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Question # 4

HJ is currently in dispute with an employee, who is claiming $400,000 in a legal case against them.

HJ's legal advisors have stated that it is probable that they will lose the case and will have to pay the amount claimed.

Also, HJ are claiming $250,000 from a supplier of defective goods and the legal advisors have stated that it is probable that HJ will be successful in this claim.

What is the correct accounting treatment for these two items in HJ's financial statements?

A.

Provide for the $400,000 potential outflow and disclose the $250,000 potential inflow.

B.

Provide for the $400,000 potential outflow and recognise the $250,000 potential inflow.

C.

Disclose the $400,000 potential outflow and disclose the $250,000 potential inflow.

D.

Disclose the $400,000 potential outflow and recognise the $250,000 potential inflow.

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Question # 5

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale.

Which of the following describes the value of the financial asset on the date of acquisition?

A.

Fair value excluding transaction costs.

B.

Fair value including transaction costs.

C.

Present value including transaction costs.

D.

Present value excluding transaction costs.

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Question # 6

UV has raised $100,000 through the issue of two irredeemable financial instruments:

•  6% debentures with a current market value of $101.50 per $100 nominal value; and

•  8% preference shares with a current share price of $2.20 each.

The corporate income tax rate is 20% 

What is the post tax cost of debt for each of these instruments?

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Question # 7

Which of the following is a related party according to the definition of a related party in IAS24 Related Party Disclosures?

A.

Major customer

B.

Provider of finance

C.

Managing Director

D.

Major supplier

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Question # 8

F has profit before interest and tax of $400,000 for the year to 30 June 20X4.

Extracts from F's statement of financial position at 30 June 20X4 are as follows:

  

Calculate the gearing (debt:equity) ratio at 30 June 20X4.

Give your answer to the nearest whole percentage.

 ?  %

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Question # 9

Taking each statement individually, which of the following explains the movement in the gross profit margin from 20X4 to 20X5 as calculated by the analysts?

A.

Increase in the levels of closing inventory of raw materials.

B.

Reduction in the cost of raw materials NOT passed onto customers.

C.

Prompt payment discounts no longer offered to customers.

D.

Increase in the volume of sales over the year.

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Question # 10

XY puchased 2% of the equity shares of FG on 1 October 20X3.

XY paid $25,000 for the shares as well as a transaction cost of 2.5% of the purchase price.

The shares are being held for short term trading and XY intend to sell them in December 20X3.

At the year end of 31 October 20X3, the shares in FG could be sold for $28,000.

What is the journal entry to record the subsequent measurement for this investment at 31 October 20X3?

A.

Debit investment in equity shares $3,000 and credit profit or loss $3,000.

B.

Debit investment in equity shares $3,000 and credit other reserves $3,000.

C.

Debit investment in equity shares $2,375 and credit profit or loss $2,375.

D.

Debit investment in equity shares $2,375 and credit other reserves $2,375.

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Question # 11

GG's gearing is currently 50% compared to the industry average of 40% (both measured as debt/equity). GG's debt is all in the form of a single bank loan that is repayable in five years' time. The directors of GG are seeking to raise finance for a new project and they are considering an additional bank loan from the same bank.

Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?

A.

A covenant on the existing bank loan that restricts the level of dividend that can be paid.

B.

A projected decrease in interest cover that would breach a covenant on the existing loan.

C.

The revaluation of GG's property that shows an increase in its value since the existing bank loan was taken out.

D.

A projected lack of profits to be able to claim tax relief on the additional interest arising from the new loan.

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Question # 12

EF acquired a copy machine under a three-year operating lease.  EF will pay nothing in year one and then will pay $6,000 in years two and three. The estimated economic useful life of the machine is six years.

Which THREE of the following statements are true in respect of how EF will account for its use of the machine and the associated operating lease payments?

A.

An asset of $12,000 will be included in EF's property, plant and equipment at the start of the lease.

B.

EF will record no expense in year one in respect of the operating lease charges for this machine.

C.

EF will record a credit to bank of $6,000 in year two.

D.

EF will include an accrual of $4,000 at the end of year one in respect of the lease payments.

E.

EF will charge $4,000 to profit or loss in each of the three years in respect of this operating lease.

F.

EF will include an accrual of $6,000 at the end of year one in respect of the lease payments.

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Question # 13

Which of the following is the correct calculation for basic earnings per share in accordance with IAS 33 Earnings Per Share?

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Question # 14

On 1 September 20X3, GH purchased 200,000 $1 equity shares in QR for $1.20 each and classified this investment as held for trading.

