TEST 3 – FINANCIAL REPORTING

Topics Covered: Chapter 24 – Published Financial Statements

Name of Student: __________________ Time Allowed: 1 Hour
Marks: 50 Marks Marks obtained: _______

SECTION: A – OBJECTIVE TEST QUESTIONS (5 Question X 2 = 10 Marks)

1) Which one of the following would not NECESSARILY lead to a liability being classified as a
current liability?
a) The liability is expected to be settled in the course of the entity's normal operating cycle.
b) The liability has arisen during the current accounting period.
c) The liability is held primarily for the purpose of trading.
d) The liability is due to be settled within 12 months after the end of the reporting period.
(2 marks)

2) Which of the following are NOT items required by IAS 1 Presentation of Financial Statements to be
shown on the face of the statement of financial position?
a) Inventories
b) Provisions
c) Government grants
d) Intangible assets (2 marks)

3) How does IAS 1 define the 'operating cycle' of an entity?

a) The time between acquisition of assets for processing and delivery of finished goods to
customers
b) The time between delivery of finished goods and receipt of cash from customers
c) The time between acquisition of assets for processing and payment of cash to suppliers
d) The time between acquisition of assets for processing and receipt of cash from customers
(2 marks)

4) As at 30 September 20X3 Dune's property in its statement of financial position was:

Property at cost (useful life 15 years) $45 million
Accumulated depreciation $6 million

On 1 April 20X4 Dune decided to sell the property. The property is being marketed by a property
agent at a price of $42 million, which was considered a reasonably achievable price at that date.
The expected costs to sell have been agreed at $1 million. Recent market transactions suggest that
actual selling prices achieved for this type of property in the current market conditions are 10%
less than the price at which they are marketed. At 30 September 20X4 the property has not been
sold.

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 At what amount should the property be reported in Dune's statement of financial position as at 30
September 20X4?
□ $36 million
□ $37.5 million
□ $36.8 million
□ $42 million (2 marks)

5) 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

At what amount will the receivable be shown in the financial statements at 31 December 20X6?
$ (to the nearest $) (2 marks)

SECTION: B (OBJECTIVE CASE QUESTIONS) (20 MARKS)

The following information is to be used for Q6 to Q10.

Cheung Co uses the costs model in relation to property, plant and equipment but has seen a
number of issues during the year following a storm on 1 July 20X8 which caused significant
damage to a number of items of plant and machinery, as well as Cheung Co's properties. The
details of the assets affected are shown below:
Asset Remaining life Carrying amount
at 1 Jan 20X8 at 1 Jan 20X8
$000
Production machinery 5 years 8,000
Factory 20 years 16,000
Head office 20 years 22,000

Cheung Co produces financial statements to 31 December each year.

6) On the date of the storm, the roof in Cheung Co's factory collapsed, damaging one of the items of
production machinery, which had a carrying amount of $5 million at the start of the year. Cheung
Co records depreciation monthly and had already accounted for all depreciation correctly up to 30

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 June 20X8.
Following the damage, the machinery can be used for another 3 years and will generate cash flows
with a present value of $4.2 million. The fair value less costs to sell would be $4 million.
What impairment should be recorded in Cheung Co's statement of profit or loss at 1 July 20X8?
$__________ (2 marks)

7) On 1 July 20X8, Cheung Co decided to sell the other piece of production machinery and replace it
with a new piece of equipment. The production machinery had a carrying amount of $3 million at
1 January 20X8.
At 1 July 20X8, the machinery had a fair value less costs to sell of $2.9 million. Cheung classed the
machinery as an asset held for sale from this date. By 31 December 20X8, the asset remained
unsold but negotiations with interested parties were ongoing.
What expense should be recorded in the statement of profit or loss for the year ended 31
December 20X8?
a) $100,000
b) $200,000
c) $300,000
d) $600,000 (2 marks)

8) In relation to the production machinery to be sold, which of the following is NOT a criterion
which Cheung Co must have met in order for the asset to be classified as held for sale?
a) The asset must be actively marketed at a reasonable price
b) Negotiations surrounding the sale must be in progress
c) The asset is available for immediate sale
d) Management must be committed to a plan to sell (2 marks)

9) At 1 July 20X8, an impairment review of Cheung Co's properties was also carried out. The fair
value of the head office was assessed at $23 million and the fair value of the factory was assessed
at $14 million
Select the correct amount to be recorded for each property at 1 July 20X8.
Head office Factory
$000 $000
23,000 15,600
21,450 14,000
(2 marks)

10) Cheung Co's assistant accountant is unsure of some technical details surrounding impairment. A
collection of statements she has read are detailed below.
Which of the following statements are true?
(i) Impairments must be taken to the statement of profit or loss
(ii) Impairment reviews are required annually for intangible assets
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 (iii) Impairment exists when the recoverable amount exceeds the carrying amount
a) (i) and (iii)
b) (i) only
c) (ii) only
d) None of them (2 marks)

The following information is to be used for Q11 to Q15:

Vernon Co holds a number of financial instruments, which are detailed below.

