Corporate Reporting - MCQ's

1. 'A series of reports that are time-consuming and expensive to prepare is presented to the board of
directors each month even though the reports are never used'. Which of the following qualitative
characteristics or constraints is violated by this statement?

Prudence
Completeness
1 Balance between benefit and cost
Materiality

2. According to the IASB Framework, which two of the following characteristics are described as
principal qualitative characteristics that make the information provided in financial statements useful to
users?

Accrual
1 Relevance
Understandability
Going concern

3. Financial statements include a balance sheet, an income statement, note on accounting policies and a
statement of changes in equity. Which of the following are also included within the financial
statements?

A directors' report
An auditor's report
1 A cash flow statement
An expert statement

4. Which of the following are listed in the IASB Framework as 'underlying assumptions' regarding
financial statements?

The financial statements are prepared under the accrual basis

Any changes of accounting policy are neutral
The enterprise can be viewed as a going concern
The financial statements are reliable

5. A change in an accounting estimate should be accounted for:

Retrospectively
1 Prospectively
Retrospectively unless it is impracticable to do so
Either retrospectively or prospectively

6. A company pays £40,000 to replace a major component of a factory machine. The faulty component
that is replaced is sold for £2,000. The carrying amount of the machine just before this replacement
occurs is £450,000, of which £10,000 relates to the faulty component that is being replaced. The revised
carrying amount of the machine after the replacement occurs and the profit or loss on disposal of the
faulty component are:

1 Carrying amount £480,000, Loss £8,000

Carrying amount £480,000, Loss £10,000
Carrying amount £490,000, Profit £2,000
Carrying amount £490,000, Loss £8,000

7. On 31 December 2014, a company acquires land for £500,000. The land is revalued at £530,000 on 31
December 2015 and £460,000 on 31 December 2016.
The company prepares financial statements to 31 December each year and uses the revaluation model
in relation to land.
The correct accounting treatment of each revaluation in the statement of comprehensive income is as
follows:

2015 Other comprehensive income £30,000 / 2016 Expense £70,000

2015 Other comprehensive income £30,000 / 2016 Negative other comprehensive income £70,000
1 2015 Other comprehensive income £30,000 / 2016 Negative other comprehensive income £30,000
Expense £40,000
2015 Income £30,000 2016 Expense £70,000

8. On 1 January 2015, a company which prepares financial statements to 31 December acquires an item
of equipment and receives a government grant of 20% of the item's cost. The item cost £30,000 and has
an expected useful life of seven years with a residual value of approximately £4,000.
The item is depreciated on the diminishing balance basis at a rate of 25% per annum.
The amount of the grant that should be recognised as income in the year to 31 December 2016 is:

£857
£6,000
1 £1,298
£1,500

9. If long term investment property is measured using the fair value model, a gain arising from a change
in the fair value of an investment property must be:

1 Recognised as other comprehensive income

Credited to a revaluation reserve
Recognised in the calculation of profit or loss
Ignored

10 How should research and development expenditure be dealt with in an entity's financial statements?

Research expenditure should always be written off as an expense but development expenditure should
always be capitalised as an intangible asset
1 Research expenditure should always be written off as an expense but development expenditure
should be capitalised as an intangible asset if it satisfies certain conditions
Research and development expenditure should always be written off as an expense
Research and development expenditure should always be capitalised as an intangible asset

11 On 31 December 2014, a company acquires an intangible asset for £50,000. The asset is revalued at
£42,000 on 31 December 2015 and £57,000 on 31 December 2016. The company prepares financial
statements to 31 December each year and uses the revaluation model in relation to this class of
intangible assets. The correct accounting treatment of each revaluation in the statement of
comprehensive income is as follows

1 2015 Expense £8,000 / 2016 Income £8,000 Other comprehensive income £7,000
2015 Expense £8,000 / 2016 Income £15,000
2015 Negative other comprehensive income £8,000 / 2016 Other comprehensive income £15,000
2015 Expense £8,000 / 2016 Other comprehensive income £15,000

12 Goodwill acquired in a business combination should subsequently be measured:

At cost less accumulated amortisation

At cost less accumulated impairment losses
At cost
At cost less accumulated amortisation and less accumulated impairment losses

13 During the year to 31 March 2016, a company spent £120,000 on research and £80,000 on
development. The development costs meet the criteria for recognition as an intangible asset and are to
be amortised over five years on the straight line basis. Their residual value is estimated to be £nil. A full
year's amortisation charge is made in the year of the expenditure. The total research and development
costs recognised as an expense in the year to 31 March 2016 are:

£16,000
£200,000
1 £136,000
£40,000
14 A company acquires all the assets and liabilities of an unincorporated business for £1m. The net fair
value of the identifiable assets and liabilities acquired is £1.2m. The assets acquired include patents with
a fair value of £300,000. How should this acquisition be accounted for in the company's financial
statements?

