CIMA F1 Financial Operations Kit

CIMA
CIMA
practice & revision kit
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operational paper f1 financial operations

operational paper f1
financial operations
This Practice & Revision Kit is one of a suite of products, for use independently
or as part of a package, supporting Operational Paper F1 Financial Operations.
This kit helps you focus your revision and practice for the exam in a way that
makes the best use of your time.
Targeted at CIMAs 2014 exams, it provides:

Practice on questions in every syllabus area in the different formats you will
encounter
Feedback on how to approach questions
Advice on how to obtain easy marks
Rehearsals for your exam day with three mock exams
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For exams in 2014

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january 2014
practice & revision kit
18.00
operational paper f1
financial operations
FOR exams in 2014
CMF1RK14 (POL & HO).indd 1-3 13/12/2013 12:05

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OPERATIONAL E
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This Kit is for exams in 2014.
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In this Kit we: S
Discuss the best strategies for revising and taking your F1 exam
I
Show you how to be well prepared for the 2014 exams
Give you lots of great guidance on tackling questions O
Demonstrate how you can build your own exams N
Provide you with three mock exams
Show you how marks are awarded in the exam, using CIMA marking guides
K
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FOR EXAMS IN 2014

ii
First edition 2010 Marking schemes and quotes from examiner comments
Fifth edition January 2014 (where provided for past CIMA exam questions) are sourced
from CIMA post exam guides, which can be found in full at
ISBN 9781 4453 7165 8 cimaglobal.com.
Previous ISBN 9781 4453 6617 3
e-ISBN 9781 4453 7192 4
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iii
Contents
Page
Finding questions and using the Practice and Revision Kit

Question index iv
Topic index vii
Using your BPP Learning Media Practice and Revision Kit viii
Passing F1
Revising F1 x
Passing the F1 exam xi
The exam paper xii
What the examiner means xix
Planning your question practice

BPP's question plan xix
Build your own exams xxi
Questions and answers

Questions 3
Answers 153
Exam practice
Mock exam 1
Questions 318
Plan of attack 329
Answers 331
Mock exam 2 (September 2013 resit exam)
Questions 346
Plan of attack 357
Answers 358
Mock exam 3 (November 2013 exam)
Questions 372
Plan of attack 383
Answers 384
Mathematical tables 397
Review form
iv Introduction
Question index
Questions set under the old syllabus's P7 Financial Accounting and Tax Principles (FATP) exam are included
because their style and content are similar to those that appear in the Paper F1 exam.
Time Page number
allocation
Marks Mins Question Answer
Part A: Regulation and Ethics of Financial

Reporting
1 Objective test questions: The regulatory framework 51 92 3 153
2 Objective test questions: External audit 31 56 7 154
3 Objective test questions: Ethics 22 40 9 155
4 Section B questions: Regulation 25 45 11 155
5 Section B questions: External audit 20 36 12 158
6 Section B questions: Ethics 15 27 13 160
Part B: Single Company Financial Statements

7 Objective test questions: Presentation 24 43 14 161
8 Section B questions: Presentation 10 18 16 161
9 Objective test questions: Statements of cash flows 24 43 17 162
10 Section B questions: Statements of cash flows 5 9 20 163
11 Dickson 15 27 23 164
12 UV (9/11) 25 45 24 167
13 OP (5/11) 25 45 26 171
14 YG (11/10) 25 45 28 175
15 Objective test questions: Non-current assets, inventories
27 49 30 179
and construction contracts I
16 Objective test questions: Non-current assets, inventories
35 63 33 180
and construction contracts II
17 Section B questions: Non-current assets, inventories and
35 63 36 181
construction contracts
18 Geneva 15 27 38 185
19 Objective test questions: Capital transactions and financial
24 43 39 185
instruments
20 Objective test questions: Accounting standards I 36 65 41 186
21 Objective test questions: Accounting standards II 48 86 45 187
22 Section B questions: Accounting standards I 40 72 50 189
23 Section B Questions: Accounting standards II 40 72 53 192
24 SA (5/13) 25 45 56 197
25 CQ (3/13) 25 45 57 199
26 YZ (11/12) 25 45 59 201
27 QWE (9/12) 25 45 60 204
28 DFG (5/12) 25 45 62 207
29 RTY (3/12) 25 45 63 210
30 ABC (11/11) 25 45 65 212
31 ZY (9/11) 25 45 66 215
32 MN (5/11) 25 45 68 218
33 XB (11/10) 25 45 69 222
34 EZ (5/10) 25 45 70 224
35 XY (Specimen paper) 25 45 71 226
Introduction v
Time Page number

