marks)
Question 4:
A company's trial balance shows a debit balance of $2.1 million brought forward on current
tax and a credit balance of $5.4 million on deferred tax. The tax charge for the current year
is estimated at $16.2 million and the carrying amounts of net assets are $13 million in
excess of their tax base. The income tax rate is 30%
Required:
a. Explain, with journals, the accounting treatment for income tax in the statement of
profit or loss for the year (show working)? (10 marks)
b. Prepare extract financial statement of the entity for the year related to the
transactions above (3 marks)
Question 5:
A company's trial balance at 31 December 20X3 shows a debit balance of $700,000 on
current tax and a credit balance of $8,400,000 on deferred tax. The directors have estimated
the provision for income tax for the year at $4.5 million and the required deferred tax
provision is $5.6 million.
Required:
a. Explain, with journals, the accounting treatment for income tax in the statement of
profit or loss for the year ended 31 December 20X3 (show working)?
b. Prepare extract financial statement of the entity for the year ended 31 December 20X3.
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CHAPTER 9: IFRS 16 LEASE
KEY OBJECTIVES:
1. Defined lease
2. Describe when exceptional recognition of lease
3. Describe how to recognize lease in simple recognition
4. Describe how to account lease including: right of use, lease liability, depreciation of
right of use and amortized of lease liability

Question 1: Describe when exceptional recognition of lease?
Question 2: Describe how to recognize lease in simple recognition
Question 3: Describe how to account lease including: right of use, lease liability,
depreciation of right of use and amortized of lease liability

Question 1:
A lessee enters into a five-year lease of a building which has a remaining useful life of ten
years. Lease payments are $50,000 per annum, payable at the beginning of each year.
The lessee incurs initial direct costs of $20,000 and receives lease incentives of $5,000.
There is no transfer of the asset at the end of the lease and no purchase option.
The interest rate implicit in the lease is not immediately determinable but the lessee’s
incremental borrowing rate is 5%.
At the commencement date the lessee pays the initial $50,000, incurs the direct costs and
receives the lease incentives.
Required:
a. Explain, with journals, the accounting treatment for the lease that should be made in
accordance with IFRS 16 for first year? (15 marks)
b. Prepare extract financial statement of the lease for first year of lease. (5 marks)
Question 2:
A lessee enters into a five-year lease of a building which has a remaining useful life of ten
years. Lease payments are $50,000 per annum, payable at the END of each year.
The lessee incurs initial direct costs of $20,000 and receives lease incentives of $5,000.
There is no transfer of the asset at the end of the lease and no purchase option.
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The interest rate implicit in the lease is not immediately determinable but the lessee’s
incremental borrowing rate is 5%.
At the commencement date the lessee pays the initial $50,000, incurs the direct costs and
receives the lease incentives.
Required:
c. Explain, with journals, the accounting treatment for the lease that should be made in
accordance with IFRS 16 for first year? (15 marks)
d. Prepare extract financial statement of the lease for first year of lease. (5 marks)
Question 3:
On 1 January 20X6 Fellini hired a machine under a lease. The present value of the lease
payments was $3.3 million. Installments of $700,000 are payable annually in advance with
the first payment made on 1 January 20X6. The interest rate implicit in the lease is 6%.
Required:
Explain, with journals, the accounting treatment of the lease in financial statements as at
31 December 20X6? (15 marks)
Question 4
A company acquired an item of plant under a lease on 1 April 20X7. The present value of the
lease payments was $15.6 million and the rentals are $6 million per annum paid in arrears
for three years on 31 March each year.
The interest rate implicit in the lease is 8% per annum.
Required:
31 March 20X8? (15 marks)
Question 6
On 1 October 20X3, Fresco acquired an item of plant under a five-year lease agreement.
The initial measurement of the liability was $25 million. The agreement had an implicit
finance cost of 10% per annum and required an immediate deposit of $2 million and annual
rentals of $6 million paid on 30 September each year for five years.
Required: Explain, with journals, the accounting treatment of the lease in financial
statements as at 30 September 20X5?
Question 7:
During the year ended 30 September 20X4 Hyper entered into two lease transactions:
On 1 October 20X3 a payment of $90,000, being the first of five equal annual payments of a
lease for an item of plant which has a five-year useful life. The lease has an implicit interest
Page 19 of 59
rate of 10% and the initial measurement of the right-of-use asset and the lease liability on 1
October 20X3 was $340,000.
On 1 August 20X4 a payment of $18,000 for a nine-month lease of an item of excavation
equipment.
statements as at 30 September 20X4?
Question 8:
On 1 January 20X6 Platinum entered into a lease agreement. The initial lease liability was
$360,000 and the terms of the lease were a initial payment of $120,000 payable on 1
January 20X6 and three further instalments of $100,000 payable on 31 December 20X6, 31
December 20X7 and 31 December 20X8. The rate of interest implicit in the lease is 12%.
Required:
31 December 20X6? (15 marks)
Question 9:
On 1 April 20X7, Fino increased the operating capacity of its plant. On the recommendation
of the finance director, Fino entered into an agreement to lease the plant from the
manufacturer. The initial measurement of the lease liability is $350,000. The lease required
four annual payments in advance of $100,000 each commencing on 1 April 20X7. The rate of
interest implicit in the lease is 10%. The lease does not transfer ownership of the plant to
Fino by the end of the lease term and there is no purchase option available.
statements as at 31/3/20X8? (15 marks)
Page 20 of 59
CHAPTER 10 IAS 08 CHANGE IN ACCOUNTING POLICY, ESTIMATE & ERROR
KEY OBJECTIVES:
1. Define accounting policy and give example of accounting policy
2. How to account for accounting policy
3. Define estimate and give example of accounting policy
4. How to account for accounting estimate
5. Define error and give example of error
6. How to account for error in current period and prior period