Recognise the identifiable assets and liabilities at their fair values and recognise a negative asset of
£200,000 in relation to goodwill
Recognise the patents at £100,000 and recognise all of the other assets and liabilities at their fair values
1 Recognise the identifiable assets and liabilities at their fair values and recognise revenue of
£200,000.
Recognise the identifiable assets and liabilities at their fair values and recognise goodwill of £200,000

15 Goodwill acquired in a business combination should subsequently be measured:

At cost less accumulated amortisation and less accumulated impairment losses

At cost less accumulated amortisation
At cost
1 At cost less accumulated impairment losses

16 An asset's recoverable amount is equal to:

1 The higher of the asset's fair value less costs of disposal and its value in use
The lower of the asset's fair value less costs of disposal and its value in use
The lower of the asset's value in use and its carrying amount
The higher of the asset's value in use and its carrying amount

17 An impairment loss is:

The amount by which the recoverable amount of an asset exceeds its written down value
1 The amount by which the carrying amount of an asset exceeds its recoverable amount
The amount by which the carrying amount of an asset exceeds its market value
The amount by which the recoverable amount of an asset exceeds its carrying amount

18 An asset's carrying amount is £25,000. Its fair value less costs of disposal is £15,000 and its value in
use is £19,000. There is an impairment loss of:

1 £6,000
£4,000
£nil
£10,000
(Recoverable amount is £19,000 (the higher of £15,000 and £19,000). So the impairment loss is £6,000
(£25,000 – £19,000).)

19 The carrying amount of a CGU is £900,000. This consists of goodwill £250,000 and property, plant and
equipment £650,000. The CGU has a recoverable amount of only £520,000. How is the impairment loss
allocated between the assets of the CGU?

1 Goodwill £250,000, PPE £130,000 ??

Goodwill £130,000, PPE £250,000
Goodwill £nil, PPE £380,000
Goodwill £190,000, PPE £190,000

20 An asset is expected to generate cash inflows of £20,000 per annum for each of the next three years
and then to be scrapped. These cash inflows will occur at the end of each year. The asset will generate
no cash outflows. Using a discounting rate of 10% per annum, what is the asset's value in use?

£60,000
£54,000
£54,540
1 £49,720

(To 3 decimal places, discount factors for each year are 0.909, 0.826 and 0.751 respectively. These
factors are 1/1.1, 1/ (1.1)2 and 1/(1.1)3. Therefore the asset's value is use is equal to (0.909 +0.826
+0.751) × £20,000 = £49,720.)

21 The carrying amount of a CGU is £525,000. This consists of goodwill £75,000, development costs
£150,000 and property, plant and equipment £300,000. The CGU has a recoverable amount of £330,000.
What is the carrying amount of the property, plant and equipment after the impairment loss has been
allocated?

£240,000
£180,000
1 £220,000
£300,000

(The impairment loss is £195,000 (£525,000 – £330,000). £75,000 of this loss is allocated to the goodwill,
reducing it to zero. The remaining £120,000 is allocated between the development costs and the PPE in
proportion to their carrying amounts.`
The loss allocated to PPE is £80,000 (£120,000 × (£300,000 /£450,000)) so the carrying amount of the
PPE after impairment is £220,000.)
22 An asset has a carrying amount of £22,500 and is expected to yield cash flows of £8,000 per annum
for the next three years. The asset's fair value less costs of disposal is £17,200.
Assuming that all cash flows occur at the end of the year concerned and that the appropriate discount
rate is 7%, the amount of the impairment loss is:

1 £1,508
£nil
£1,500
£5,300

(To 3 decimal places, discount factors for each year are 0.935, 0.873 and 0.816 respectively. These
factors are 1 /1.07, 1 / (1.07)2 and 1 / (1.07) 3. Therefore the asset's value is use is equal to (0.935
+0.873 + 0.816) × £8,000 = £20,992. This exceeds fair value less costs of disposal so recoverable amount
is also £20,992 and the impairment loss is £1,508 (£22,500 – £20,992).)

23 A non-current asset should be classified as held for sale only if:

1 Its carrying amount will be recovered principally through a sale transaction rather than through
continuing use
Its carrying amount will be recovered principally through continuing use rather than through a sale
transaction
Its carrying amount will be recovered wholly through continuing use rather than through a sale
transaction
Its carrying amount will be recovered wholly through a sale transaction rather than through continuing
use

24 The conditions which must be satisfied in order for the sale of an asset to be deemed "highly
probable" include:

A completed sale is expected within five years

The asset is being marketed at a price which greatly exceeds its fair value
Management is considering a plan to sell the asset
1 None of the above