Item Date acquired/issued Value 1 January X4
$000
Equity investments 1 January 20X4 28,700
4% Convertible bonds 1 January 20X4 30,000
4% Loan notes 1 January 20X4 20,000

11) Vernon Co holds the equity investments using the alternative treatment permitted by IFRS 9.
During the year, Vernon Co sold shares which had cost $7.8 million for $9.7 million. The fair value
of the remaining shares at 31 December 20X4 was $19.8 million.
How much should be taken to the statement of profit or loss for the year ending 31 December
20X4?
$_________'000 gain (2 marks)

12) The $30 million convertible bonds can be converted on 31 December 20X6. Similar loan notes
without the conversion option carry an interest rate of 7%. Relevant discount factors are shown
below.
Year Discount factor Discount factor
4% 7%
1 0.962 0.935
2 0.925 0.873
3 9.889 0.816

How much should be recorded in equity in relation to the convertibles?

a) $3,330,000
b) $Nil
c) $2,100,000
d) $2,371,000 (2 marks)

13) The $20 million 4% loan notes incurred $500,000 issue costs. The loan notes are repayable at a
premium, giving them an effective rate of 8%.

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 What amount should be recorded in finance costs in relation to the loan notes for the year
ending 31 December 20X4?
a) $780,000
b) $800,000
c) $1,560,000
d) $1,600,000 (2 marks)

14) Vernon Co also factored $2 million of its receivables to a bank during the year. The bank paid $1.8
million to Vernon Co. The bank charged Vernon Co a $100,000 fee for this, and all responsibility
for the receivables returns to Vernon Co if the debts are unpaid after 6 months.

Which TWO of the following represent the correct accounting treatment for this arrangement?
a) This is a $1.8 million loan and should be held as a current liability
b) The $100,000 should be expensed in the statement of profit or loss
c) A loss of $200,000 should be recorded in the statement of profit or loss
d) The receivables should be derecognised from the statement of financial position (2 marks)

15) During the year, Vernon Co purchased government bonds which are redeemable in 4 years.
Vernon Co's business model is to hold bonds until redemption and the cash flows are solely
repayments of interest and capital.
If Vernon Co applies the alternative treatment, what is the correct treatment for the bonds?
a) Fair value through other comprehensive income
b) Split accounting
c) Equity accounting
d) Amortised cost (2 marks)

SECTION: C (CONSTRCUTED RESPONSE QUESTIONS) (20 MARKS)

Below is the summarised draft statement of financial position of Dexon, a publicly listed
company, as at 31 March 20X8.
$’000 $’000 $’000
Assets
Non-current assets
Property at valuation (land $20m; buildings $165m (note (i)) 1,85,000
Plant (note (i)) 1,80,500
Financial assets at fair value through profit or loss at 1 April 20X7 (note (ii)) 12,500
3,78,000
Current assets
Inventory 84,000

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 Trade receivables (note (iii)) 52,200
Bank 3,800 1,40,000
Total assets 5,18,000
EQUITY AND LIABILITIES
Equity
Ordinary shares of $1 each 2,50,000
Share premium 40,000
Revaluation surplus 18,000
Retained earnings – At 1 April 20X7 12,300
– For the year ended 31 March 20X8 96,700 1,09,000 1,67,000
4,17,000
Non-current liabilities
Deferred tax – at 1 April 20X7 (note (iv)) 19,200
Current liabilities 81,800
Total equity and liabilities 5,18,000

The following information is relevant.

i. The non-current assets have not been depreciated for the year ended 31 March 20X8.
Dexon has a policy of revaluing its land and buildings at the end of each accounting year. The
values in the above statement of financial position are as at 1 April 20X7 when the buildings
had a remaining life of 15 years. A qualified surveyor has valued the land and buildings at 31
March 20X8 at $180 million.

Plant is depreciated at 20% on the reducing balance basis.

ii. The financial assets at fair value through profit and loss 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.

iii. 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. Dexon is not insured for this loss and it cannot be
recovered from the credit controller, nor is it deductible for tax purposes.

iv. During the year the company's taxable temporary differences increased by $10 million of
which $6 million related to the revaluation of the property. The deferred tax relating to the
remainder of the increase in the temporary differences should be taken to profit or loss. The

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 applicable income tax rate is 20%.

v. The above figures do not include the estimated provision for income tax on the profit for the
year ended 31 March 20X8. After allowing for any adjustments required in items (i) to (iii), the
directors have estimated the provision at $11.4 million (this is in addition to the deferred tax
effects of item (iv)).

vi. Dividends totaling $15.5 million were paid during the year.

Required
Taking into account any adjustments required by items (i) to (vi) above:
(a) Prepare a statement showing the recalculation of Dexon's profit for the year ended 31 March
20X8. (8 marks)
(b) Redraft the statement of financial position of Dexon as at 31 March 20X8. (12 marks)

Notes to the financial statements are not required.

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