GH paid a 1% transaction fee to its broker on this transaction. QR's equity shares had a fair value of $1.35 each on 31 December 20X3.

Which of the following journals records the subsequent measurement of this financial instrument at 31 December 20X3?

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 15

GH's financial statements show the following:

  

What is the value of the dividend received from the associate to be included in GH's consolidated statement of cash flows for the year?

Give your answer to the nearest $000.

 $ ? 000

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Question # 16

ST acquired 75% of the 2 million $1 equity shares of CD on 1 January 20X3, when the retained earnings of CD were S3,550,000. CD has no other reserves.

ST paid $5,600,000 for the shares in CD and the non controlling interest was measured at its fair value of S1,400,000 at acquisition.

At 1 January 20X3, the fair value of CD's net assets were equal to their carrying amount, with the exception of a building. This building had a fair value of $1,000,000 in excess of its carrying amount and a remaining useful life of 25 years on 1 January 20X3.

At 31 December 20X5, the retained earnings of ST and CD were $8,500,000 and $5,250,000 respectively.

What is the value of goodwill to be included in the consolidated statement of financial position of ST as at 31 December 20X5?

A.

$450,000

B.

$1,450,000

C.

$950,000

D.

$570,000

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Question # 17

The dividend yield of ST has fallen in the year to 31 May 20X5, compared to the previous year.

The share price on 31 May 20X4 was $4.50 and on 31 May 20X5 was $4.00.  There were no issues of share capital during the year.

Which of the following should explain the reduction in the dividend yield for the year to 31 May 20X5 compared to the previous year?

A.

The dividend paid in the year was reduced in order to pay for new assets.

B.

Surplus cash was used to pay a special dividend in addition to the normal dividend in the year.

C.

The profit for the year fell significantly and the dividend per share stayed the same.

D.

To compensate investors for the reduction in share price a higher dividend per share was paid.

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Question # 18

A group presents its financial statements in A$.

The goodwill of its only foreign subsidiary was measured at B$100,000 at acquisition. There have been no impairments to this goodwill.

Exchange rates (where A$/B$ is the number of B$'s to each A$) are as follows:

  

The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

A.

A$75,758.

B.

A$66,667.

C.

A$150,000.

D.

A$132,000.

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Question # 19

A local council is one year into a two year project to renovate local parks. The project is on track to be completed within the set time-scale, however it has proved more costly than initially expected.

The project is on track to be completed within its two year period. Contracts for the labour and materials needed to renovate the parks were agreed at the start of the project and no changes have arisen. Despite the fact

that the council has yet to fully settle these contracts, costs are set to be as budgeted.

Why would this example not be recognised as a provision?

A.

Neither the timing nor the amount of the provision is uncertain.

B.

The settlement of the contract is unlikely to result in an outflow from the council.

C.

The council doesn't have a present obligation from the project.

D.

The council has no potential future obligations arising from the project.

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Question # 20

As at 31 October 20X7 TU's financial statements show the entity having profit after tax of $600,000 and 900,000 $1 ordinary shares in issue. There have been no issues of shares during the year. At 31 October 20X7 TU have 300,000 share options in issue, which allow the holders to purchase ordinary shares at $2 a share in 3 years' time. The average price of the ordinary shares throughout the year was $5 a share.

What is the diluted earnings per share for the year ended 31 October 20X7?

A.

66.7 cents

B.

58.8 cents

C.

50.0 cents

D.

55.6 cents

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Question # 21

The following information relates to DEF for the year ended 31 December 20X7:

• Property, plant and equipment has a carrying value of $3,500,000 and a tax written down value of $2,500,000.

• There are unused tax losses to carry forward of $1,250,000. These tax losses have arisen due to poor trading conditions which are not expected to improve in the foreseeable future.

• The corporate income tax rate is 25%.

In accordance with IAS 12 Income Taxes, the financial statements of DEF for the year ended 31 December 20X7 would recognise deferred tax balances of:

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 22

On 1 January 20X4 EF grants each of its 125 employees 500 share options on the condition that they remain in employment for 3 years. During the year to 31 December 20X4 10 employees left and It is expected that a further 25 will leave before the end of the vesting period.

The fair value of each share option is $30 on 1 January 20X4 and $45 on 31 December 20X4.

What is the journal entry in respect of these share options in EF's financial statements for the year ended 31 December 20X4?

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 23

XY owned 60% of the equity share capital of AB at 1 January 20X6.  XY acquired a further 20% of AB's equity share capital on 31 December 20X6 for $500,000.  The non controlling interest in AB was measured at $720,000 immediately prior to the 20% acquisition.