25 A non-current asset held for sale should be measured at:

Fair value less costs to sell

The higher of the asset's carrying amount when originally classified as held for sale and its fair value less
costs to sell
The asset's carrying amount when originally classified as held for sale, less any accumulated
depreciation since that date
1 The lower of the asset's carrying amount when originally classified as held for sale and its fair value
less costs to sell

26 On 1 November 2015, a company which prepares financial statements to 31 March each year
classifies a non-current asset as held for sale. The asset's carrying amount on 1 November 2015 is
£40,000 and its fair value less costs to sell is £35,000. The asset is still held on 31 March 2016, when its
fair value less costs to sell is £27,500. The impairment losses that should be recognised are:

1 November 2015 £nil / 31 March 2016 £12,500

1 November 2015 £nil / 31 March 2016 £nil
1 November 2015 £5,000 / 31 March 2016 £12,500
1 1 November 2015 £5,000 / 31 March 2016 £7,500

27 An asset which ceases to be classified as held for sale should be measured at the lower of its carrying
amount before being classified as held for sale (less any depreciation that would normally have been
charged in the meantime) and:

Fair value less costs to sell at the date of the decision not to sell
The lower of fair value less costs to sell and value in use at the date of the decision not to sell
Value in use at the date of the decision not to sell
1 The higher of fair value less costs to sell and value in use at the date of the decision not to sell

28 A discontinued operation is defined as a component of an entity which:

1 Has been disposed of or is classified as held for sale

Is expected to be disposed of within the next 12 months
Is classified as held for sale
Has been disposed of

29 With regard to discontinued operations, an entity's statement of comprehensive income should show
a single amount comprising:

The pre-tax profit or loss of discontinued operations

The post-tax profit or loss of discontinued operations
The pre-tax profit or loss of discontinued operations and the pre-tax gain or loss on the remeasurement
or disposal of the assets of discontinued operations
1 The post-tax profit or loss of discontinued operations and the post-tax gain or loss on the
remeasurement or disposal of the assets of discontinued operations

30 On 30 April 2016, a company classified a freehold building as held for sale. The building had a carrying
amount on that date of £5m. The building has been valued by an estate agent at £6m and selling costs
are expected to absorb 5% of this amount.
In the company's statement of financial position at 30 April 2016, the building should be shown at:

£5.7m
£6m
£4.75m
1 £5m

31 IFRS 5 requires entities to present and disclose information which enables users to evaluate the
effects of discontinued operations. This improves:

Verifiability
Timeliness
1 Comparability
Neutrality

32 Which of the following items cannot be included in the cost of inventories?

Variable production overheads

Fixed production overheads
Irrecoverable import duties payable on the acquisition of inventories
1 The cost of abnormal wastage of materials and labour

33 Which of the following items should be included in the cost of inventories?

1 Conversion costs
The cost of abnormal wastage of materials and labour
Selling costs
The cost of storing finished goods

34 The cost formulas permitted by IAS2 are:

1 FIFO and AVCO

LIFO and AVCO
FIFO and LIFO
FIFO, LIFO and AVCO

35 The FIFO cost formula assumes that:

Newer inventory items are sold or consumed before older inventory items
1 The inventory items which are sold or consumed are those acquired longest ago
The inventory items which are sold or consumed are a mixture of those acquired previously
The inventory items which are sold or consumed are those acquired most recently
36 The net realisable value of inventories is defined by IAS2 as:

Cost price
Selling price
1 Selling price less costs of completion and selling costs
Selling price less costs of completion

37 On 31 December 2015, a company has partly-completed inventory with a cost to date of £26,300. It is
expected that further costs of £8,900 will be incurred in order to complete the inventory. It will then be
sold for £47,500. Selling costs will be £2,000.
The cost and the net realisable value of this inventory at 31 December 2015 are:

£26,300 and £38,600

£35,200 and £45,500
£35,200 and £47,500
1 £26,300 and £36,600

(Cost is £26,300 / NRV = £47,500 – £8,900 – £2,000 = £36,600)

38 IAS 2 states that inventories should be measured at:

The higher of cost and net realisable value

Cost
Net realisable value
1 The lower of cost and net realisable value

39 At the end of an accounting period, the cost of a company's inventory is £450,000. This includes
damaged items with a cost of £25,000 which are expected to be sold for only £10,000 (less selling
expenses of 5%). All other items of inventory have a net realisable value which exceeds cost. The
amount at which the company's inventory should be recognised at the end of the period is:

£450,000
1 £434,500
£425,000
£435,000

40 A company which makes only one type of product incurs fixed production overheads of £180,000 for
an accounting year. Actual production during the year was 30,000 units. Normal production is 24,000
units per annum. The amount of fixed production overheads that should be allocated to each unit of
production is:
£nil
£30
£7.50
1 £6

41 With regard to the definition of revenue given by IFRS15, which of the following statements is true?

1 Revenue arises from ordinary activities only

Revenue may arise from either ordinary activities or extraordinary activities
Revenue includes cash received from borrowings
Revenue includes cash received from share issues

42 Step 1 of the "five-step model" states that certain conditions must be satisfied before an entity can
account for a contract with a customer. Which of the following is not one of these conditions?