allocation
Marks Mins Question Answer
Part C: Group Financial Statements

36 Objective test questions: Group financial statements 21 38 73 228
37 Club, Green and Tee (5/13) 25 45 76 230
38 TX, SX and LW (3/13) 25 45 78 232
39 AZ, PQ and SY (11/12) 25 45 79 234
40 Wood, Plank and Bush (9/12) 25 45 80 237
41 Loch, River and Stream (5/12) 25 45 82 239
42 Tree, Branch and Leaf (3/12) 25 45 83 242
43 PH, SU and AJ (11/11) 25 45 85 245
44 AX (5/10) 25 45 86 247
45 PSA (Specimen Paper) 25 45 87 249
46 Parsley 25 45 89 251
47 Tom, Dick and Harry 25 45 90 254
48 ZA 25 45 91 255
Part D: Principles of Business Taxation

49 Objective test questions: General principles of taxation 36 65 93 257
50 Objective test questions: Types of taxation I 47 85 95 258
51 Objective test questions: Types of taxation II 55 99 98 259
52 Objective test questions: Deferred tax 43 77 103 263
53 Section B questions: Taxation I 25 45 106 265
54 Section B questions: Taxation II 25 45 107 267
55 Section B questions: Taxation III 25 45 108 269
Mixed question banks

56 Mixed objective test questions bank 1 (Specimen Paper) 20 36 110 271
57 Mixed objective test questions bank 2 (5/10) 20 36 112 272
68 Mixed section B questions bank 1 (Specimen Paper) 30 54 132 281
69 Mixed section B questions bank 2 (5/10) 30 54 134 284
vi Introduction
Mock exam 1
Questions 80 to 83
Mock exam 2 (September 2013 resit exam)

Questions 84 to 87
Mock exam 3 (November 2013 exam)

Questions 88 to 91

Our guidance from page xx shows you how to organise your question practice, either by attempting questions
from each syllabus area or by building your own exams tackling questions as a series of practice exams.
Introduction vii
Topic index
Listed below are the key Paper F1 syllabus topics and the numbers of the questions in this Kit covering those
topics.
If you need to concentrate your practice and revision on certain topics or if you want to attempt all available
questions that refer to a particular subject you will find this index useful.
Syllabus topic Question numbers
Consolidated financial statements 36-48

Company taxation 33, 51, 53(c), 55(b), 55(e)
Construction contracts 15, 16, 17(f), 18, 23(c)
Deferred tax 35(a), 52, 53(c), 55(a d)
Discontinued operations 22(g), 22(h), 32
Ethics 3, 6
Events after the reporting period 20, 21
External audit 2, 5
Financial instruments 19, 22(d)
General tax principles 49, 53(a), 54(b)
IAS 1 7, 8
IAS 8 7
IAS 12 52, 55(d)
Indirect taxation 50, 53(b), 53(e), 54(a)
Intangible assets 17(a), 17(d), 23(e)
International tax 50, 54(d)
Inventories 15, 16, 17(b)
Impairment of assets 15, 16, 17(d), 17(e)
Leasing 20, 21, 22(a), 23(b), 23(d), 23(f)
Non-current assets 15, 16, 22(h)
Operating segments 20
Property, plant and equipment 17(c), 17(d), 17(e), 21
Provisions 20, 21, 22(b), 22(c), 22(g), 23(a)
Regulatory framework 1, 4
Related parties 21, 22(d), 23(g)
Research and development 5(a), 14, 17(a), 23(e)
Revenue recognition 21, 22(f)
Share capital transactions 10, 19
Statement of cash flows 10 14
Statement of changes in equity 32
Statement of comprehensive income 8(b), 32 35
Statement of financial position 32 35
Withholding tax 53(d), 54(c)
viii Introduction
Using your BPP Learning Media Practice and Revision Kit

Tackling revision and the exam
You can significantly improve your chances of passing by tackling revision and the exam in the right ways. Our
advice is based on feedback from CIMA. We focus on Paper F1; we discuss revising the syllabus, what to do
(and what not to do) in the exam, how to approach different types of question and ways of obtaining easy marks.
Selecting questions
We provide signposts to help you plan your revision.
A full question index
A topic index, listing all the questions that cover key topics, so that you can locate the questions that
provide practice on these topics, and see the different ways in which they might be examined
BPP's question plan, highlighting the most important questions
Build your own exams, showing you how you can practise questions in a series of exams
Making the most of question practice

