Section A – ALL 20 questions are compulsory and MUST

be attempted
1 Monty had profit before tax of $3 million for the year ended 31 March 20X3, after charging loan interest of
$150,000 and interest on a finance lease of $250,000. Extracts from the equity and liabilities section of the
statement of financial position of Monty at 31 March 20X3 are as follows.
$’000 $’000
Total equity 12,550
Non-current liabilities
8% loan notes 1,400
Deferred tax 1,500
Finance lease obligation 1,200
4,100
Current liabilities
Finance lease obligation 750
Trade payables 2,650
Current tax 1,250
4,650

What is the return on year-end capital employed?

A 16.3%
B 21.4%
C 18.6%
D 24.3% (2 marks)

2 How can ROCE be further analysed into its component ratios?

A Gross profit margin / net asset turnover
B Gross profit margin × net asset turnover
C Net profit margin / net asset turnover
D Net profit margin × net asset turnover (2 marks)

3 At 1 April 20X2 Atlas had in issue 80 million 50c equity shares. On 1 July 20X2 Atlas made and recorded a
fully subscribed rights issue of 1 for 4 at $1.20 each. Immediately before this issue the stock market value of
Atlas’s shares was $2 each, giving a theoretical ex-rights price of $1.84. Earnings for the year amounted to
$31.2 million.
What is the basic earnings per share of Atlas for the year ended 31 March 20X3?
A 32.8c
B 31.2c
C 32.3c
D 33.4c (2 marks)

4 At 31 March 20X2 Monty had equity of $9.75 million, loan notes of $3.125 million and finance lease
obligations totalling $1.5 million.
During the year to 31 March 20X3 equity increased by $2.8 million, $1.725 million of the loan notes were
repaid and finance lease obligations increased by $450,000.
What was gearing (debt / debt + equity) at 31 March 20X3?
A 10%
B 35%
C 28%
D 21% (2 marks)

Mock exam 1: questions 217

 5 On 1 October 20X2 Atlas sold $10 million of maturing inventory to Xpede. The cost of the goods at the date
of sale was $7 million and Atlas has the option to repurchase these goods at any time within three years of
the sale at a price of $10 million plus accrued interest from the date of sale at 10% per annum. At 31 March
20X3 the option had not been exercised but it is highly likely that it will be before the date it lapses.
What should be the net effect on profit or loss of this transaction for the year ended 31 March 20X3?
A Credit $3,000,000
B Charge $500,000
C Credit $2,500,000
D Credit $2,000,000 (2 marks)

6 Radar’s sole activity is the operation of hotels all over the world. After a period of declining profitability,
Radar’s management took the following steps during the year ended 31 March 20X3:
(i) It entered into negotiations with a buyer to sell all of its hotels in country A
(ii) It disposed of two loss-making hotels in country B
Which of these decisions meet the criteria for being classified as discontinued operations in the financial
statements for the year ended 31 March 20X3?
A (i)
B (ii)
C Both of them
D Neither of them (2 marks)

7 Which of the following is not an advantage which could be expected to follow from global harmonisation of
accounting standards?
A Elimination of exchange differences
B Easier transfer of accounting staff across national borders
C Ability to comply with the requirements of overseas stock exchanges
D Better access to foreign investor funds (2 marks)

8 Ravenscroft is closing one of its production facilities and satisfies the requirements for a restructuring
provision. The facility has 250 employees. 50 will be retrained and deployed to other subsidiaries; the
remainder will accept redundancy and be paid an average of $5,000 each. Plant has a carrying amount of
$2.2 million but is only expected to sell for $500,000, incurring $50,000 of selling costs. The facility itself is
expected to sell for a profit of $1.2 million.
What amount should be provided for restructuring?
A $2,750,000
B $2,875,000
C $2,650,000
D $2,775,000 (2 marks)

9 Which of the following would not give rise to a valid provision in accordance with IAS 37 Provisions,
contingent liabilities and contingent assets?
A A company’s operations have caused environmental damage. It is not legally obliged to rectify this
but will do so in order to maintain its eco-credentials.
B A company is vacating a factory building that it was occupying under an operating lease. It is moving
to a new building on 1 July but the lease on the existing building runs up to 1 September and cannot
be cancelled.
C A company has decided to change one of its current raw materials for a substitute which is more
environmentally friendly. This material is more expensive and it is estimated that this will lead to a $2
million reduction in profit in the coming year.
D A company sells a product with a six-month guarantee which provides customers with free repairs or
replacement for any defect which arises within that period. (2 marks)

