FR – Lakshya (Test 5) Question and answers

Examinable portion: Chapter foreign currency, Financial

Instruments, Leases and Revenue
Marks – 30 marks (each question carries 2 marks)
Time allotted: 40 mins

Section A

Q1. Which of the following is NOT an indication that a contract contains a lease under IFRS 16
Leases?

A. The customer has the right to obtain substantially all the economic benefits from the asset
during the period of use

B. The customer has the right to direct the use of the asset

C. The supplier has substantive rights to substitute the asset throughout the period of use

D. The asset is implicitly specified in the contract

Solution: Option C is the correct answer

 The supplier has substantive rights to substitute the asset throughout the period of use.

The other options all indicate that the contract does contain a lease. The right to direct the use of
the asset and to obtain substantially all the economic benefits from the asset are explicit IFRS 16
criteria for a lease. The asset may be explicitly or implicitly specified in the contract. If a supplier has
substantive substitution rights, this means that the contract does not contain a lease.

Q2. Chipping is preparing its financial statements for the year ended 31 December 20X8. At 1 January
20X8, Chipping had equity investments which had a carrying amount of $16.8 million. These included
$9.6 million shares held for trading and $7.2 million shares for which an irrevocable election had
been made at initial recognition. At 31 December 20X8, all of the equity investments were still held
by Chipping. The shares held for trading had a fair value of $8.7 million and the other shares had a
fair value of $8.6 million.
What amounts will be recognised in the statement of profit or loss and other comprehensive
income for the year ended 31 December 20X8 in relation to the equity investments?

A. $0.9 million loss recognised in profit or loss and $1.4 million gain recognised in other
comprehensive income

B. $0.5 million gain recognised in profit or loss

C. $0.9 million loss recognised in other comprehensive income and $1.4 million gain recognised
in profit or loss

D. $0.5 million gain recognised in other comprehensive income

Solution: Option A is the correct answer

 $0.9 million loss recognised in profit or loss and $1.4 million gain recognised in other
comprehensive income

IFRS 9 requires that all equity investments are measured at fair value. By default they are measured
at FVTPL, however an irrevocable election may be made on initial recognition to record gains or
losses on investments in equity instruments in other comprehensive income, IFRS 9 only allows this
option for equity investments not held for trading.

Q3. Dovercourt Copiers Co sells a photocopier to Manningtree for $8,400. The price includes five
years’ servicing. The copier is also sold without servicing for $7,740 and servicing is sold for $172 per
annum.

Under IFRS 15 Revenue from Contracts with Customers, how should the $8,400 transaction price
be split between the different performance obligations and calculate the value allocated to
servicing?

Servicing: $

Solution: $840 is the correct answer

Q4. On 1 April 20X8, Pemberley Co, a manufacturing company sold one of its factories to Bakewell
Co, for its fair value of $12,600,000, and immediately leased it back. At the date of the agreement,
the carrying amount of the factory was $11,900,000.

The present value of the future lease payments is $11,238,150 and the transaction constitutes a sale
in accordance with IFRS 15 Revenue from Contracts with Customers.

How much should Pemberley Co recognise in profit or loss on 1 April 20X8 in respect of this
transaction?

A. $1,361,850
B. $700,000
C. $624,342
D. $75,658

Solution: Option D is the correct answer

Q5.

Solution: Option D is the correct answer

Q6. On 31 March, DT received an order from a new customer, XX, for products with a sales value of
$900,000. XX enclosed a deposit with the order of $90,000.

On 31 March, DT had not obtained credit references of XX and has not determined if it will meet this
order.

According to IFRS 15 Revenue from Contracts with Customers, which TWO of the following indicate
how DT should record this transaction in its financial statements for the year ended 31 March?
 A. Include $900,000 as revenue for the year

B. Include $90,000 as revenue for the year

C. Do not include any amount in revenue for the year

D. Recognise a trade receivable for $810,000

E. Create a contract liability for $90,000

Solution: The correct answers are C and E.

Tutorial note: The criteria for revenue recognition have not yet been met; the advanced payment
should be presented in as a contract liability within current liabilities.

Q7.

Solution: Option A is the correct answer

Q8. Smith co made a purchase order of goods on 20th September 20X8 for Krown 2,20,000. Smith co
has a functional currency of dollars. The goods were delivered on 25th September 20X8. Smith co
made 50% payment for the goods on 28th September whereas the rest of the amount remains
outstanding at the year end. What is the net exchange gain/loss and year end payables balance for
the year ended 30th September 20X8?