We realise that you need more than questions and model answers to get the most from your question practice.
Our Top tips provide essential advice on tackling questions and presenting answers
We show you how you can pick up Easy marks on questions, as picking up all readily available marks
can make the difference between passing and failing
We include marking guides to show you what the examiner rewards
We summarise Examiner's comments to show you how students coped with the questions
We refer to the BPP 2013 Study Text (for 2014 exams) for detailed coverage of the topics covered in
each question
Marking schemes and quotes from examiner comments (where provided for past CIMA exam questions) are
sourced from CIMA post exam guides, which can be found in full at cimaglobal.com.
Introduction ix
Attempting mock exams

There are three mock exams that provide practice at coping with the pressures of the exam day. We strongly
recommend that you attempt them under exam conditions as they reflect the question styles and syllabus
coverage of the exam. To help you get the most out of doing these exams, we provide guidance on how you
should have approached the whole exam.
Our other products

BPP Learning Media also offers these products for practising and revising for the F1 exam:
Passcards Summarising what you should know in visual, easy to remember, form
i-Pass Providing computer-based testing in a variety of formats, ideal for self-assessment
Interactive Allowing you to learn actively with a clear visual format summarising what you must
Passcards know
You can purchase these products by visiting www.bpp.com/lm

x Introduction
Revising F1
This is a very wide-ranging syllabus, but with not a great deal of depth in some areas. The format of the paper
allows the examiner to cover a large part of the syllabus, so you cannot afford to neglect any area.
The syllabus is made up as follows:
Principles of business tax 25%
Regulation and ethics of financial reporting 15%
Financial accounting and reporting 60%
Areas to concentrate your revision on are:
Statements of cash flows. This topic is not always examined in each paper, but as seen in the November
2010, May 2011, September 2011 resit and November 2013 exam, it could form the basis of a 25
mark question, so you really need to know how to assemble a statement of cash flows.
Leases and construction contracts. These are tricky subjects. However the questions you get on them are
likely to be of a standard format. So if you practice the questions in this Kit and learn how to do the
basics, you should be able to pick up at least some of the marks for questions on these topics in the
exam.
Non-current assets. You will almost always have to calculate depreciation on property, plant and
equipment, and probably also deal with a revaluation. This is not a difficult topic. Make sure you practice
plenty of questions so you can gain as many of the easy marks as possible in the exam.
Taxation and deferred tax remember that tax makes up 25% of the syllabus. Do not neglect this area.
International tax and VAT appear to be favourite subjects for the examiner to test.
The IASB Framework. Defining the qualitative characteristics contained in the Framework is a popular
question. This is just rote learning so make sure you take the time to learn here.
Single company statement of comprehensive income and statement of financial position. You must know
the correct IAS 1 formats. This topic is highly examinable and has formed the basis of a Section C
question in all the new syllabus exam papers. Make sure you can draw up the proformas from memory
very quickly, this will help you to tackle these questions.
Consolidated financial statements. You need to be able to calculate goodwill and put together
consolidated statements of comprehensive income and consolidated statements of financial position,
including equity accounting for an associate. Unrealised profit on intra-group trading is also likely to
feature in consolidation questions, learn how to deal with this adjustment. You also need to understand
how to classify investments, whether as subsidiaries, associates or trade investments.
Question practice
You should use the Passcards and any brief notes you have to revise these topics, but you mustn't spend all your
revision time passively reading. Question practice is vital. Doing as many questions as you can in full will help
develop your ability to analyse scenarios and produce relevant discussion and recommendations. The question
plan on page xv tells you what questions cover so that you can choose questions covering a variety of topics.
Introduction xi
Passing the F1 exam

Displaying the right qualities
The examiners will expect you to display the following qualities.
Qualities required
Produce neat workings and readable If you produce no workings, the marker can give you no credit for using
answers the right method. If the marker cannot read what you have written they
can give you no marks at all.
Carry out standard calculations You must be able to deal with simple tax and financial instrument
calculations.
Demonstrate understanding of the Deferred tax and construction contracts can be complex, but you will
basics only get fairly simple questions, so make sure you understand the
principles.
Avoiding weaknesses
The examiners have identified weaknesses that occur in many students' answers at every sitting. You will enhance your
chances significantly if you ensure you avoid these mistakes:
Failing to provide what the question verbs require (discussion, evaluation, recommendations) or to write
about the topics specified in the question requirements
Inability to carry out calculations
Not showing workings in 3-4 mark questions
Repeating the same material in different parts of answers
Regurgitation of definitions and lists with no application to the question
Brain dumping all that is known about a topic (no credit is given for this)
Failing to answer sufficient questions because of poor time management
Not answering all parts of questions
Not using the information provided in the question accurately
Attempting to question spot
Using the reading time