218 Mock exam 1: questions

10 Speculate owned an office building with a depreciated historical cost of $2 million and a remaining useful life
of 20 years at 1 April 20X2. On 1 October 20X2 Speculate ceased to occupy the building and let it out to a
third party. The property was reclassified as an investment property, applying the revaluation model in
accordance with IAS 40 Investment Property. The value of the property was independently assessed at $2.3
million at 1 October 20X2 and had risen to $2.34 million by 31 March 20X3.
What amount will be charged/credited to profit or loss in respect of this property for the year ended 31
March 20X3?
A Credit $40,000
B Charge $50,000
C Charge $10,000
D No charge or credit (2 marks)

11 At what amount does IAS 41 Agriculture generally require biological assets to be measured upon initial
recognition?
A Cost
B Fair value
C Market value
D Fair value less costs to sell (2 marks)

12 What are the two fundamental qualitative characteristics of financial information according to the
Conceptual Framework?
A Relevance and faithful representation
B Accruals and going concern
C Going concern and faithful representation
D Relevance and accruals (2 marks)

13 The Conceptual Framework describes a number of different measurement bases. One of them is described
as follows.
‘Assets are carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset was acquired currently. Liabilities are carried at the undiscounted amount of cash or cash
equivalents that would be required to settle the obligation currently.’
Which measurement basis is being described?
A Historical cost
B Current cost
C Realisable (settlement) value
D Present value (2 marks)

14 Pisces has an asset carried at $6.5 million in its statement of financial position at 31 December 20X2. The
present value of the cash flows which the asset will generate for the rest of its useful life is $5.8 million. The
current cost of an identical asset of the same age is $6.1 million. Pisces has received an offer of $6.2
million for the asset. The cost of dismantling the asset and transporting it to the customer would be
$200,000.
At what amount should the asset be recognised in the statement of financial position at 31 December 20X2?
A $6 million
B $6.5 million
C $6.1 million
D $5.8 million (2 marks)

Mock exam 1: questions 219

 15 Which one of the following would require adjustment to the financial statements according
to IAS 10 Events After the Reporting Period if they took place between the end of the reporting period and
the date the financial statements were authorised for issue?
A A decision to discontinue an operation
B A collapse in property prices, affecting the company’s portfolio
C Sale of inventory in its year-end condition at a price below its year end carrying amount
D Legal action commenced by a supplier (2 marks)

16 IFRS 10 Consolidated Financial Statements provides a definition of control and identifies three separate
elements of control. Which one of the following is not one of these elements of control?
A Power over the investee
B The power to participate in the financial and operating policies of the investee
C Exposure to, or rights to, variable returns from its involvement with the investee
D The ability to use its power over the investee to affect the amount of the investor’s returns (2 marks)

17 Springthorpe entered into a three-year contract on 1 January 20X2 to build a factory. The contract price was
$12 million. At 31 December 20X2 details of the contract were as follows.
$m
Costs to date 6
Estimated costs to complete 9
Progress billings 4
Certified complete 40%
What amount should appear in the statement of financial position of Springthorpe as at 31 December 20X2
as amount due to/from customers in respect of this contract?
A $1 million due to customers
B $2 million due to customers
C $1 million due from customers
D $2 million due from customers (2 marks)

18 How does IFRS 9 Financial Instruments require investments in equity instruments to be measured and
accounted for (in the absence of any election at initial recognition)?
A Fair value with changes going through profit or loss
B Fair value with changes going through other comprehensive income
C Amortised cost with changes going through profit or loss
D Amortised cost with changes going through other comprehensive income (2 marks)

19 On 1 January 20X1 Penfold purchased a debt instrument for its fair value of $500,000. It had a principal
amount of $550,000 and was due to mature in five years. The debt instrument carries fixed interest of 6%
paid annually in arrears and has an effective interest rate of 8%. It is held at amortised cost.
At what amount will the debt instrument be shown in the statement of financial position of Penfold as at
31 December 20X2?
A $514,560
B $566,000
C $564,560
D $520,800 (2 marks)