Question 1: List 3 accounting policy and 3 accounting estimate related to standards
Question 2: Define accounting policy and give example of accounting policy
Question 3: How to account for accounting policy
Question 4: Define estimate and give example of accounting policy
Question 5: How to account for accounting estimate
Question 6: Define error and give example of error
Question 7: How to account for error in current period and prior period

Question 1:
Which one of the following would be treated under IAS 8 Accounting policies, changes in
accounting estimates and errors as a change of accounting policy?
1. A change in valuation of inventory from a weighted average to a FIFO basis
2. A change of depreciation method from straight line to reducing balance
3. Adoption of the revaluation model for non-current assets previously held at cost
4. Capitalisation of borrowing costs which have arisen for the first time
5. Adjusting the financial statements of a subsidiary prior to consolidation as its accounting
policies differ from those of its parent
6. A change in reporting depreciation charges as cost of sales rather than as administrative
expenses
7. Depreciation charged on reducing balance method rather than straight line
8. Reducing the value of inventory from cost to net realisable value due to a valid adjusting
event after the reporting period
9. Classifying commission earned as revenue in the statement of profit or loss, having
previously classified it as other operating income
10. Switching to purchasing plant using leases from a previous policy of purchasing plant for
cash
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11. Changing the value of a subsidiary's inventory in line with the group policy for inventory
valuation when preparing the consolidated financial statements
12. Revising the remaining useful life of a depreciable asset
Question 2:
In March 20X2, Fresco's internal audit department discovered a fraud committed by the
company's credit controller who did not return from a foreign business trip. The outcome of
the fraud is that $4 million of the company's trade receivables have been stolen by the
credit controller and are not recoverable. Of this amount, $1 million relates to the year
ended 31 March 20X1 and the remainder to the current year. Current year end is 31 March
20X2.
Required: Explain, with journals, the accounting treatment of errors in financial
statements as at 31 March 20X2 (10 marks)
Question 3:
In late March 20X8 the directors of Dexon discovered a material fraud perpetrated by the company's
credit controller that had been continuing for some time. Investigations revealed that a total of $4
million of the trade receivables as shown in the statement of financial position at 31 March 20X8 had
in fact been paid and the money had been stolen by the credit controller. An analysis revealed that
$1.5 million had been stolen in the year to 31 March 20X7 with the rest being stolen in the current
year
Required: Explain, with journals, the accounting treatment of errors in financial

statements as at 31 March 20X8 (10 marks)
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CHAPTER 11 IAS 28 INVESTMENT IN ASSOCIATE
KEY OBJECTIVES:
1. Define associate, equity accounting, significant influence
2. Describe how to account investment in associate in separate financial statement
3. Describe how to account investment in associate in consolidated financial statement
4. Describe how to account intra group sale of inventory between parent and associate
in consolidated financial statement

Question 1
How should an associate be accounted for in the consolidated financial statement?
Question 2
How should an associate be accounted for in the separate financial statement?
Question 3:
Explain equity accounting method?
Question 4:
Explain significant influence? Give 3 examples of significant influence?
Question 5:
Explain how to account investment in associate in consolidated financial statement
Question 6:
Explain how to account intra group sale of inventory between parent and associate in
consolidated financial statement

Question 1
On 1 October 20X8 Pacemaker acquired 30 million of Vardine's 100 million shares in
exchange for 75 million of its own shares. The stock market value of Pacemaker's shares at
the date of this share exchange was $1.60 each.
Vardine's profit is subject to seasonal variation. Its profit for the year ended 31 March 20X9
was $100 million. $20 million of this profit was made from 1 April 20X8 to 30 September
20X8. Pacemaker has one subsidiary and no other investments apart from Vardine.
Required:
a. Prepare extract separate financial statement of Pacemaker as at 31 March 20X9
(assume that the entity use cost method for recording investment in associate)?
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b. Prepare extract consolidated financial statement of Pacemaker as at 31 March 20X9.
Question 2:
Jarvis owns 30% of McLintock. During the year to 31 December 20X4 McLintock sold $2
million of goods to Jarvis, of which 40% were still held in inventory by Jarvis at the year end.
McLintock applies a mark-up of 25% on all goods sold.
Required:
a. Explain the effect of the above transactions have on consolidated financial statement
at 31 December 20X4?
b. Provide journal entry to record that transaction on consolidated financial statement?
Question 3:
Ulysses owns 25% of Grant, which it purchased on 1 May 20X8 for $5 million. At that date
Grant had retained earnings of $7.4 million. At the year end date of 31 October 20X8 Grant
had retained earnings of $8.5 million after paying out a dividend of $1 million. On 30
September 20X8 Ulysses sold $600,000 of goods to Grant, on which it made 30% profit.
Grant had resold none of these goods by 31 October.
Required: Show working to determine below item
At what amount will Ulysses record its investment in Grant in its consolidated statement
of financial position at 31 October 20X8?
Question 4:
On 1 February 20X3 Pinot acquired 30% of the equity shares of Noir, its only associate, for
$10 million in cash. The post-tax profit of Noir for the year to 30 September 20X3 was $6
million. Profits accrued evenly throughout the year. Noir made a dividend payment of $1
million on 1 September 20X1. At 30 September 20X3 Pinot decided that an impairment loss
of $700,000 should be recognised on its investment in Noir.
Required:
a. What amount will be shown as 'investment in associate' in the separate statement of
financial position of Pinot as at 30 September 20X3 (show working)?
b. What amount will be shown as 'investment in associate' in the consolidated statement
of financial position of Pinot as at 30 September 20X3 (show working)?
c. What amount will be shown as “share profit of associate” in consolidated statement of
comprehensive income of Pinot as at 30 September 20X3
Question 5
An associate is an entity in which an investor has significant influence over the investee.
Which TWO of the following indicate the presence of significant influence? Explain
reasons
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a) The investor owns 330,000 of the 1,500,000 equity voting shares of the investee.
b) The investor has representation on the board of directors of the investee.
c) The investor is able to insist that all of the sales of the investee are made to a subsidiary
of the investor.
d) The investor controls the votes of a majority of the board members.
Question 6
Ruby owns 30% of Emerald and exercises significant influence over it. Emerald sold goods to
Ruby for $160,000. Emerald applies a one third mark up on cost. Ruby still had 25% of these
goods in inventory at the year end.
Required: What amount should be deducted from consolidated retained earnings in
respect of this transaction (show working) ?
Page 25 of 59
CHAPTER 12 CONSOLIDATED FINANCIAL STATEMENT
KEY OBJECTIVES:
1. Define subsidiary, control, intra group transaction, goodwill, non-controlling interest
2. Describe how to account investment in subsidiary in separate financial statement
3. Describe how to determine goodwill
4. Describe how to account in intra group trading of inventory consolidated statement
of financial position
5. Describe how to account common items (receivable and payable) in consolidated
statement of financial position
6. Describe how to account in goodwill impairment in consolidated statement of profit
or loss
7. Describe how to account of intra group trading in consolidated statement of profit or
loss
8. How to determine profit attribute to non-controlling interest in consolidated statement of
profit or loss and consolidated statement of financial position

