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N1612

BSc Accounting and Finance Second Year

Intermediate Financial Accounting 

Mock Exam

Question1

AAP ltd acquired 75% of Joy ltd for £300,000 on 1.5.2013. On that date Joy ltd

equity section in the balance sheet had the following:

                                                        £

Share capital (£1)                  100,000

Share premium                        30,000

General reserves                     20,000

Retained earnings                 140,000

Joy ltd’s share price on 1.05.2013 was quoted at £2.20 and on that date the fair

value of its identifiable assets was the same as their book value.

The goodwill in Juice (non-controlling interest measured at fair value) at acquisition

date is:

a. £65,000

b. £10,000

c. £245,000

d. £190,000

Question 2

AAP ltd acquired 70% of Joy ltd for £300,000 on 01.05.2013. On that date Joy ltd had in issue 200,000 ordinary shares of £0.5 (each issued at 80p when the company was incorporated).

Joy ltd’s share price on 01.05.2013 was quoted at £1.05 and on that date the fair value of its identifiable assets was the same as their book value.

On 01.05.2013 Juice's retained earnings were £180,000 and the fair value of its identifiable assets was the same as their book value.

The goodwill in Juice (non-controlling interest measured at fair value) at acquisition date is:

a. £40,000

b. -£97,000

c. £120,000

d. £23,000

Question 3

What is the amount of the unrealised profit to be eliminated if the parent’s year-end
inventory includes at £540,000 goods invoiced to it by its 60% owned subsidiary at
a mark-up of 25%.

a. £108,000

b. £64,800

c. £81,000

d. £135,000

Question 4

Ruby Co owns 30% of Emerald Co and exercises significant influence over it.
Emerald Co sold goods to Ruby Co for £160,000. Emerald Co applies a one-third
mark-up on cost. Ruby Co still had 25% of these goods in inventory at the year
end.
What amount should be deducted from consolidated retained earnings in respect
of this transaction?

a. 2,000

b.  1,500

c. 3,000

d.  4,500

Question 5

Wetherby Co purchased a machine on 1 July 20X7 for £500,000. It is being depreciated on a straight-line basis over its useful life of ten years. Residual value is estimated at £20,000. On 1 January 20X8, following a change in legislation, Wetherby Co fitted a safety guard to the machine. The safety guard cost £25,000 and has a useful life of five years with no residual value.

What amount will be charged to profit or loss for the year ended 31 March 20X8 in respect of depreciation on this machine?

a. 37,000

b. 36,250

c. 35,250

d. 37,250

Question 6

On 30 September 20X7 the impairment review was carried out. The following amounts were established in respect of the machine:

	＄
Carrying amount	850,000
Value in use	760,000
Fair value	850,000
Costs of disposal	30,000

What should be the carrying amount of the machine following the impairment review?

a. 760,000  

b. 820,000

c. 850,000

d. 800,000

Question 7

On 1 January 20X6 Fellini Co hired a machine under a four-year lease. A deposit of $700,000 was payable on the commencement of the lease on 1 January 20X6. The present value of the future lease payments was $1,871,100. A further 3 instalments of $700,000 are payable annually in advance. The interest rate implicit in the lease is 6%.

What amount will appear under non-current liabilities in respect of this lease in the statement of financial position of Fellini Co at 31 December 20X6? [Answers to nearest $'000]

a. $742,000

b. $1,283,000

c. $1,872,000

d. $700,000

Question 8

On 1 October 20X2 Pricewell Co entered into a contract to construct a bridge over a river. The total contract revenue was $50 million and construction is expected to be completed on 30 September 20X4. Costs to date are:

Materials, labour and overheads: $12m

Specialist plant acquired 1 October 20X2 $8m

The sales value of the work done at 31 March 20X3 has been agreed at $22 million and the estimated cost to complete (excluding plant depreciation) is $10 million. The specialist plant will have no residual value at the end of the contract and should be depreciated on a monthly basis. Pricewell Co recognises satisfaction of performance obligations on the percentage of completion basis as determined by the agreed work to date compared to the total contract price.

What is the profit to date on the contract at 31 March 20X3?

a. $13,200,000

b. $11,440,000

c. $10,000,000

d. $8,800,000

Question 9

Intellect intelligence Co receives a government grant of $400,000 on 1st April 20X6 to facilitate purchase on the same day of an asset which costs $600,000. The asset has a five-year useful life and is depreciated on a 25% reducing balance basis. Company policy is to account for all grants received as deferred income.

