Departamento de Gestión de Empresas

Enpresen Kudeaketa Saila

FACULTAD DE CIENCIAS ECONOMICAS Y EMPRESARIALES

DEPARTAMENTO GESTION DE EMPRESAS
GRADO EN ADE/ECONOMIA GRUPO INTERNACIONAL 2º
FINANCIAL ACCOUNTING II – FINAL EXAM DECEMBER 20, 2022

LAST NAME_________________________________________

FIRST NAME__________________
The exam is made up of 2 sections: multiple choice (16) and two problems (2 x 10). Total points = 36.
MULTIPLE CHOICE: There are 16 questions. Correct=1; Incorrect=-0.25; no answer=0.
Consider IFRS for all questions.

1. Which of the following is a major characteristic of a plant asset?

a. Possesses physical substance
b. Can be represented by securities.
c. Acquired for use in operations or resale.
d. All of these are major characteristics of a plant asset.
2. If a government grant is recognized as a decrease of the initial valuation of the plan asset
financed with the grant…
a. the company is not applying the income approach.
b. the company is not applying the IAS-20.
c. revenues related with the grant will be overstated.
d. none of the above.
3. An improvement made to a machine increased its fair value and its production capacity by
25% without extending the machine's useful life. The cost of the improvement should be…
a. expensed, as capitalization requires improvements of at least 50%.
b. capitalized but not amortized.
c. capitalized and amortized but not tested for impairment.
d. capitalized, amortized and tested for impairment.
4. Pro-tech Software Co. acquired Reliable Software Co. for €14 million. The book value of
Reliable’s net assets (assets minus liabilities) was €8.3 million. The fair values of Reliable’s
assets and liabilities equalled their book values with the exception of certain intangible assets
whose fair values exceeded book values by €2.5 million. Consequently…
a. Pro-tech recognized goodwill for €3.2 million and amortized it in 10 years.
b. Pro-tech recognized goodwill for €8.2 million and amortized it in 10 years.
c. Pro-tech recognized goodwill for €3.2 million but it did not amortize it.
d. Pro-tech recognized goodwill for €5.8 million but it will not amortize it.
5. Which of the following best describes accounting for leases under IFRS?
a. Since 2019 no lease agreement (without exception) can be recognized as operating lease.
b. Depreciation of right-of-use assets must always be straight line and based on the useful life of the
asset under lease.
c. At the end of the lease agreement, if the asset reverts to the lessor, the lessee will recognize a loss
for the book value of the asset.
d. Since 2019 assets under lease affect the income statement of the lessee in two items: depreciation
expense and interest expense.
6. Choose the only wrong answer…
a. Companies must assign a portion of their fixed overhead to self-constructed assets.
b. Freight costs incurred to acquire an equipment are part of the initial valuation of the new
equipment.
c. Sum of the years-digits is an activity-based depreciation method.
d. Lump-sum purchases are transactions where the cost must be allocated according to fair values.
7. Thinking about intangibles, the correct answer under IFRS is….
a. Intangibles include trademarks, patents and investments in securities, among others.
b. Intangible assets are submitted to amortization but not to impairment.
c. Development phase costs can be capitalized only if economic feasibility has been achieved.
d. All internally developed intangibles can be recognized as assets.
8. Which of the following most accurately reflects the difference between depreciation
amortization and impairment?
a. Depreciation applies to tangibles and amortization and impairment to intangibles.
b. Depreciation and impairment are systematic but amortization is non-systematic.
c. Depreciation and amortization affect the income statement but impairment affects only the balance
sheet.
d. Depreciation is to plant assets what amortization is to intangibles and impairment applies to both
tangibles and intangibles.
9. The IASB framework defines a liability as…
a. Amounts a business may have to pay after the balance sheet date.
b. Present obligations arising from past events which will result in outflow of economic benefits.
c. Obligations to pay which may arise depending on some future events.
d. Unpaid portion of expenses incurred in the current accounting period.
10. Measurement principle in the conceptual framework states…
a. That historical cost and fair value are the two valuation criteria accepted by the IASB model and
thus both can be applied by the company at any moment.
b. That historical cost and fair value are the two valuation criteria accepted by the IASB model but
their application will be subsequently determined by the specific standards.
c. That in case neither historical cost nor fair value can be applied, the IASB model will accept the
application of a liquidation value.
d. That historical cost and fair value are the two valuation criteria accepted by the IASB model but only
for assets.
11. Which is true regarding assumptions included in the Conceptual Framework…
a. Assumptions are the same as fundamental quantitative characteristics.
b. The going concern assumption establishes that as the life of the company is long, it must be divided
for the provision of information to investors and creditors.
c. If the going concern assumption does not hold, companies will have to apply a liquidation accounting
model.
d. The accrual basis of accounting is considered a necessary assumption because the cash basis is
considered as a principle.
12. Which one of the following transactions decreases our equity?
a. We acquire treasury shares at a cost that is higher than their issuing price.
b. We cancel treasury shares that we previously acquired at a cost that was higher than their issuing
price.
c. We pay a dividend that we had previously declared two months before.
d. We receive dividends from a company of which we own 30% of its shares.
13. Choose the only correct answer.
a. Warranties should be expensed when actually claimed by the customers.
b. Unlike VAT, Sales taxes give rise to both assets and liabilities.
c. Unearned revenue is a short-term liability for accrued revenue not yet collected.
d. The initial valuation of Accounts payable to a supplier of merchandise will include the VAT
incorporated in the invoice.
14. Taxable temporary differences…
a. Give rise to Deferred Tax Assets in the balance sheet for the accumulated effect of difference.
b. Are the short-term version of permanent differences.
c. Increase Deferred Tax Assets when they arise and increase Deferred Tax Liabilities when they
reverse.
d. Their minimum life is two years.
15. On January 01, 2020 Samurtec plc. issued a mortgage in BCH for a total amount of
£40,000. Eight annual instalments of £6,000 each have to be paid each Dec. 31 starting 2020.
Issue costs amount to £1,000. The effective interest rate for the company is 4.8598% or
4.2395% depending on the consideration of issue costs. Consequently, on January 01, 2020…
a. BCH will recognize Mortgages payable short-term for £4,105.
b. BCH will recognize Mortgages payable short-term for £4,304.
c. BCH will recognize Mortgages payable short-term for £5,835.
d. BCH will recognize Mortgages payable short-term for £6,000.
16. Which of the following securities investment treatments is FV to OCI?
a. Debt investments held for collection.
b. Equity investment 20-50% stake.
c. Debt investments held for collection and selling.
d. Equity investment less than 20% stake, trading.
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 PROBLEM 1 (10 points)