Exchange rates are as follows:

At 20th September 20X8 - $1: 2 Krown

At 25th September 20X8 - $1: 2.2 Krown

At 28th September 20X8 - $1: 2.5 Krown

At 30th September 20X8 - $1: 1.8 Krown

A. Net exchange loss of $5,111 and payable should be restated to $61,111

B. Net exchange gain of $6,111 and payable should be restated to $61,111
C. Net exchange gain of $11,000 and payables should be restated to $61,111
D. Net exchange gain of $6,000 and payable should be restated to $61,111

Solution: Option A is the correct answer

Q9. IFRS 15 Revenue from Contracts with Customers states that, where performance obligations are
satisfied over time, entities should apply an appropriate method of measuring progress.

Which TWO of the following are appropriate OUTPUT methods of measuring progress?
 A. Total costs to date of the contract as a percentage of total contract revenue

B. Physical milestones reached as a percentage of physical completion

C. Surveys of performance completed to date as a percentage of total contract revenue

D. Labour hours expended as a percentage of total expected labour hours

Solution: Option B and C is the correct answer

Q10. On 1 January 20X7 Melon leased an asset under the following payment terms:

Deposit 6,000

Balance 14,200

Total contract price 20,200

The balance is payable in two annual instalments commencing 31 December 20X7.

The interest rate implicit in the lease contract is 12%.

The present value of $1 receivable at the end of the year, based on a discount rate of 12%, is:

12%

End of year 1 0.89

2 0.80

What is the finance charge to profit or loss for the year ended 31 December 20X7, in accordance
with IFRS 16 Leases? (Answer in $ in the Answer box)

$
Solution: $1440 is the correct answer

Section B
The following scenario relates to questions Q11–Q15.

Nationa Co manufactures cycling equipment. The following relate to its year ended 30 June 20X5.

Inventory

At 30 June 20X5 it has a number of items of Product A in inventory which cost $68,000 to
manufacture. These were manufactured to meet a customer order and the agreed total price was
$96,000. Due to recent technological advances, the current cost of manufacturing such products is
estimated to be $31,000.

Sale and repurchase

In May 20X5 Nationa Co entered into a contract for the sale of inventory of Product B to Corona Co
for $700,000. Nationa Co received $700,000 on 30 June 20X5 and delivered the goods on 4 July 20X5.
Nationa Co has the right to repurchase the goods on 30 June 20X6 for $840,000.

Lease arrangement

Nationa Co entered into an eight-year lease agreement on 1 July 20X4 for an item of plant. The lease
requires annual payments of $750,000 in arrears. The present value of the future lease payments at
1 July 20X4, discounted at a rate of 6% was $4,657,500. Nationa Co paid lease arrangement fees of
$37,500 on 1 July 20X4. The costs to dismantle the plant at the end of the lease term are $320,000
and the present value of these is $200,640.

Contract with a customer

Nationa Co entered into a contract with a professional cycling team on 1 February 20X5 to provide 10
bikes as well as maintenance support services for a period of a year for a total price of $150,000.
Each bike has a selling price of $15,000 and maintenance support services for a year are usually
charged at $3,750 per bike.

Q11. At what amount is the closing inventory of Product A included in Nationa’s statement of
financial position at 30 June 20X5?

Solution: 68000 will be the correct answer

The inventory is measured at the lower of cost or net realisable value.

Q12. Which statement is correct in relation to the sale of Product B?

A. A financial liability of $700,000 is recognised in Nationa’s statement of financial position at

30 June 20X5

B. Revenue of $700,000 is recognised in Nationa’s statement of profit or loss in the year ended
30 June 20X5.

C. A financial liability of $840,000 is recognised in Nationa’s statement of financial position at

30 June 20X5.

D. A contract liability of $700,000 is recognised in Nationa’s statement of financial position at 30

June 20X5.

Solution: Option A is the correct answer

The transaction is a sale and repurchase arrangement in which Nationa Co has the right to
repurchase the goods sold at a future date. Since the repurchase price is greater than the sale price
this should be treated as a financing arrangement and no revenue should be recognised. A financial
liability is initially measured at the $700,000 proceeds received and the amortised cost method is
applied to wind this up to redemption value at 30 June 20X6.
Q13. What is the total depreciation charge in the statement of profit or loss for the year ended 30
June 20X5 in respect of the right-of-use asset?

A. $582,188
B. $586,875
C. $611,955
D. $626,875

Solution: Option C is the correct answer

Cost 1 July 20X4 ($4,657,500+$37,500 + $200,640) = $4,895,640

Depreciation to 30 June 20X5 ($4,895,640/8) = $611,955

Q14. What is the carrying amount of the non-current lease liability in the statement of financial
position at 30 June 20X5?

Solution: 3688167 js the correct answer

Lease liability

1 July 20X4 + 6% interest - Instalment paid = losing liability

$4,657,500 $279,450 ($750,000) $4,186,950

$4,186,950 $251,217 ($750,000) $3,688,167

Q15. What revenue should Nationa Co recognise in respect of the contract with the cycling team in
the year ended 30 June 20X5?

A. $150,000
B. $132,500
C. $135,000
D. $120,000

Solution: Option B is the correct answer