What amount of income will be recognized in respect of the grant in the year to 31st March 20X8?

a. $75,000

b. $100,000

c. $125,000

d. $120,000

Question 10

Which of the following items is a change in accounting policy under IAS8 Accounting Policies, Changes in Accounting Estimates and errors?

a. Switching to purchasing plant using leases from a previous policy of purchasing plant for cash.

b. Changing the value of a subsidiary’s inventory in line with the group policy for inventory valuation when preparing the consolidated financial statements.

c. Classifying commission earned as revenue in the statement of profit or loss, having previously classified it as other operating income.

d. Revising the remaining useful life of a depreciable asset.

Question 11

Derringdo Co is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo Co invested in a new server at a cost of $800,000 on 1 October 20X2. The server has an estimated useful life of ten years with a residual value equal to 15% of its cost. Derringdo Co uses straight-line depreciation on a time apportioned basis.

The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo Co has no intention of disposing of the server within the first four years. Derringdo Co's accounting policy for capital-based government grants is to treat them as deferred income and release them to income over the life of the asset to which they relate.

What is the net amount that will be charged to operating expenses in respect of the server for the year ended 31 March 20X3?

a. $10,000

b. $28,000

c. $22,000

d. $34,000

Question 12

Derringdo Co is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo Co invested in a new server at a cost of $800,000 on 1 October 20X2. The server has an estimated useful life of ten years with a residual value equal to 15% of its cost. Derringdo Co uses straight-line depreciation on a time apportioned basis.

The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo Co has no intention of disposing of the server within the first four years. Derringdo Co's accounting policy for capital-based government grants is to treat them as deferred income and release them to income over the life of the asset to which they relate.

What amount will be presented under non-current liabilities at 31 March 20X3 in respect of the grant?

a.  $204,000

b. $228,000

c. $216,000

d. $240,000

Question 13

Derringdo Co also sells a package which gives customers a free laptop when they sign a two-year contract for provision of broadband services. The laptop has a stand-alone price of $200 and the broadband contract is for $30 per month. In accordance with IFRS 15 Revenue from Contracts with Customers, what amount will be recognised as revenue on each package in the first year? Select the correct answer from the options below:

a. $281

b. $439

c. $461

d. $158

Question 14

Derringdo Co is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo Co invested in a new server at a cost of $800,000 on 1 October 20X2. The server has an estimated useful life of ten years with a residual value equal to 15% of its cost. Derringdo Co uses straight-line depreciation on a time apportioned basis.

The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo Co has no intention of disposing of the server within the first four years. Derringdo Co's accounting policy for capital-based government grants is to treat them as deferred income and release them to income over the life of the asset to which they relate.

Determining the amount to be recognised in the first year is an example of which stage in the process of applying IFRS15?

a. Determining the transaction price

b. Identifying the separate performance obligations

c. Recognising revenue when a performance obligation is satisfied  

d. Allocating the transaction price to the performance obligations

Question 15

Which of the following items is a change in accounting policy under IAS8 Accounting Policies, Changes in Accounting Estimates and errors?

a. A change in Derringdo Co’s reporting depreciation charges as cost of sales rather than as administrative expenses

b. Adjusting the financial statements of a Derringdo Co's subsidiary prior to consolidation as its accounting policies differ from those of its parent

c. Depreciation charged on reducing balance method rather than straight-line

d. Reducing the value of Derringdo Co’s inventory from cost to net realizable value due to a valid adjusting event after the reporting period

Question 16

On 1st October 20X5 Dearing Co acquired a machine under the following terms.

	£
Cost	1,050,000
Trade discount (applying to cost only)	20%
Freight charges	30,000
Electrical installation cost	28,000
Staff training in use of machine	40,000
Pre-production testing	22,000
Purchase of a three-year maintenance contract	60,000

On 1st October 20X7 Dearing Co decided to upgrade the machine by adding new components at a cost of £200,000. This upgrade led to a reduction in the production time per unit of the goods being manufactured using the machine.

What amount should be recognised under non-current assets as the cost of the machine on 1st October 20X5?

a. £840,000

b. £898,000

c. £870,000

d. £920,000

Question 17

On 1st October 20X5 Dearing Co acquired a machine under the following terms.