Calculate the amount that XY debited to non controlling interest when it accounted for the 20% acquisition in its consolidated financial statements at 31 December 20X6.

Give your answer to the nearest $000.

$ ?  000

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Question # 24

Which of the following actions would be most likely to improve an entity's gross profit margin?

A.

Negotiating with trade suppliers for a bulk purchase discount

B.

Offering increased credit to customers

C.

Reducing administrative expenses by 10%

D.

Writing down the value of obsolete inventories

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Question # 25

CD acquired 100% of the equity share capital of FG for cash consideration of Kr1,200,000 on 1 January 20X7.

Retained earnings of FG at the date of acquisition was Kr800,000. CD operates from Country A and its functional and presentation currency is $. FG is located and trades throughout Country B and its functional currency is the Krona (Kr).

CD has no other subsidiaries. Goodwill had not suffered any impairment to date.

Summarised data from the statements of financial position for both entities at 31 December 20X7 is presented below:

Calculate the exchange difference arising on the retranslation of goodwill on the acquisition in the consolidated statement of financial position of CD at 31 December 20X7.  

Give your answer to the nearest $000.

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Question # 26

LM acquired 80% of the equity shares of ST when ST's retained earnings were $50 million.  The fair value of the net assets of ST included a contingent liability with a fair value of $100 million at the date of acquisition and a fair value of $40 million at 31 December 20X6. No other fair value adjustments were required at the date of acquisition.

LM and ST had retained earnings of $200 million and $80 million respectively at 31 December 20X6. 

The consolidated retained earnings of LM at 31 December 20X6 were:

A.

$164 million

B.

$176 million

C.

$272 million

D.

$284 million

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Question # 27

Which of the following is a related party according to the definition of a related party in IAS24 Related Party Disclosures?

A.

Major customer

B.

Provider of finance

C.

Managing Director

D.

Major supplier

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Question # 28

On 1 January 20X7 GH purchased plant and equipment at a cost of $400,000.  The temporary differences in respect of this plant and equipment at 31 December 20X7 and 20X8 have been calculated as follows:

  

Assume that there are no other temporary differences in the periods and that the corporate income tax rate is 25%. GH is expected to have significant taxable profits in the future.

Which of the following is the correct impact in GH's statement of financial position at 31 December 20X8 in respect of deferred tax?

A.

Increase in the deferred tax asset.

B.

Increase in the deferred tax liability.

C.

Decrease in the deferred tax asset.

D.

Decrease in the deferred tax liability.

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Question # 29

AB acquired an investment in a debt instrument on 1 January 20X5 at its nominal value of $25,000, which it intends to hold until maturity. The instrument carried a fixed coupon interest rate of 5%, payable in arrears. Transactions costs of $5,000 were paid in respect of this investment.  The effective interest rate applicable to this instrument was estimated at 9%.  

Calculate the value of this investment  that AB will include in its statement of financial position at 31 December 20X5.

Give your answer to the nearest whole number. 

$ ?  

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Question # 30

When establishing a group structure, which of the following factors need to be considered: Select ALL that apply.

A.

Whether control has been established

B.

The percentage ownership

C.

The date of acquisition

D.

Non-controlling interests

E.

Goodwill

F.

Intra-group investments

G.

Whether control is direct or indirect

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Question # 31

MNO has calculated its return on capital employed ratio for 20X4 and 20X5 as 41% and 56% respectively.

Taking each statement in isolation, which would explain the movement in the ratio between the 2 years?

A.

In 20X5 the average interest rate on borrowing decreased compared to 20X4.

B.

In 20X4 an onerous contract was provided for and this provision did not change in 20X5.

C.

In 20X5 the increase in value of MNO's head office was reflected in the financial statements.

D.

In 20X4 an unused building was sold at a price in excess of its carrying value.

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Question # 32

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale.

Which of the following describes the value of the financial asset on the date of acquisition?

A.

Fair value excluding transaction costs.

B.

Fair value including transaction costs.

C.

Present value including transaction costs.

D.

Present value excluding transaction costs.

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Question # 33

Which of the following best describes the goal of WACC as a measure?

A.

To work out the average return that is required by the company on its investments in order to satisfy all shareholders and debt holders.

B.

To work out the average return that is required by the company on its investments in order to satisfy all shareholders.

C.

To work out the average return that is required by the company on its investments in order to satisfy all debt holders.

D.

To work out the minimum return that is required by the company on its investments in order to satisfy all shareholders and debt holders.