1. Define subsidiary
2. Define control in accordance to IFRS 03
3. Give 2 example of intra group transaction
4. Explain meaning of goodwill and non-controlling interest
5. Describe how to account investment in subsidiary in separate financial statement
6. Describe how to determine goodwill in consolidated financial statement
7. Describe how to account in intra group trading of inventory consolidated statement of
financial position
8. Describe how to account common items (receivable and payable) in consolidated
statement of financial position
9. Describe how to account in goodwill impairment in consolidated statement of profit or
loss
10. Describe how to account of intra group trading in consolidated statement of profit or
loss

Question 1.1
Laurel acquired 80% of the ordinary share capital of Hardy for $160m and 40% of the
ordinary share capital of Comic for $70m on 1 January 20X7 when the retained earnings
balances were $64m in Hardy and $24m in Comic. Laurel, Comic and Hardy are public
limited companies.
Page 26 of 59
The statements of financial position of the three companies at 31 December 20X9 are set
out below:
You are also given the following information:

1 On 30 November 20X9 Laurel sold some goods to Hardy for cash for $32m. These goods
had originally cost $22m and none had been sold by the year end. On the same date Laurel
also sold goods to Comic for cash for $22m. These goods originally cost $10m and Comic
had sold half by the year end.
2 On 1 January 20X7 Hardy owned some items of equipment with a book value of $45m
that had a fair value of $57m. These assets were originally purchased by Hardy on 1 January
20X5 and are being depreciated over six years.
3 Group policy is to measure non-controlling interests at acquisition at fair value. The fair
value of the non-controlling interests in Hardy on 1 January 20X7 was calculated as $39m.
4 Cumulative impairment losses on recognised goodwill amounted to $15m at 31
December 20X9. No impairment losses have been necessary to date relating to the
investment in the associate.
Required: Prepare a consolidated statement of financial position for Laurel and its
subsidiary as at 31 December 20X9, incorporating its associate in accordance with IAS 28.
(20 marks)
Page 27 of 59
Example 2
Below are the statements of profit or loss and other comprehensive income of Tyson, its
subsidiary Douglas and associate Frank at 31 December 20X8. Tyson, Douglas and Frank are
public limited companies.
You are also given the following information:

1 Tyson acquired 80m shares in Douglas for $188m three years ago when Douglas had a
credit balance on its reserves of $40m. Douglas has 100m $1 ordinary shares.
2 Tyson acquired 40m shares in Frank for $60m two years ago when that company had a
credit balance on its reserves of $20m. Frank has 100m $1 ordinary shares.
3 During the year Douglas sold some goods to Tyson for $66m (cost $48m). None of the
goods had been sold by the year end.
4 Group policy is to measure non-controlling interests at acquisition at fair value. The fair
value of the non-controlling interests in Douglas at acquisition was $40m. An impairment
test carried out at the year end resulted in $15m of the recognised goodwill relating to
Douglas being written off and recognition of impairment losses of $2.4m relating to the
investment in Frank.
Required: Prepare the consolidated statement of profit or loss and other comprehensive
income for the year ended 31 December 20X8 for Tyson, incorporating its associate. (20
marks)
Page 28 of 59
Question 1.2
On 1 January 20X2, Viagem acquired 90% of the equity share capital of Greca in a share
exchange in which Viagem issued two new shares for every three shares it acquired in Greca.
Additionally, on 31 December 20X2, Viagem will pay the shareholders of Greca $1.76 per
share acquired. Viagem's cost of capital is 10% per annum.
At the date of acquisition, shares in Viagem and Greca had a stock market value of $6.50
and $2.50 each respectively.
The following information is relevant:

(i) At the date of acquisition the fair values of Greca's assets were equal to their carrying
amounts with the exception of two items:
1. An item of plant had a fair value of $1.8 million above its carrying amount. The
remaining life of the plant at the date of acquisition was three years. Depreciation is
charged to cost of sales.
2. Greca had a contingent liability which Viagem estimated to have a fair value of $450,000.
This has not changed as at 30 September 20X2.
Greca has not incorporated these fair value changes into its financial statements.
(ii) Viagem's policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, Greca's share price at that date can be deemed to be
representative of the fair value of the shares held by the non-controlling interest.
(iii) Sales from Viagem to Greca throughout the year ended 30 September 20X2 had
consistently been $800,000 per month. Viagem made a mark-up on cost of 25% on these
sales. Greca had $1.5 million of these goods in inventory as at 30 September 20X2.
Page 29 of 59
(iv) Viagem's investment income is a dividend received from its investment in a 40% owned
associate which it has held for several years. The underlying earnings for the associate for
the year ended 30 September 20X2 were $2 million.
(v) Although Greca has been profitable since its acquisition by Viagem, the market for
Greca's products has been badly hit in recent months and Viagem has calculated that the
goodwill has been impaired by $2 million as at 30 September 20X2.
Required
(a) Calculate the goodwill arising on the acquisition of Greca (6 marks)
(b) Prepare the consolidated statement of profit or loss for Viagem for the year ended 30
September 20X2. (14 marks)
Page 30 of 59
Question 2
On 1 October 20X0 Prodigal purchased 75% of the equity shares in Sentinel. The acquisition
was through a share exchange of two shares in Prodigal for every three shares in Sentinel.
The stock market price of Prodigal's shares at 1 October 20X0 was $4 per share. The
summarised statements of profit or loss and other comprehensive income for the two
companies for the year ended 31 March 20X1 are:
Prodigal Sentinel
$'000 $'000
Revenue 450,000 240,000
Cost of sales (260,000) (110,000)
Gross profit 190,000 130,000
Distribution costs (23,600) (12,000)
Administrative expenses (27,000) (23,000)
Finance costs (1,500) (1,200)
Profit before tax 137,900 93,800
Income tax expense (48,000) (27,800)
Profit for the year 89,900 66,000
Other comprehensive income
Gain on revaluation of land (note(i)) 2,500 1,000
Loss on fair value of investment in equity instrument (700) (400)
1,800 600
Total comprehensive income for the year 91,700 66,600
The equity of Sentinel at 1 April 20X0 was:
$'000
Equity shares of $1 each 160,000
Other equity reserve (re investment in equity instrument) 2,200
Retained earnings 125,000

(i) Prodigal's policy is to revalue the group's land to market value at the end of each
accounting period. Prior to its acquisition, Sentinel's land had been valued at historical cost.
During the post-acquisition period Sentinel's land had increased in value over its value at the
Page 31 of 59
date of acquisition by $1 million. Sentinel has recognised the revaluation within its own
financial statements.
(ii) Immediately after the acquisition of Sentinel on 1 October 20X0, Prodigal transferred an
item of plant with a carrying amount of $4 million to Sentinel at an agreed value of $5
million. At this date the plant had a remaining life of two and half years. Prodigal had
included the profit on this transfer as a reduction in its depreciation costs. All depreciation is
charged to cost of sales.
(iii) After the acquisition Sentinel sold goods to Prodigal for $40 million. These goods had
cost Sentinel $30 million. $12 million of the goods sold remained in Prodigal's closing
inventory.
(iv) Prodigal's policy is to value the non-controlling interest of Sentinel at the date of
acquisition at its fair value which the directors determined to be $100 million.
(v) The goodwill of Sentinel has not suffered any impairment.
(vi) All items in the above statements of profit or loss and other comprehensive income are
deemed to accrue evenly over the year unless otherwise indicated.
Required
(a) Calculate the goodwill on acquisition of Sentinel. (4 marks)
(b) Prepare the consolidated statement of profit or loss and other comprehensive income
of Prodigal for the year ended 31 March 20X1. (16 marks)
Page 32 of 59
Question 3
On 1 January 20X4, Plastik acquired 80% of the equity share capital of Subtrak. The
consideration was satisfied by a share exchange of two shares in Plastik for every three
acquired shares in Subtrak. At the date of acquisition, shares in Plastik and Subtrak had a
market value of $3 and $2.50 each respectively. Plastik will also pay cash consideration of
27.5 cents on 1 January 20X5 for each acquired share in Subtrak. Plastik has a cost of capital
of 10% per annum. None of the consideration has been recorded by Plastik.
Below are the summarised draft financial statements of both companies.
Page 33 of 59
(i) At the date of acquisition, the fair values of Subtrak's assets and liabilities were equal to
their carrying amounts with the exception of Subtrak's property which had a fair value of $4
million above its carrying amount. For consolidation purposes, this led to an increase in
depreciation charges (in cost of sales) of $100,000 in the post-acquisition period to 30
September 20X4. Subtrak has not incorporated the fair value property increase into its
entity financial statements.
The policy of the Plastik group is to revalue all properties to fair value at each year end. On
30 September 20X4, the increase in Plastik's property has already been recorded, however,
a further increase of $600,000 in the value of Subtrak's property since its value at
acquisition and 30 September 20X4 has not been recorded.
(ii) Sales from Plastik to Subtrak throughout the year ended 30 September 20X4 had
consistently been $300,000 per month. Plastik made a mark-up on cost of 25% on all these
sales. $600,000 (at cost to Subtrak) of Subtrak's inventory at 30 September 20X4 had been
supplied by Plastik in the post-acquisition period.
(iii) Plastik's policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Subtrak's share price at that date can be deemed to be
(iv) Due to recent adverse publicity concerning one of Subtrak's major product lines, the
goodwill which arose on the acquisition of Subtrak has been impaired by $500,000 as at 30
September 20X4. Goodwill impairment should be treated as an administrative expense.
(v) Assume, except where indicated otherwise, that all items of income and expenditure
accrue evenly throughout the year.
Required
(a) Calculate the goodwill arising on the acquisition of Subtrak on 1 January 20X4. (4
marks)
(b) Calculate the following amounts for presentation in the consolidated statement of
financial position:
(i) Group retained earnings
(ii) Non-controlling interest (6 marks)
(c) Prepare the consolidated statement of profit or loss and other comprehensive income
for Plastik for the year ended 30 September 20X4. (10 marks)
Page 34 of 59
Question 4
On 1 October 20X0, Paladin secured a majority equity shareholding in Saracen on the
following terms. An immediate payment of $4 per share on 1 October 20X0; and a further
amount deferred until 1 October 20X1 of $5.4 million.
The immediate payment has been recorded in Paladin's financial statements, but the
deferred payment has not been recorded. Paladin's cost of capital is 8% per annum, giving
the deferred payment a current cost at 1 October 20X0 of $5 million.
On 1 February 20X1, Paladin also acquired 25% of the equity shares of Augusta paying $10
million in cash.
The summarised statements of financial position of the three companies at 30 September
20X1 are:

(i) Paladin's policy is to value the non-controlling interest at fair value at the date of
acquisition. The directors of Paladin considered the fair value of the non-controlling interest
in Saracen to be $7 million.
(ii) At the date of acquisition, the fair values of Saracen's property, plant and equipment
was equal to its carrying amount with the exception of Saracen's plant which had a fair
Page 35 of 59
value of $4 million above its carrying amount. At that date the plant had a remaining life of
four years. Saracen uses straight-line depreciation for plant assuming a nil residual value.
Also at the date of acquisition, Paladin valued Saracen's customer relationships as a
customer base intangible asset at fair value of $3 million. Saracen has not accounted for this
asset. Trading relationships with Saracen's customers last on average for six years.
(iii) At 30 September 20X1, Saracen's inventory included goods bought from Paladin (at cost
to Saracen) of $2.6 million. Paladin had marked up these goods by 30% on cost. Paladin's
agreed current account balance owed by Saracen at 30 September 20X1 was $1.3 million.
(iv) Impairment tests were carried out on 30 September 20X1 which concluded that
consolidated goodwill was not impaired, but, due to disappointing earnings, the value of the
investment in Augusta was impaired by $2.5 million.
(v) Assume all profits accrue evenly through the year.
Required: Prepare the consolidated statement of financial position for Paladin as at 30
September 20X1. (20 marks)
Page 36 of 59
Question 5:
The following are the draft statements of financial position of Party Co and Streamer Co as
at 30 September 20X5:
Party Co Streamer Co
$’000 $’000
ASSETS
Non-current assets
Property, plant and equipment 392,000 84,000
Investments 120,000 Nil
Current assets 94,700 44,650
Total assets 606,700 128,650
EQUITY AND LIABILITIES
Equity
Equity shares 190,000 60,000
Retained earnings 210,000 36,500
Revaluation surplus 41,400 4,000
Non-current liabilities
Deferred consideration 441,400 100,500
Current liabilities 28,000 Nil
Total equity and liabilities 606,700 128,650