Each party's rights with regard to the goods or services concerned can be identified
1 It is certain that the entity will collect the consideration to which it is entitled
The entity and the customer have approved the contract and are committed to perform their
contractual obligations
The payment terms can be identified

43 A company enters into a contract to build a factory for a customer. The agreed price is £2m and the
specified completion date is 31 October 2016. However, the contract provides that the company should
receive an incentive payment of a further £250,000 if the factory is completed by 30 September 2016.
Similarly, the price will be reduced by £250,000 if the factory is not completed until after 30 November
2016.

The company estimates that there is a 15% probability that the factory will be completed by 30
September 2016, an 80% probability that it will be completed in October 2016 or November 2016 and a
5% probability that it will not be completed until after 30 November 2016.

What is the expected value of the transaction price for this contract?

£1.975m
1 £2.025m
£2.125m
£2m

44 The accounting principle applied by IFRS 15 when determining whether or not revenue should be
recognised in respect of a repurchase agreement is:

Relevance
1 Substance over form
Prudence
Verifiability

45 A performance obligation is satisfied over time if:

The customer does not receive or consume the benefits provided by the entity's performance until the
obligation is completely satisfied
The entity does not have an enforceable right to payment for the performance that has been completed
to date
1 The entity's performance creates an asset that the customer controls as it is created
The entity's performance creates an asset which has an alternative use to the entity

46 A company enters into a contract to supply three distinct products to a customer. The promise to
supply each of these products is regarded as a separate performance obligation. The stand-alone prices
of the three products (if sold singly) are:

Product X £12,500
Product Y £24,000
Product Z £27,500

The agreed contract price is £57,600. How should this price be allocated to performance obligations?

Product X £10,367 / Product Y £21,867 Product Z £25,366

Product X £12,500 / Product Y £24,000 / Product Z £27,500
Product X £19,200 / Product Y £19,200 / Product Z £19,200
1 Product X £11,250 /Product Y £21,600 / Product Z £24,750

47 In general, contract costs incurred in relation to a contract with a customer must be:

Recognised as an asset if they are not expected to be recovered

Recognised as an asset if they relate to a performance obligation which has been satisfied
Recognised as an expense when incurred
1 Recognised as an asset if they relate to a performance obligation which has not yet been satisfied

48 The carrying amount of contract costs relating to a performance obligation and recognised as an
asset is £120,000. Further costs required in order to satisfy the obligation are estimated to be £30,000.
The consideration receivable by the company when the obligation is satisfied is £132,000.

Calculate the amount of the impairment loss (if any) which should be deducted from the contract asset
and recognised as an expense.
£30,000
£42,000
1 £18,000
£nil

49 Short-term employee benefits do not include:

1 Bonuses payable more than 12 months after the end of the period in which the related employee
services are performed
Short-term sick pay
Benefits in kind
Employer's social security contributions

50 Defined benefit plans are post-retirement benefit plans where:

The employer pays an agreed level of contributions into the pension fund each year and is not obliged to
make any further contributions
The employer is legally obliged to provide an agreed level of post-employment benefits
The risk that benefits will be less than expected falls upon the employees
1 The employer is legally or constructively obliged to provide an agreed level of post-employment
benefits

51 In the case of a defined benefit plan, the employer's statement of financial position should show:

An asset or liability equal to the difference between the present value of the defined benefit obligation
at the end of the reporting period and the cost of the plan assets at the end of the reporting period
A liability equal to the undiscounted defined benefit obligation at the end of the reporting period
1 An asset or liability equal to the difference between the present value of the defined benefit
obligation at the end of the reporting period and the fair value of the plan assets at the end of the
reporting period
An asset equal to the cost of the plan assets at the end of the reporting period

52 In the case of a defined benefit plan, the expense shown in the employer's statement of
comprehensive income should normally include:

The interest cost for the period

The present value of the current service cost for the reporting period
The interest income for the period
1 All of the above

53 In the case of a defined benefit plan, actuarial gains may arise because:
There are adverse differences between actuarial assumptions made at the end of the previous period
and actual events which have occurred in the current period
Benefits paid during the period are less than employer contributions.
1 There are favourable differences between actuarial assumptions made at the end of the previous
period and actual events which have occurred in the current period
Benefits paid during the period are less than employee contributions.

54 In the case of a defined benefit scheme, the items which must be shown in other comprehensive
income in the statement of comprehensive income are:

Interest cost and interest income

Actuarial gains or losses only
1 Actuarial gains or losses and the return on plan assets (less interest income)
Return on plan assets only

55 A company's estimate of its current tax liability for the year to 31 December 2014 differed from the
actual tax liability by £10,000. This resulted in a credit balance of £10,000 being shown in the company's
trial balance as at 31 December 2015.