20 A sale and leaseback transaction involves the sale of an asset and the leasing back of the same asset. If the
lease arrangement results in a finance lease, how should any ‘profit’ on the sale be treated?
A Recognise immediately in profit or loss
B Defer and amortise over the lease term
C Any excess above fair value to be deferred and amortised, rest to be recognised in profit or loss
D No profit should be recognised (2 marks)

220 Mock exam 1: questions

Section B – ALL 3 questions are compulsory and MUST be
attempted
1 The following trial balance relates to Atlas at 31 March 20X3.
$’000 $’000
Equity shares of 50 cents each 50,000
Share premium 20,000
Retained earnings at 1 April 20X2 11,200
Land and buildings – at cost (land $10 million) (Note 1) 60,000
Plant and equipment – at cost (Note 1) 94,500
Accumulated depreciation at 1 April 20X2: – buildings 20,000
– plant and equipment 24,500
Inventory at 31 March 20X3 43,700
Trade receivables 42,200
Bank 6,800
Deferred tax (Note 2) 6,200
Trade payables 35,100
Revenue 550,000
Cost of sales 411,500
Distribution costs 21,500
Administrative expenses 30,900
Dividends paid 20,000
Bank interest 700
Current tax (Note 2) 1,200
725,000 725,000

Notes
The following notes are relevant.
1 Non-current assets:
On 1 April 20X2, the directors of Atlas decided that the financial statements would show an improved
position if the land and buildings were revalued to market value. At that date, an independent valuer
valued the land at $12 million and the buildings at $35 million and these valuations were accepted by
the directors. The remaining life of the buildings at that date was 14 years. Atlas does not make a
transfer to retained earnings for excess depreciation. Ignore deferred tax on the revaluation surplus.
Plant and equipment is depreciated at 20% per annum using the reducing balance method and time
apportioned as appropriate. All depreciation is charged to cost of sales, but none has yet been
charged on any non-current asset for the year ended 31 March 20X3.
2 Atlas estimates that an income tax provision of $27.2 million is required for the year ended
31 March 20X3 and at that date the liability to deferred tax is $9.4 million. The movement on deferred
tax should be taken to profit or loss. The balance on current tax in the trial balance represents the
under/over provision of the tax liability for the year ended 31 March 20X2.
Required
(a) Prepare the statement of profit or loss and other comprehensive income for Atlas for the year
ended 31 March 20X3. (7 marks)
(b) Prepare the statement of financial position of Atlas as at 31 March 20X3. (8 marks)
(15 marks)

Mock exam 1: questions 221

 2 Monty is a publicly listed company. Its financial statements for the year ended 31 March 20X3 including
comparatives are shown below.
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH
20X3 20X2
$’000 $’000
Revenue 31,000 25,000
Cost of sales (21,800) (18,600)
Gross profit 9,200 6,400
Distribution costs (3,600) (2,400)
Administrative expenses (2,200) (1,600)
Finance costs – loan interest (150) (250)
– lease interest (250) (150)
Profit before tax 3,000 2,050
Income tax expense (1,000) (750)
Profit for the year 2,000 1,300
Other comprehensive income (Note 1) 1,350 –
Total comprehensive income 3,350 1,300

STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH

20X3 20X2
ASSETS $’000 $’000
Non-current assets
Property, plant and equipment 14,000 10,700
Deferred development expenditure 1,000 –
15,000 10,700
Current assets
Inventory 3,300 3,800
Trade receivables 2,950 2,200
Bank 50 1,300
6,300 7,300
Total assets 21,300 18,000

EQUITY AND LIABILITIES

Equity shares of $1 each 8,000 8,000
Revaluation surplus 1,350 –
Retained earnings 3,200 1,750
12,550 9,750
Non-current liabilities
8% loan notes 1,400 3,125
Deferred tax 1,500 800
Finance lease obligation 1,200 900
4,100 4,825
Current liabilities
Finance lease obligation 750 600
Trade payables 2,650 2,100
Current tax payable 1,250 725
4,650 3,425
Total equity and liabilities 21,300 18,000

Notes
1 On 1 July 20X2, Monty acquired additional plant under a finance lease that had a fair value
of $1.5 million. On this date it also revalued its property upwards by $2 million and transferred
$650,000 of the resulting revaluation reserve this created to deferred tax. There were no disposals of
non-current assets during the period.