(i) On 1 October 20X4, Party Co acquired 80% of the share capital of Streamer Co. At this
date the retained earnings of Streamer Co were $34m and the revaluation surplus stood at
$4m. Party Co paid an initial cash amount of $92m and agreed to pay the owners of
Streamer Co a further $28m on 1 October 20X6. The accountant has recorded the full
amounts of both elements of the consideration in investments. Party Co has a cost of capital
of 8%. The appropriate discount rate is 0·857.
(ii) On 1 October 20X4, the fair values of Streamer Co’s net assets were equal to their
carrying amounts with the exception of some inventory which had cost $3m but had a fair
value of $3·6m. On 30 September 20X5, 10% of these goods remained in the inventories of
Streamer Co.
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(iii) During the year, Party Co sold goods totalling $8m to Streamer Co at a gross profit
margin of 25%. At 30 September 20X5, Streamer Co still held $1m of these goods in
inventory. Party Co’s normal margin (to third party customers) is 45%.
(iv) The Party group uses the fair value method to value the non-controlling interest. At
acquisition the non-controlling interest was valued at $15m.
Required: Prepare consolidate statement of financial position
Page 38 of 59
Question 7
On 1 January 20X6, Dargent Co acquired 75% of Latree Co’s equity shares by means of a
share exchange of two shares in Dargent Co for every three Latree Co shares acquired. On
that date, further consideration was also issued to the shareholders of Latree Co in the form
of a $100 8% loan note for every 100 shares acquired in Latree Co.
None of the purchase consideration, nor the outstanding interest on the loan notes at 31
March 20X6, has yet been recorded by Dargent Co. At the date of acquisition, the share
price of Dargent Co and Latree Co is $3·20 and $1·80 respectively.
The summarised statements of financial position of the two companies as at 31 March 20X6
are:
Dargent Co Latree Co
$’000 $’000
Assets
Non-current assets
Property, plant and equipment (note (i)) 75,200 31,500
Investment in Amery Co at 1 April 20X5 (note (iv)) 4,500 –
Current assets
Inventory (note (iii)) 19,400 18,800
Trade receivables (note (iii)) 14,700 12,500
Bank 1,200 600
Total assets 115,000 63,400
Equity and liabilities
Equity
Equity shares of $1 each 50,000 20,000
Retained earnings – at 1 April 20X5 20,000 19,000
– for year ended 31 March 20X6 16,000 8,000
8% loan notes 5,000 nil
Current liabilities (note (iii)) 24,000 16,400
Page 39 of 59
(i) At the date of acquisition, the fair values of Latree Co’s assets were equal to their carrying
amounts. However, Latree Co operates a mine which requires to be decommissioned in five
years’ time. No provision has been made for these decommissioning costs by Latree Co. The
present value (discounted at 8%) of the decommissioning is estimated at $4m and will be
paid five years from the date of acquisition (the end of the mine’s life).
(ii) Dargent Co’s policy is to value the non-controlling interest at fair value at the date of
acquisition. Latree Co’s share price at that date can be deemed to be representative of the
fair value of the shares held by the non-controlling interest.
(iii) The inventory of Latree Co includes goods bought from Dargent Co for $2·1m. Dargent
Co applies a consistent mark-up on cost of 40% when arriving at its selling prices.
On 28 March 20X6, Dargent Co despatched goods to Latree Co with a selling price of
$700,000. These were not received by Latree Co until after the year end and so have not
been included in the above inventory at 31 March 20X6.
At 31 March 20X6, Dargent Co’s records showed a receivable due from Latree Co of $3m,
this differed to the equivalent payable in Latree Co’s records due to the goods in transit.
The intra-group reconciliation should be achieved by assuming that Latree Co had received
the goods in transit before the year end.
(iv) The investment in Amery Co represents 30% of its voting share capital and Dargent Co
uses equity accounting to account for this investment. Amery Co’s profit for the year ended
31 March 20X6 was $6m and Amery Co paid total dividends during the year ended 31 March
20X6 of $2m. Dargent Co has recorded its share of the dividend received from Amery Co in
investment income (and cash).
(v) All profits and losses accrued evenly throughout the year.
(vi) There were no impairment losses within the group for the year ended 31 March 20X6.
Required: Prepare the consolidated statement of financial position for Dargent Co as at 31
March 20X6. (20 marks)
Page 40 of 59
Question 8
On 1 October 2015, Zanda Co acquired 60% of Medda Co’s equity shares by means of a
share exchange of one new share in Zanda Co for every two acquired shares in Medda Co. In
addition, Zanda Co will pay a further $0·54 per acquired share on 30 September 2016.
Zanda Co has not recorded any of the purchase consideration and its cost of capital is 8%
per annum. The market value of Zanda Co’s shares at 1 October 2015 was $3·00 each.
The summarised statements of financial position of the two companies as at 31 March 2016
are:
Zanda Co Medda Co
$’000 $’000
Assets
Non-current assets
Property, plant and equipment (note (i)) 25,400 13,500
Financial asset: equity investments (note (iv)) 5,500 2,000
Current assets
Inventory (note (iii)) 12,700 5,300
Other current assets 9,700 4,000
Equity
Retained earnings:
Brought forward at 1 April 2015 12,200 8,600
Profit/(loss) for the year ended 31 March 2016 5,000 (3,000)
Deferred tax (note (i)) 5,000 nil
Current liabilities 11,100 10,200
Page 41 of 59
(i) At the date of acquisition, Zanda Co conducted a fair value exercise on Medda Co’s net
assets which were equal to their carrying amounts (including Medda Co’s financial asset
equity investments) with the exception of an item of plant which had a fair value of $2·5
million below its carrying amount. The plant had a remaining useful life of 30 months at 1
October 2015.
The directors of Zanda Co are of the opinion that an unrecorded deferred tax asset of $1·2
million at 1 October 2015, relating to Medda Co’s losses, can be relieved in the near future
as a result of the acquisition. At 31 March 2016, the directors’ opinion has not changed, nor
has the value of the deferred tax asset.
(ii) Zanda Co’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, a share price for Medda Co of $1·50 each is representative of
the fair value of the shares held by the non-controlling interest.
(iii) At 31 March 2016, Medda Co held goods in inventory which had been supplied by Zanda
Co at a mark-up on cost of 35%. These goods had cost Medda Co $2·43 million.
(iv) The financial asset equity investments of Zanda Co and Medda Co are carried at their fair
values at 1 April 2015. At 31 March 2016, these had fair values of $6·1 million and $1·8
million respectively, with the change in Medda Co’s investments all occurring since the
acquisition on 1 October 2015.
(v) There is no impairment to goodwill at 31 March 2016.
Required: Prepare consolidated statement of financial position as at 31 March 2016
Page 42 of 59
Question 9
On 1 January 2015, Palistar acquired 75% of Stretcher’s equity shares by means of
an immediate share exchange of two shares in Palistar for five shares in Stretcher. The fair
value of Palistar and Stretcher’s shares on 1 January 2015 were $4·00 and $3·00 respectively.
In addition to the share exchange, Palistar will make a cash payment of $1·32 per acquired
share, deferred until 1 January 2016. Palistar has not recorded any of the
consideration for Stretcher in its financial statements. Palistar’s cost of capital is 10% per
annum.
The summarised statements of financial position of the two companies as at 30 June 2015
are:
Palistar Stretcher
$’000 $’000
Assets
Non-current assets
Property, plant and equipment 55,000 28,600
Financial asset equity investments 11,500 6,000
Current assets
Inventory 17,000 15,400
Trade receivables 14,300 10,500
Bank 2,200 1,600
Equity

Other component of equity 4,000 nil
Retained earnings – at 1 July 2014 26,200 14,000
– for year ended 30 June 2015 24,000 10,000
Current liabilities 25,800 18,100
Page 43 of 59
(i) Stretcher’s business is seasonal and 60% of its annual profit is made in the period 1
January to 30 June each year.
(ii) At the date of acquisition, the fair value of Stretcher’s net assets was equal to their
carrying amounts with the following exceptions:
An item of plant had a fair value of $2 million below its carrying value. At the date of
acquisition it had a remaining life of two years.
The fair value of Stretcher’s investments was $7 million (see also note (v)).
Stretcher owned the rights to a popular mobile (cell) phone game. At the date of acquisition,
a specialist valuer estimated that the rights were worth $12 million and had an estimated
remaining life of five years.
(iii) Following an impairment review, consolidated goodwill is to be written down by $3
million as at 30 June 2015.
(iv) Palistar sells goods to Stretcher at cost plus 30%. Stretcher had $1·8 million of goods in
its inventory at 30 June 2015 which had been supplied by Palistar. In addition, on 28 June
2015, Palistar processed the sale of $800,000 of goods to Stretcher, which Stretcher did not
account for until their receipt on 2 July 2015. The in-transit reconciliation should be
achieved by assuming the transaction had been recorded in the books of Stretcher before
the year end. At 30 June 2015, Palistar had a trade receivable balance of $2·4 million due
from Stretcher which differed to the equivalent balance in Stretcher’s books due to the sale
made on 28 June 2015.
(v) At 30 June 2015, the fair values of the financial asset equity investments of Palistar and
Stretcher were $13·2 million and $7·9 million respectively.
(vi) Palistar’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Stretcher’s share price at that date is representative of the fair
value of the shares held by the non-controlling interest.
Required: Prepare the consolidated statement of financial position for Palistar as at 30
June 2015. (25 marks)
Page 44 of 59
Question 10
1 On 1 July 2014 Bycomb acquired 80% of Cyclip’s equity shares on the following terms:
– a share exchange of two shares in Bycomb for every three shares acquired in Cyclip; and
– a cash payment due on 30 June 2015 of $1·54 per share acquired (Bycomb’s cost
of capital is 10% per annum).
At the date of acquisition, shares in Bycomb and Cyclip had a stock market value of
$3·00 and $2·50 each respectively.
Statements of profit or loss for the year ended 31 March 2015:
The following information is also relevant:

(i) At the date of acquisition, the fair values of Cyclip’s assets were equal to their
carrying amounts with the exception of an item of plant which had a fair value of $720,000
above its carrying amount. The remaining life of the plant at the date of acquisition was 18
months. Depreciation is charged to cost of sales.
(ii) On 1 April 2014, Cyclip commenced the construction of a new production facility,
financing this by a bank loan. Cyclip has followed the local GAAP in the country where it
operates which prohibits the capitalisation of interest. Bycomb has calculated that, in
accordance with IAS 23 Borrowing Costs, interest of $100,000 (which accrued evenly
throughout the year) would have been capitalised at 31 March 2015. The production facility
is still under construction as at 31 March 2015.
(iii) Sales from Bycomb to Cyclip in the post-acquisition period were $3 million at a mark-up
on cost of 20%. Cyclip had $420,000 of these goods in inventory as at 31 March 2015.
Page 45 of 59
(iv) Bycomb’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose Cyclip’s share price at that date can be deemed to be
(v) On 31 March 2015, Bycomb carried out an impairment review which identified
that the goodwill on the acquisition of Cyclip was impaired by $500,000. Impaired
goodwill is charged to cost of sales.
Required:
(a) Calculate the consolidated goodwill at the date of acquisition of Cyclip. (6 marks)
(b) Prepare extracts from Bycomb’s consolidated statement of profit or loss for the year
ended 31 March 2015
Page 46 of 59
CHAPTER 13 ANALYSIS FINANCIAL STATEMENT
KEY OBJECTIVES:
1. List and explain meaning key ratio in assessing profitability (profit margin, asset
turnover, ROE, ROCE) of an entity in separate financial statement
2. List and explain meaning key ratio in assessing liquidity (inventory day, receivable
day, payable day, current ratio, quick ratio) of an entity in separate financial
statement
3. List and explain meaning key ratio in assessing financial risk (interest cover, gearing)
of an entity in separate financial statement
4. Describe limitation of financial indicator in analysis performance of an entity