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Question # 34

Which TWO of the following are true in relation to IAS21 The Effects of Changes in Foreign Exchange Rates when consolidating an overseas subsidiary?

A.

A current period exchange gain or loss is shown within the consolidated statement of comprehensive income within other comprehensive income.

B.

Goodwill is re-translated at the end of each reporting period and reflected at the period end exchange rate in the consolidated statement of financial position.

C.

Assets and liabilities of the subsidiary are translated at each reporting date using the average exchange rate for the period.

D.

Goodwill is reflected in the consolidated statement of financial position translated at the exchange rate on the date of acquisition.

E.

The statement of profit or loss of the subsidiary is translated for the reporting period using the closing exchange rate.

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Question # 35

The basic earning per share computed by a company for year ended 31st March 20X7 is £2 per share. The company had certain convertible debentures outstanding as on 31st March 20X7. The conversion of

debentures to equity shares would result in the earnings per share to be £2.2. Which of the following should the company disclose?

A.

Basic earnings per share only

B.

Diluted earnings per share only

C.

Both basic and diluted earnings per share

D.

Neither basic nor diluted earnings per share

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Question # 36

Information from the financial statements of RST for the year ended 30 April 20X9 is as follows:

  

At 30 April 20X9 the ordinary shares are trading at $4.75.

What is the price earnings (P/E) ratio for RST at 30 April 20X9?

A.

15.83

B.

7.92

C.

10.56

D.

9.31

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Question # 37

AB sold the majority of its operating equipment to LM for cash on 30 December 20X9 and then immediately leased it back under an operating lease.  

AB used the cash proceeds from the sale to reduce its long term borrowings significantly.  No early repayment charge was levied by the lender.

Which of the following statements is true in respect of AB's ratios calculated at 31 December 20X9?

A.

AB's return on capital employed would be lower as a result of this sale being recorded.

B.

AB's current ratio would be lower as a result of this sale being recorded.

C.

AB's non-current asset turnover would be lower as a result of this sale being recorded.

D.

AB's gearing ratio would be lower as a result of this sale being recorded.

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Question # 38

Which of the following would cause a deferred tax balance to be included in the statement of financial position for an entity?

A.

Expenses in the statement of profit or loss which are not allowable for tax creating a permanent difference.

B.

The acquisition of land for which there is no tax depreciation.

C.

The acquisition of plant and equipment a year ago where the tax depreciation rate is different to the accounting depreciation rate.

D.

Impairment of goodwill that arose on the acquisition of a subsidiary entity.

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Question # 39

AB and EF are located in the same country and prepare their financial statements to 31 October in accordance with International Accounting Standards. EF supplies AB with a component that is vital to AB's product range. AB is considering acquiring a controlling interest in EF by 31 December 20X4 in order to guarantee future supply. The Board of EF has indicated that such an approach would be postively considered. AB would use its control to make AB the sole customer of EF.

The Finance Director of AB has been granted access to EF's management accounts and has conducted some initial analysis from the financial press. The results togther with comparisons for AB for the year to 31 October 20X4 are presented below:

AB and EF are forecasting revenues of S1,500,000 and $700,000 respectively for the year ended 31 October 20X5.

AB's Finance Director met with one of the directors of EF to discuss the potential impact of the acquisition.

Which of the director's statements below is correct?

A.

The P/E ratio of EF will increase to 12 after acquisition in line with that of AB.

B.

The gross profit margin of EF will increase if AB's bargaining power is used to negotiate lower material costs for the whole group.

C.

Redundancy costs arising from reorganisation following acquisition will be provided for by charging EF's profit for the year ended 31 October 20X4.

D.

Dividend yield for both entities will be identical after the acquisition.

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Question # 40

RST sells computer equipment and prepares its financial statements to 31 December.

On 30 September 20X5 RST sold computer software along with a two year maintenance package to a customer. The customer is given the right to return the goods within six months and claim a full refund if they are not satisfied with the computer software. The risk of return is considered to be insignificant for RST.

How should the revenue from this transaction and the right of return be recognised in the financial statements for the year ended 31 December 20X5?

A.

Recognise 100% of the revenue from both the sale of goods and the maintenance contract and create a provision for the anticipated level of returns.

B.

Do not recognise any revenue from the sale of goods or the maintenance contract and do not create a provision for the anticipated level of returns.

C.

Recognise 12.5% of the revenue from both the sale of goods and the maintenance contract and do not create a provision for the anticipated level of returns.

D.

Recognise 100% of the revenue from the sale of goods,12.5% of the revenue from the maintenance contract and create a provision for the anticipated level of returns.

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