The current tax liability for the year to 31 December 2015 is estimated to be £340,000.

The current tax expense which should be shown in the statement of comprehensive income for the year
to 31 December 2015 is:

£340,000
£350,000
1 £330,000
£10,000

56 Deferred tax should be accounted for in relation to certain differences between taxable profit and
accounting profit. The differences which require an entity to account for deferred tax are:

Both temporary differences and permanent differences

1 Permanent differences
Neither temporary differences nor permanent differences
Temporary differences

57 A company's financial statements for the year to 30 June 2016 show a pre-tax profit of £500,000. This
is after charging depreciation of £100,000. Depreciation for the year for tax purposes is £160,000.
Assuming that the rate of tax paid by the company is 20%, the required transfer to or from the
company's deferred tax account is:
A transfer of £12,000 from the deferred tax account
1 A transfer of £12,000 to the deferred tax account
A transfer of £32,000 from the deferred tax account
A transfer of £32,000 to the deferred tax account

(Taxable profits for the year are £60,000 less than accounting profits and this is caused by a temporary
difference. Therefore £12,000 (20% of £60,000) is transferred to the deferred tax account.)

58 A company's financial statements for the year to 31 March 2016 show a pre-tax profit of £2,700,000.
This is after charging depreciation of £320,000.
Depreciation for the year for tax purposes is £150,000. Assuming that the rate of tax paid by the
company is 23%, the required transfer to or from the company's deferred tax account is:

A transfer of £34,500 from the deferred tax account

A transfer of £34,500 to the deferred tax account
1 A transfer of £39,100 from the deferred tax account
A transfer of £39,100 to the deferred tax account

(Taxable profits for the year are £170,000 greater than accounting profits and this is caused by a
temporary difference. Therefore £39,100 (23 % of £170,000) is transferred from the deferred tax
account.)

59 The tax base of an asset is defined by international standard IAS 12 as the amount which is
attributable to that asset for tax purposes. If the tax base of an asset is less than its carrying amount, this
is evidence of:

A deductible temporary difference

A deductible permanent difference
1 A taxable temporary difference
A taxable permanent difference

60 An item of property, plant and equipment is shown in a company's statement of financial position at
its written down value of £420,000. For tax purposes, the item's written down value is £610,000. The
residual value of the item at the end of its useful life is expected to be £nil.

Assuming that the company pays tax at 23%, the resulting deferred tax asset or liability is:

£nil
Deferred tax asset of £190,000
Deferred tax liability of £43,700
1 Deferred tax asset of £43,700
61 Unpaid expenses are shown in a company's statement of financial position as a current liability of
£30,000. These expenses have already been deducted when computing accounting profit but will not be
deducted for tax purposes until they are paid.

Assuming that the company pays tax at 20%, the resulting deferred tax asset or liability is:

Deferred tax asset of £30,000

1 Deferred tax asset of £6,000
Deferred tax liability of £6,000
£nil

62 A company uses the indirect method for reporting cash flows from operating activities. During an
accounting period, inventories have risen by £5,000, trade receivables have fallen by £4,000 and trade
payables have risen by £3,000. When calculating the net cash inflow or outflow from operating
activities, the required adjustments are as follows:

Add £5,000, Subtract £4,000, Subtract £3,000

Subtract £5,000, Add £4,000, Add £3,000
Subtract £5,000, Add £4,000, Subtract £3,000
Add £5,000, Subtract £4,000, Add £3,000

63 A company uses the indirect method for reporting cash flows from operating activities. During an
accounting period, plant which had cost £30,000 some years ago was sold for £3,000. The accumulated
depreciation on this plant at the time of disposal was £25,000. The effects of this transaction on the
statement of cash flows are as follows:

Operating activities: Add disposal proceeds £3,000 / Investing activities: Subtract loss on disposal of
plant £2,000
Operating activities: Add back loss on disposal £2,000 / Investing activities: Cash received on disposal
of plant £3,000
Operating activities: Subtract loss on disposal £2,000 / Investing activities: Cash received on disposal of
plant £3,000
Operating activities: Add back loss on disposal £5,000 / Investing activities: Cash received on disposal of
plant £3,000

64 The carrying amount of a company's property, plant and equipment was £740,000 at the beginning of
an accounting year and £835,000 at the end of the year. The depreciation charge for the year was
£100,000. Plant with a carrying amount of £25,000 was sold during the year for £10,000 and a property
was revalued upwards by £50,000. The cash outflow caused by the acquisition of property, plant and
equipment during the year was:
£155,000
£205,000
£170,000
£220,000