Cayó la noche Inc. is a company that produces computers and IT software. This company presents the
following statement of financial position as of December 31th, 2022.

1) On September 1st, 2022 Cayó la noche Inc. bought land on which to build a new factory. The purchase
price of the land was €500. The company incurred €10 to demolish an old hut made of wood. The company
sold the trunks obtaining a value of 5€. On November 30th, 2022, some fences were installed with a cost of
€20. All these payments were made in cash and they are not part of the payments associated with the
building. This same day Cayó la noche Inc. contracted Monotonía SpA to construct a building for €1000 on the
previous land. The company made the following payments related to this building:
11/30/2022 €200
12/31/2022 €500
05/31/2023 €300
The company completed the building on May 31th 2023. Cayó la noche Inc. had a 6%, ten-year, $1000,
note to finance purchase of the building, dated November 30th, 2022 with interest payable annually on
November 30th. During 2022, a portion of this note was invested and the company earned $5. Moreover, it is
known that the company has the following debt obligation outstanding during 2022:
10%, $700, 10-year bonds issued December 31th, 2018, with interest payable annually on December 31th.
The useful-life for all the above-mention assets is 20 years. Cayó la noche Inc. uses the straight-line
depreciation method. On December 31th, 2022 and 2023, there is no signal of impairment.
2) On January 1st, 2022 the company bought a computer (Deep F&F) to answer an increase in the demand
of its products. The useful life was estimated to be five years. The company uses the straight-line method for
depreciation. On December 31th, 2022, there were clear signs of impairment, although the useful life does not
change after the impairment. On December 31th, 2023 it is known that the fair value is 2 with a cost-to-sell of
1. The value-in-use is estimated to be 4.

3) On February 1st, 2023 Cayó la noche Inc. contracts to lease a lorry for 5 years, agreeing to make a
payment of €20 at the beginning of each year, starting February 1st, 2023. The Cayó la noche Inc’s
incremental borrowing cost is 5%, and the implicit rate in the lease is 10%, although Cayó la noche has no
access to this information. The company has the option to purchase de lorry for €5 upon termination of the
lease. It is reasonably certain the Cayó la noche Inc. will execute the option. The lorry has an estimated useful
life of 10 years. The company uses the sum-of-the-year digits for depreciation on similar owned equipment.