	£
Cost	1,050,000
Trade discount (applying to cost only)	20%
Freight charges	30,000
Electrical installation cost	28,000
Staff training in use of machine	40,000
Pre-production testing	22,000
Purchase of a three-year maintenance contract	60,000

On 1st October 20X7 Dearing Co decided to upgrade the machine by adding new components at a cost of £200,000. This upgrade led to a reduction in the production time per unit of the goods being manufactured using the machine.

How should the £200,000 worth of new components be accounted for?

a. Charged to profit or loss

b. Capitalised as a separate asset

c. Debited to accumulated depreciation

d. Added to the carrying amount of the machine

Question 18

On 1st October 20X5 Dearing Co acquired a machine under the following terms.

	£
Cost	1,050,000
Trade discount (applying to cost only)	20%
Freight charges	30,000
Electrical installation cost	28,000
Staff training in use of machine	40,000
Pre-production testing	22,000
Purchase of a three-year maintenance contract	60,000

On 1st October 20X7 Dearing Co decided to upgrade the machine by adding new components at a cost of £200,000. This upgrade led to a reduction in the production time per unit of the goods being manufactured using the machine.

Every five years the machine will need a major overhaul in order to keep running. How should this be accounted for?

a. Set up a provision at year 1

b. Capitalise the cost when it arises and amortise over five years

c. Build up the provision over years 1-5

d. Write the overhaul off to maintenance costs

Question 19

Which of the following investments owned by Dearing Co should be accounted for using the equity method in the consolidated financial statements?

1. 30% of the non-voting preference share capital in Yellow Co

2. 18% of the ordinary share capital in Blue Co with directors of Dearing Co having two of the five places on the board of Blue Co

3. 45% of the ordinary share capital of Red Co, with directors of Dearing Co having four of the six places on the board of Red Co

a. 1 and 2

b. 1 and 3

c. 2 and 3

d. 2 only

Question 20

On 1st October 20X8 Dearing Co acquired 30 million of Vardine Co's 100 million shares in exchange for 75 million of its own shares. The fair value of Dearing Co's shares at the date of this share exchange was £1.60 each.

Vardine Co's profit is subject to seasonal variation. Its profit for the year ended 31st March 20X9 was £100 million. £20 million of this profit was made from 1st April 20X8 to 30th September 20X8.

Dearing Co has one subsidiary and no other investments apart from Vardine Co.

What amount will be shown as ‘investment in associate’ in the consolidated statement of financial position of Dearing Co as at 31st March 20X9?

a. £150 million

b. £126 million

c. £144 million

d. £78 million

SECTION B

This section has a 40% weighting. All the questions in this section must be attempted. Show your workings.

Ding acquired 60% of the share capital of Sal on 1 April 2018.  The retained earnings of Sal on 31 Dec 2017 were £220,000.

The fair value of the 20% non-controlling interest at acquisition was £280,000.

At acquisition the fair value of Sal's plant exceeded its book value by £200,000. Plants are depreciated at 20% rate (straight line method).

Goodwill should be written down by 10% of its original value to allow for impairment.

After acquisition, Ding sold goods to Sal for £100,000 at gross profit margin of 30%. At 30 Sept 2019, 20% of these good are still at the inventory of Sal. 

Below are the statements of financial position of as at 31 Dec 2018.

 

Requirements 

Prepare the consolidated statement of financial position of Ding Group as at 31 Dec 2018, assuming the group uses the fair value method to account for non-controlling interest. Show in your answer all the workings and the double entries to eliminate intra group transactions.

a) Prepare the consolidated statement of financial position of Ding Group as at 31 Dec 2018, assuming the group uses the fair value method to account for non-controlling interest. Show in your answer all the workings and the double entries to eliminate intra group transactions. (30 Marks)

b) Write the double entries to eliminate intra-group transactions if Sal sold goods to Ding in August 209 for £90,000 at mark-up of 20%. And at 30 Sept 2019, 20% of these good are still at the inventory of Ding.  (4 Marks)

c) Briefly explain the "five-step model" for the recognition and measurement of revenue which is set out in international standard IFRS15. Support your answer with an example (Maximum 150 words). (6 Marks)

 (Total 40 marks)