65 The current tax liability shown in a company's statement of financial position at 31 December 2016 is
£392,000. The comparative figure at 31 December 2015 was £355,000. The tax expense shown in the
statement of comprehensive income for the year to 31 December 2016 is £410,000. A transfer of £5,000
was made to the deferred tax account during the year. The amount of tax paid during the year to 31
December 2016 was:

£410,000
£355,000
£342,000
£368,000

66 When a parent company acquires a subsidiary, the amount paid for goodwill is equal to the amount
paid by the parent company for its shares in the subsidiary company, less:

The nominal value of those shares

1 The nominal value of those shares plus the parent's stake in the subsidiary's reserves
The market value of those shares plus the parent's stake in the subsidiary's reserves
The market value of those shares

67 On 1 July 2016, A Ltd pays £870,000 to acquire the entire share capital of B Ltd. The equity of B Ltd on
that date consists of ordinary share capital of £400,000 and retained earnings of £210,000. The fair
value of the non-current assets of B Ltd on 1 July 2016 exceeds their carrying amount by £35,000. The
amount paid for goodwill by A Ltd is:

£260,000
£470,000
1 £225,000
£295,000

(The equity of B Ltd (including fair value adjustment of £35,000) is £645,000. So the amount paid for
goodwill is £225,000 (£870,000 – £645,000)

68 On 1 May 2014, C Ltd paid £430,000 to acquire the entire share capital of D Ltd. The equity of D Ltd
on that date consisted of ordinary share capital of £200,000 and retained earnings of £90,000. All of its
assets and liabilities were carried at fair value.
On 30 April 2016, the retained earnings of C Ltd and D Ltd are £970,000 and £115,000 respectively.
Goodwill arising on consolidation has suffered an impairment loss of 25% since 1 May 2014.
Group retained earnings at 30 April 2016 are:

£1,085,000
£1,050,000
1 £960,000
£980,000

(The amount paid for goodwill was £140,000 (£430,000 – £290,000). So the impairment loss is £35,000
(25% of £140,000). The retained earnings of D Ltd have increased by £25,000 since acquisition.
Therefore group retained earnings at 30 April 2016 are (£970,000 +£25,000 – £35,000) = £960,000.)

69 On 1 January 2009, P Ltd paid £480,000 to acquire 65% of the ordinary share capital of Q Ltd. The
equity of Q Ltd on that date consisted of ordinary share capital of £200,000 and retained earnings of
£150,000. The fair value of the non-current assets of Q Ltd on 1 January 2009 exceeded their carrying
amount by £250,000. Goodwill arising on consolidation has suffered an impairment loss of 40% between
1 January 2009 and 31 December 2016. The goodwill figure which should be shown in the consolidated
statement of financial position at 31 December 2016 is:

£151,500
£36,000
1 £54,000
£78,000

(The amount paid for goodwill by P Ltd was £90,000 (£480,000 – 65 % of (£350,000 + £250,000)). The
impairment loss is £36,000 (40% of £90,000) so the goodwill figure at 31 December 2016 is £54,000.)

70 On 1 January 2013, E Ltd paid £560,000 to acquire 80% of the ordinary share capital of F Ltd. The
equity of F Ltd on that date consisted of ordinary share capital of £300,000 and retained earnings of
£150,000. All of its assets and liabilities were carried at fair value.
On 31 December 2016, the retained earnings of E Ltd and F Ltd are £1,870,000 and £65,000 respectively.
Goodwill arising on consolidation has suffered an impairment loss of 70% since 1 January 2013. The
retained earnings figure which should be shown in the consolidated statement of financial position at 31
December 2016 is:

£1,708,000
£1,725,000
1 £1,662,000
£1,645,000

(The amount paid for goodwill was £200,000 (£560,000 – 80 % of (£300,000 + £150,000)) so the
impairment loss is £140,000 (70 % of £200,000). The retained earnings of F Ltd have decreased by
£85,000 since acquisition. 80 % of this is £68,000. Therefore group retained earnings at 31 December
2016 are (£1,870,000 – £68,000 – £140,000) = £1,662,000.)

71 Which of the following is not an example of an intra-group balance?

A trade payable owing to a subsidiary by its parent company

A loan made by one subsidiary to another
1 A trade receivable owing to a subsidiary by an individual who is one of its customers
A loan made by a parent company to a subsidiary

72 G Ltd owns 90% of the ordinary share capital of H Ltd. The inventories of H Ltd on 30 November 2015
include goods purchased from G Ltd for £300,000. These goods had been sold to H Ltd by G Ltd at a
markup of 50%. The amount of unrealised profit which should be subtracted from group inventories and
from group retained earnings is:

£150,000
1 £100,000
£135,000
£90,000

(The original cost of the goods to G Ltd must have been £200,000, since £200,000 plus 50% is £300,000.
So the unrealised profit is £100,000. This must be eliminated in full, despite the fact that H Ltd is a
partly-owned subsidiary.)