4) On June 1st, 2023, in accordance with the new strategic plan, the company sells the laboratory being the
selling price €60. Cayó la noche Inc. started operating the laboratory on October 31th, 2021. The acquisition
cost was €100 and the estimated residual value was €5. The estimated useful-life was 5 years. The company
uses double-declining balanced method for depreciation.

5) Cayó la noche Inc. spent €50 in research costs during 2023. As a result, a new software called Bonita
was patented. The patent was obtained on July 1st, 2023 incurring in a legal cost of €20. It has a legal life of
20 years and a useful life of 10 years. The company uses straight line depreciation method.

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Required
a. Complete (and explain briefly) the missing values in the Statement of Financial Position Dec. 31, 2022
b. Journal entries all through 2022 and 2023 (including adjusting entries at December 31).
c. Can you determine the balance of the following accounts dated December 31, 2023?

Land……………………………………………………

Building………………………………………………..

Research and development expense……………….….

Notes payable……………………………………….…

Interest payable…………………………………..……

Laboratory……………………………………….…….

Share capital……………………………………….…..

Building-in-progress…………………..………..……..

Right-of-use-of-the-asset………………………..…….

Patent………………………………………………….

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 PROBLEM 2 (10 points)

DARK RAINBOW, S.A. is a company incorporated in Germany. It shows the following balance sheet as of
Dec. 31, 2021

DARK RAINBOW, SA BALANCE SHEET DEC.31, 2021 (in €)

During the year 2022, DARK RAINBOW, S.A. carried out the following transactions:

1. Since the year 2019, the company enjoys a portfolio to buy and sell equity securities expecting to earn
profits on short-term differences in price. On December 31, 2021 the portfolio was made up of ordinary shares
of the following companies:
Number of shares Cost (per/share) Market price (per/share)
Amber Co. 1,000 €2 € 2.2
Turner Co. 3,000 €4 € 4.1
Wallis Co. 2,000 €3 € 3.2
All investments are intermediated by Barclays Bank that charges a 2% fee on the initial cost for that
reason.
During 2022 Dark Rainbows sold all shares of Amber and Turner for €2.3 and €4.0, respectively, and
incorporated Faxner Co. as a new investment in its portfolio. Namely 2,500 shares at €3.6 unit cost plus fees.
Market prices (per/share) Dec. 31, 2022
Amber Co. €2.4
Turner Co. €4.1
Wallis Co. €3.3
Faxner Co. €3.5
2. On January 01, 2022 Dark Rainbow acquired bonds issued this same date by the German Government.
The bonds have a face value of €2,000 and pay an explicit interest of 6% each January 01 starting in 2023.
The effective interest rate is 5% and they will be amortized on January 01, 2024. They were classified as held
for collection. The fair value of the bonds as of Dec.31, 2022 €2,100.
3. Dark Rainbow had two series of shares.
Series A: 2,000 authorized shares of €10 par value each.
Series B: 1,000 authorized shares of €8 par value each.
All shares had been issued by December 31, 2021 except for 400 shares of series B. Series A were issued at
120% and series B at 110%. In both series the company faced issued costs (€300 in series A and €100 in
series B.
On February 2022 the company acquired 200 of their own shares (series A) at a unit cost of €20 and
immediately cancelled 120 shares. The remaining 80 shares were put back into the market at a price of €22 at
the end of August.
On September 2022 the company issued the remaining authorized shares of series B at 115% with issue
costs amounting to €60. The company collected only the minimum required by Spanish Ley de Sociedades de
Capital.
4. On January 01, 2020 Dark Rainbow issued a four-year note with a face value of €8,000 to borrow €7,700
cash from Rabobank. The note pays a 3% explicit interest every January 01 starting in 2021. Issue costs =
€300. The effective interest rate considering issue costs was 5,121%.

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 5. The 2021’s income tax payable was paid in June 2022.
Pre-tax financial income in 2022 was €15,500. The equipment that shows in the balance sheet was acquired
on January 01, 2019 for €36,000. The company uses straight-line depreciation for financial statement purposes
and accelerated depreciation for tax purposes. On December 31, 2021 the carrying amount of the equipment
was €30,000 and the differences with its consideration for tax purposes are reflected in the balance of the
Deferred Tax Liability account.
Unearned revenue in the balance sheet Dec. 31, 2021 consists of advanced collections for special services
that will not be provided by Dark Rainbow until 2022. Tax treatment for these special services is cash basis.
Interest revenue from the German Government bonds are exempted from corporate income tax.
Tax rate = 30%.
Required
a. Complete the missing values in the balance sheet Dec.31, 2021
b. Enter all journal entries (including adjusting entries) during 2022
(Show the conciliation between pre-tax financial income and taxable income).

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