1. List and explain meaning key ratio in assessing profitability (profit margin, asset turnover,
ROE, ROCE) of an entity in separate financial statement
2. List and explain meaning key ratio in assessing liquidity (inventory day, receivable day,
payable day, current ratio, quick ratio) of an entity in separate financial statement
3. List and explain meaning key ratio in assessing financial risk (interest cover, gearing) of
an entity in separate financial statement
4. Describe limitation of financial indicator in analysis performance of an entity
Page 47 of 59
Question 1
Page 48 of 59
Page 49 of 59
Question 2
Bengal is a public company. Its most recent financial statements are shown below:
STATEMENTS OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH
Additional information:
(i) There were no disposals of non-current assets during the period; however Bengal does
have some non-current assets classified as 'held for sale' at 31 March 20X1.
(ii) Depreciation of property, plant and equipment for the year ended 31 March 20X1 was
$640,000.
Page 50 of 59
A disappointed shareholder has observed that although revenue during the year has
increased by 48% (8,250 / 17,250 × 100), profit for the year has only increased by 20% (500 /
2,500 × 100).
Required
(a) Comment on the performance (including addressing the shareholder's observation)
and financial position of Bengal for the year ended 31 March 20X1. Up to five marks are
available for the calculation of appropriate ratios. (15 marks)
(b) Explain the limitations of ratio analysis. (5 marks)
Page 51 of 59
Question 3:
Mowair Co is an international airline which flies to destinations all over the world. Mowair
Co experienced strong initial growth but in recent periods the company has been criticised
for under-investing in its non-current assets.
Extracts from Mowair Co’s financial statements are provided below.
The following information is also relevant:
Page 52 of 59
(i) Mowair Co had exactly the same flight schedule in 20X7 as in 20X6, with the overall
number of flights and destinations being the same in both years.3 [P.T.O.
(ii) In April 20X7, Mowair Co had to renegotiate its licences with five major airports, which
led to an increase in the prices Mowair Co had to pay for the right to operate flights there.
The licences with ten more major airports are due to expire in December 20X7, and Mowair
Co is currently in negotiation with these airports.
Required:
(a) Calculate the following ratios for the years ended 30 June 20X6 and 20X7:
(i) Operating profit margin;
(ii) Return on capital employed;
(iii) Net asset turnover;
(iv) Current ratio;
(v) Interest cover;
(vi) Gearing (Debt/Equity).
Note: For calculation purposes, all loan notes should be treated as debt. (6 marks)
(b) Comment on the performance and position of Mowair Co for the year ended 30 June
20X7. (14 marks)
Page 53 of 59
Question 4:
Nonat Co is a manufacturer of domestic appliances. Its chairman is pleased with the
results for the year ended 31 December 2015 as they show a continuing improvement
over recent past performance. However, the finance director says that a better
assessment of the company’s performance would be made by a comparison to other
companies in the same sector. The finance director has obtained some ratios for Nonat Co’s
business sector, based on a year end of 31 December 2015, which are:
Return on capital employed (ROCE) 18·5%
Net asset (total assets less current liabilities) turnover 1·8 times
Gross profit margin 21%
Operating profit margin 10.3%
Current ratio 1.6:1
Gearing (debt/equity) 36%
The summarised financial statements of Nonat Co are:
Page 54 of 59
Required:
(a) Prepare for Nonat Co the equivalent ratios to those of its sector.
Note: The finance lease obligations should be treated as debt in the ROCE and gearing
calculations. (6 marks)
(b) Analyse the financial performance and position of Nonat Co for the year to 31
December 2015 in comparison to the sector averages. (9 marks)
Page 55 of 59
Contents
CHAPTER 1 IAS 23: BORROWING COST ................................................................................................... 1
PART 1: THEORY QUESTION .................................................................................................................... 1
PART 2: PRACTICE QUESTION ................................................................................................................. 1
Question 1 (15 marks)......................................................................................................................... 1
Question 2 (10 marks)......................................................................................................................... 2
Question 3 ........................................................................................................................................... 2
Question 4 (10 marks)......................................................................................................................... 2
Question 5 (20 marks)......................................................................................................................... 2
CHAPTER 2: IFRS 05 NON-CURRENT ASSET HELD FOR SALE ................................................................... 4
Question 1 (5 marks)........................................................................................................................... 4
Question 2 (5 marks)........................................................................................................................... 4
Question 3 (5 marks)........................................................................................................................... 4
PART 2: PRACTISE QUESTION.................................................................................................................. 4
Question 1 (20 marks)......................................................................................................................... 4
Question 2 (15 marks)......................................................................................................................... 5
Question 3 (15 marks)......................................................................................................................... 5
Question 4 (15 marks)......................................................................................................................... 5
CHAPTER 3: IAS 20 GOVERNMENT GRANT ............................................................................................. 6
Question 1 (5 marks)........................................................................................................................... 6
Question 2 (5 marks)........................................................................................................................... 6
Question 3 (5 marks)........................................................................................................................... 6
Question 1 ........................................................................................................................................... 6
Question 2 ........................................................................................................................................... 6
Question 3: .......................................................................................................................................... 7
CHAPTER 4: IAS 37 PROVISION ............................................................................................................... 8
Question 1: .......................................................................................................................................... 8
Question 1: .......................................................................................................................................... 8
Page 56 of 59
Question 1 ........................................................................................................................................... 8
Question 2 .......................................................................................................................................... 8
Question 3 ........................................................................................................................................... 9
Question 4 ........................................................................................................................................... 9
Question 5: .......................................................................................................................................... 9
CHAPTER 5: FINANCIAL INSTRUMENT .................................................................................................. 10
PART 1: THEORY QUESTION .................................................................................................................. 10
Question 1 (5 marks)......................................................................................................................... 10
Question 2 (5 marks)......................................................................................................................... 10
Question 3 (5 marks)......................................................................................................................... 10
Question 4 (5 marks)......................................................................................................................... 10
PART 2: PRACTISE QUESTION................................................................................................................ 11
Question 1 (10 marks)....................................................................................................................... 11
Question 2 (12 marks)....................................................................................................................... 11
Question 3 (7 marks)......................................................................................................................... 11
Question 4 (10 marks)....................................................................................................................... 11
Question 5 (10 marks)....................................................................................................................... 11
Question 6 (10 marks)....................................................................................................................... 12
CHAPTER 7: IAS 21 FOREIGN EXCHANGE RATE ..................................................................................... 13
Question 1: ........................................................................................................................................ 13
Question 2: ........................................................................................................................................ 13
Question 3: ........................................................................................................................................ 13
Question 4: ........................................................................................................................................ 13
Question 5: ........................................................................................................................................ 13
Question 6: ........................................................................................................................................ 13
Question 1: ........................................................................................................................................ 13
Question 2 ......................................................................................................................................... 14
Question 3 ......................................................................................................................................... 14
Question 4 ......................................................................................................................................... 14
CHAPTER 8 IAS 12 TAXATION ................................................................................................................ 16
Page 57 of 59
Question 1: Recognition of current tax liabilities and assets ........................................................... 16
Question 2: ........................................................................................................................................ 16
Question 3: ........................................................................................................................................ 17
Question 4: ........................................................................................................................................ 17
Question 5: ........................................................................................................................................ 17
CHAPTER 9: IFRS 16 LEASE .................................................................................................................... 18
CHAPTER 10 IAS 08 CHANGE IN ACCOUNTING POLICY, ESTIMATE & ERROR ....................................... 21
CHAPTER 11 IAS 28 INVESTMENT IN ASSOCIATE .................................................................................. 23
CHAPTER 12 CONSOLIDATED FINANCIAL STATEMENT ......................................................................... 26
Question 1.1 ...................................................................................................................................... 26
Question 1.2 ...................................................................................................................................... 29
Question 2 ......................................................................................................................................... 31
Question 3 ......................................................................................................................................... 33
Question 4 ......................................................................................................................................... 35
Question 5: ........................................................................................................................................ 37
Question 7 ......................................................................................................................................... 39
Question 8 ......................................................................................................................................... 41
Question 9 ......................................................................................................................................... 43
Question 10 ....................................................................................................................................... 45
CHAPTER 13 ANALYSIS FINANCIAL STATEMENT ................................................................................... 47
Question 1 ......................................................................................................................................... 48
Question 2 ......................................................................................................................................... 50
Question 3: ........................................................................................................................................ 52
Page 58 of 59
Question 4: ........................................................................................................................................ 54
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CHAPTER 1 IAS 23: BORROWING COST

PART 1: THEORY QUESTION

Question 3: List criteria for commence capitalize borrowing cost?

PART 2: PRACTICE QUESTION

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

Question 2: Describe how to determine tax expense on statement of profit or loss?

Question 3: Describe how to determine deferred tax on statement of financial position?

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

Question 2: Describe how to recognize lease in simple recognition

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

Required: Explain, with journals, the accounting treatment of errors in financial

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

PART 1: THEORY QUESTION

PART 2: PRACTISE QUESTION

You are also given the following information:

You are also given the following information:

The following information is relevant:

The following information is relevant:

The following information is relevant:

The following information is relevant:

The following information is relevant:

Equity shares of $1 each 20,000 20,000

The following information is also relevant:

PART 1: THEORY QUESTION

The following information is also relevant:

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