222 Mock exam 1: questions

 2 Depreciation of property, plant and equipment was $900,000 and amortisation of the deferred
development expenditure was $200,000 for the year ended 31 March 20X3.
Required
Prepare a statement of cash flows for Monty for the year ended 31 March 20X3, in accordance with
IAS 7 Statement of Cash Flows, using the indirect method. (15 marks)
3 (a) On 1 October 20X2, Paradigm acquired 75% of Strata’s equity shares by means of a share exchange
of two new shares in Paradigm for every five acquired shares in Strata. In addition, Paradigm issued
to the shareholders of Strata a $100 10% loan note for every 1,000 shares it acquired in Strata.
Paradigm has not recorded any of the purchase consideration, although it does have other 10% loan
notes already in issue.
The market value of Paradigm’s shares at 1 October 20X2 was $2 each.
The summarised statements of financial position of the two companies at 31 March 20X3 are:
Paradigm Strata
$’000 $’000
ASSETS
Non-current assets
Property, plant and equipment 47,400 25,500
Financial asset: equity investments (Notes 1 and 4) 10,500 3,200
57,900 28,700
Current assets
Inventory (Note 2) 17,400 8,400
Trade receivables (Note 3) 14,800 9,000
Bank 2,100 –
Total assets 92,200 46,100

EQUITY AND LIABILITIES

Equity
Equity shares of $1 each 40,000 20,000
Retained earnings/(losses) – at 1 April 20X2 19,200 (4,000)
– for year ended 31 March 20X3 7,400 8,000
66,600 24,000
Non-current liabilities
10% loan notes 8,000 –

Current liabilities
Trade payables (Note 3) 17,600 13,000
Bank overdraft – 9,100
Total equity and liabilities 92,200 46,100

Notes
The following information is relevant.
1 At the date of acquisition, Strata produced a draft statement of profit or loss which showed it
had made a net loss after tax of $2 million at that date. Paradigm accepted this figure as the
basis for calculating the pre- and post-acquisition split of Strata’s profit for the year ended 31
March 20X3.
Also at the date of acquisition, Paradigm conducted a fair value exercise on Strata’s net assets
which were equal to their carrying amounts (including Strata’s financial asset equity
investments) with the exception of an item of plant which had a fair value of $3 million below
its carrying amount. The plant had a remaining economic life of three years at 1 October
20X2.

Mock exam 1: questions 223

 Paradigm’s policy is to value the non-controlling interest at fair value at the date of
acquisition. For this purpose, a share price for Strata of $1.20 each is representative of the fair
value of the shares held by the non-controlling interest.
2 Each month since acquisition, Paradigm’s sales to Strata were consistently $4.6 million.
Paradigm had marked these up by 15% on cost. Strata had one month’s supply ($4.6 million)
of these goods in inventory at 31 March 20X3. Paradigm’s normal mark-up (to third party
customers) is 40%.
3 Strata’s current account balance with Paradigm at 31 March 20X3 was $2.8 million, which did
not agree with Paradigm’s equivalent receivable due to a payment of $900,000 made by Strata
on 28 March 20X3, which was not received by Paradigm until 3 April 20X3.
4 On 1 January 20X3 Paradigm acquired 35% of the equity shares in Rainbow, a holding which
enabled it to exercise significant influence. Rainbow had retained earnings of $7.5 million at
31 March 20X2 and $13.5 million at 31 March 20X3. Its profits accrue evenly over the year.
Rainbow paid a dividend of $2 million on 1 March 20X3. Paradigm credited its dividend
received to profit or loss.
5 The financial asset equity investments of Paradigm include $3 million paid for the shares in
Rainbow. The other financial asset equity investments of Paradigm and Strata are carried at
their fair values as at 1 April 20X2. As at 31 March 20X3, these had fair values of $7.1 million
and $3.9 million respectively.
6 There were no impairment losses within the group during the year ended 31 March 20X3
Required
Prepare the consolidated statement of financial position for Paradigm as at 31 March 20X3.
(25 marks)
(b) Paradigm has a strategy of buying struggling businesses, reversing their decline and then selling
them on at a profit within a short period of time. Paradigm is hoping to do this with Strata.
Required
As an advisor to a prospective purchaser of Strata, explain any concerns you would raise about
basing an investment decision on the information available in Paradigm’s consolidated financial
statements and Strata’s entity financial statements. (5 marks)
(30 marks)

224 Mock exam 1: questions