73 During an accounting period, a parent company sells goods to one of its subsidiaries for £10,000.
These goods cost the parent company £6,000. At the end of the accounting period, three-quarters of the
goods have been sold by the subsidiary to customers outside the group but the remaining one-quarter
of the goods are still held in inventories. The adjustments required when preparing the group statement
of comprehensive income are:

Subtract £10,000 from group sales revenue and subtract £10,000 from group cost of sales
Subtract £10,000 from group sales revenue and subtract £11,000 from group cost of sales
Subtract £10,000 from group sales revenue and subtract £6,000 from group cost of sales
1 Subtract £10,000 from group sales revenue and subtract £9,000 from group cost of sales

[Unrealised profit is £1,000 (one-quarter of £4,000). This should be added to group cost of sales, since a
reduction in closing inventories causes an increase in cost of sales. The adjustment to group cost of sales
is therefore £9,000 (£10,000 subtracted to eliminate the intra-group purchase and £1,000 added in
relation to unrealised profit).]

74 During an accounting period, a parent company sells goods to one of its subsidiaries for £200,000.
This represents cost plus 25%. At the end of the accounting period, one-fifth of these goods are still held
in the subsidiary's inventories. The cost of sales figures reported in the parent's and the subsidiary's
financial statements are £890,000 and £530,000 respectively.
The parent company has a 60% interest in the subsidiary's ordinary shares. The cost of sales figure that
should appear in the consolidated statement of comprehensive income for the year is:

1 £1,228,000
£1,212,000
£1,260,000
£1,096,000

[The goods that were sold by the parent to the subsidiary must have cost the parent £160,000 (since
£160,000 plus 25% = £200,000). Therefore the profit loading was £40,000 and the unrealised profit is
£8,000 (one-fifth of £40,000).

Group cost of sales is £1,228,000 (£890,000 + £530,000 – £200,000 + £8,000). The fact that the
subsidiary is partly-owned is irrelevant to this calculation.]

75 A parent company owns 73% of a subsidiary's ordinary shares. The non-controlling interest in the
group statement of financial position is measured at the appropriate proportion of the subsidiary's
identifiable net assets. An impairment loss in relation to goodwill arising on consolidation should be
accounted for in the group statement of comprehensive income as follows:

Do nothing
Recognise 73% of the impairment loss as a group expense and subtract the remaining 27% from the
profit attributable to the non-controlling interest
1 Recognise 100% of the impairment loss as a group expense
Recognise 73% of the impairment loss as a group expense but make no further adjustments

76 The amount of profit attributable to the non-controlling interest in a 90% subsidiary is generally
equal to:

10% of the subsidiary's profit before tax

10% of the subsidiary's profit after tax
10% of the group profit after tax
10% of the group profit before tax

77) When preparing a set of group financial statements, the correct treatment of dividends paid by a
subsidiary company to its non-controlling shareholders is to:

1 Deduct them in the non-controlling interest column in the group statement of changes in equity
Cancel them against dividends received by the parent company
Add them in the non-controlling interest column in the group statement of changes in equity
Ignore them completely

78) In an accounting period, a parent company has pre-tax profits of £5m. Its 75% subsidiary has pre-tax
profits of £2m. The tax expense for both companies is equal to 30% of profit before tax. The profit
attributable to the non-controlling interest is:

£500,000
1 £350,000
£1,225,000
£1,750,000

[The subsidiary's tax expense is £600,000 (30% of £2m) so its profit after tax is £1.4m. Profit attributable
to the NCI is £350,000 (25% of £1.4m)]

79) Which of the following is an example of an intra-group item which is cancelled out when preparing
the group statement of comprehensive income?

Administrative fees charged by a parent to a subsidiary

Interest payable by a subsidiary to its parent
Management expenses charged by one subsidiary to another
1 All of the above

80) An associate is an entity over which the investor has:

1 Significant influence
Some influence
Control
Joint control

81) Which of the following would normally indicate that an investor has significant influence over an
investee?

The investor has the right to appoint or remove members of the investee's key management personnel
The investor has the right to direct the investee to enter into transactions for the investor's benefit
The investor owns 55% of the investee's ordinary shares
1 The investor owns 21% of the investee's ordinary shares

82) An investment in an associate is normally accounted for using the equity method. This method
requires that the investment in the associate is:

Recognised at fair value

Initially recognised at cost and not adjusted thereafter
1 Initially recognised at cost and then adjusted in each subsequent accounting period to reflect the
investor's share of the associate's profit or loss for the period
Initially recognised at cost and then adjusted to fair value in subsequent accounting periods

83) On 1 May 2015, V Ltd acquired 35% of the ordinary share capital of W Ltd at a cost of £472,500. It
was agreed that this amount was equal to 35% of the fair value of the net assets of W Ltd on that date.
In the year to 30 April 2016, W Ltd made a profit after tax of £80,000 and paid an ordinary dividend of
£32,000. In the financial statements of V Ltd, the carrying amount of the investment in W Ltd as at 30
April 2016 should be:

£520,500
£472,500
£500,500
1 £489,300

[V Ltd's share of the profit of W Ltd for the year is £28,000 (35% of £80,000). Similarly, V Ltd's share of
the dividend is £11,200 (35% of £32,000). The carrying amount of the investment becomes £489,300
(£472,500 + £28,000 – £11,200).]

84) An investor company has a 22% interest in an associate. During an accounting period, the investor
bought goods from the associate for £70,000. These goods had cost the associate £50,000. One-quarter
of the goods remained in the investor's inventories at the end of the period. The unrealised profit is:

1 £1,100
£20,000
£5,000
£4,400

[The unrealised profit is £1,100 (22% of one-quarter of £20,000).]

85) A person (P) is necessarily related to a reporting entity (R) if:

P owns ordinary shares in R

P's grandfather has control over R
P is an employee of R
1 P is the domestic partner of a director of R

86) A person (P) is not necessarily related to a reporting entity (R) if:

1 P is a major customer of R
P is a director of R
P is a director of R's parent company
P's father has significant influence over R

87) An entity (E) is necessarily related to a reporting entity (R) if:

E owns ordinary shares in R

E is a major supplier of R
1 E and R are both subsidiaries of the same parent
E is a bank which lends money to R

88) An entity (E) is not necessarily related to a reporting entity (R) if:

E is an associate of R
E has significant influence over R
E is a subsidiary of a subsidiary of R
1 E and R have a director in common

89) Factors which might help to determine an entity's functional currency include:

The currency that mainly influences sales prices for the entity's goods and services
The currency that mainly influences the costs of providing goods and services
The currency in which funds from financing activities are generated
1 All of the above

90) A company prepares financial statements to 31 December each year and has the pound sterling as
its functional currency. On 29 October 2015, the company buys inventory for $28,380. This amount is
still unpaid at 31 December 2015. The inventory is all sold during the month of December. Exchange
rates are £1 = $1.65 on 29 October 2015 and £1 = $1.72 on 31 December 2015. Calculate: (a) the
amount in £ at which the purchase and the trade payable should be recorded on 29 October 2015 (b)
the amount in £ at which the trade payable should be shown in the statement of financial position at 31
December 2015 (c) the exchange difference which arises.

(a) £17,200 (b) £17,200 (c) £nil

1 (a) £17,200 (b) £16,500 (c) £700 (favourable)
(a) £16,500 (b) £16,500 (c) £nil
(a) £17,200 (b) £16,500 (c) £700 (adverse)

91) A company's issued share capital throughout an accounting period consists of 500,000 ordinary
shares of 20p and 80,000 preference shares of £1. Profit after tax for the period is £320,000 and the
preference dividend is £8,000. Basic EPS for the period is:

64p
1 62.4p
55.2p
£3.12

92) On 1 January 2015, a company's issued share capital consisted of 120,000 ordinary shares of £1. On
1 May 2015, the company issued another 30,000 ordinary shares and on 1 July 2015 the company issued
a further 50,000 shares. Both issues were made at full market price. The weighted average number of
shares outstanding during the year to 31 December 2015 was:

1 165,000
160,000
156,667
175,000

93) A company's profit after tax for the year to 30 June 2016 was £1m. The company's issued share
capital at 1 July 2015 consisted of 2,400,000 ordinary shares of 50p each. A further 300,000 shares were
issued at full market price on 1 September 2015. Basic EPS for the year is:

75.5p
39.2p
78.4p
1 37.7p

94) A company's profit after tax for the year to 31 December 2015 was £150,000. The comparative
figure for 2014 was £135,000. The company's issued share capital at 1 January 2014 consisted of
240,000 ordinary shares. A 1 for 4 bonus issue was made on 1 July 2015. There were no other share
issues in either year. Basic EPS for 2015 and restated basic EPS for 2014 are:

55.6p and 50p

50p and 45p
50p and 56.25p
55.6p and 56.25p

95) In February 2016, a company makes a 1 for 10 rights issue at 70p per share. The market value of the
company's shares just before this rights issue was £1.25 per share. The theoretical market value per
share after the rights issue has been made is:

70p
£1.32
£1.20
£1.14
96) A company's profit after tax for the year to 31 December 2015 was £275,000. The company's issued
share capital on 1 January 2015 consisted of 350,000 ordinary shares. On 1 April 2015, the company
made a 1 for 7 rights issue at £1 per share. The market value of the company's shares just before this
rights issue was £1.40 per share. Basic EPS for 2015 is:

70.1p
75.8p
68.75p
70.4p