Use the reading time to analyse the adjustments needed in the Section C questions and go over the requirements
of the Section B questions deciding which parts to answer first.
Tackling questions
Numerical questions
Expect to see numbers throughout the paper. Approach them methodically and show all workings clearly.
Discussion questions
Remember that depth of discussion is also important. Discussions will often consist of paragraphs containing 2-
3 sentences. Each paragraph should:
Make a point
Explain the point (you must demonstrate why the point is important)
Illustrate the point (with material or analysis from the scenario, perhaps an example from real-life)
xii Introduction
Gaining the easy marks

The first few marks are always the easiest to gain in any question. This applies particularly to Section B. Spend
the same amount of time on each Section B question. This will give you a good chance of scoring marks on each
question. Your Section C questions carry a lot of marks. Make sure you begin by getting down the format and
filling in any numbers which don't require calculation.
The exam paper

Format of the paper
Number
of
marks
Section A: Around 7-10 multiple choice and other objective test questions, 2-4 marks each 20
Section B: 6 compulsory questions, 5 marks each 30
Section C: 2 compulsory questions, totalling 50 marks 50
100
Time allowed: 3 hours plus 20 minutes reading time.

Section A will always contain some multiple choice questions but will not consist solely of multiple choice
questions. For 3 or 4-mark questions, marks are given for correct workings.
Section B questions will be mainly written discussion, although some calculations may be included. This section
will require breadth of syllabus knowledge and also good time management skills.
The Section C questions will cover statements of comprehensive income, statements of financial position,
statements of cash flows for a single company and simple consolidated statement of comprehensive income and
statement of financial position.
November 2013
Section A
1 Direct tax, PAYE, tax residency, deferred tax, VAT calculation, ethical code, IFRS Foundation, IASB
Conceptual Framework, IAS 1 presents fairly, materiality.
Section B
2a Explain classification of subsidiaries (IFRS 10)
2b Prepare journal entries for consolidation
2c Explain indexation and calculate capital gains tax
2d Calculate tax payable
2e Prepare briefing note on tax groups
2f Explain duties of external auditor
Section C
3 Explain treatment of change in inventory accounting policy, and prepare financial statements for a single
entity including purchase of own shares.
4 Explain treatment of preference shares in financial statements, calculate revised profit, and prepare
statement of cash flows.
The November 2013 paper is mock exam 3 in this Kit.
Introduction xiii
September 2013 (resit exam)

Section A
1 Type of tax system, definition of tax avoidance, calculation of capital gains tax, significance of permanent
establishment, withholding tax, benefit of regulating published accounts, IASBs Conceptual Framework,
accounting standards bodies, fundamental qualitative characteristics, type of audit report.
Section B
2a Prepare cash flows from financing activities
2b Explain ethical issues
2c Explain difference between bonus issue and rights issue, and prepare journal entries for rights issue
2d Explain meaning of temporary difference (IAS 12) and calculate deferred tax
2e Explain meaning of benefits in kind and prepare income tax computation
2f Calculate net profit, and calculate VAT payable
Section C
3 Explain why impairment review might have been carried out, financial statements for a single entity
including asset for sale and finance lease.
4 Define control (IFRS 10), consolidated statement of financial position including associate and intra-group
trading.
The September 2013 paper is mock exam 2 in this Kit.
May 2013
Section A
1 Type of tax system, methods of reducing tax avoidance and evasion, methods of giving double taxation
relief, calculation of capital gains tax, meaning of rollover relief, type of legal system, benefits of global
harmonisation of accounting standards, IFRS Advisory Council, IASBs Conceptual Framework, sections of
external audit report.
Section B
2a Prepare cash flows from investing activities
2b Explain steps to ensure adherence to CIMA Code of Ethics
2c Explain classification of preferred shares and account for costs in accordance with IAS 39
2d Define tax base of an asset and calculate deferred tax
2e Calculate tax payable by an entity
2f Explain cascade sales tax and VAT, calculate profit/loss and VAT due
Section C
3 Explain held for sale criteria (IFRS 5) and prepare financial statements for a single entity, including
discontinued operations.
4 Explain treatment of post-acquisition increase in goodwill, consolidated statement of financial position
including associate and intra-group trading.
March 2013
Section A
1 Tax on foreign dividends, IFRS Foundation, accounting depreciation and tax depreciation, IASBs
Framework, adverse audit opinion, CIMA Code of Ethics, IAS 7, users of financial statements, related
party transaction, IAS 18 recognition criteria.
xiv Introduction
Section B
2a List four taxes that require detailed records and identify records required for VAT returns
2b Calculate tax payable by an entity
2c Explain the effect of closure of a division and restructuring on SPLOCI (IFRS 5)
2d Explain three reasons why excise duty may be imposed
2e Explain country of residence for tax purposes and explain how profits will be taxed
2f Identify five purposes of IASB Framework
Section C
3 Financial statements for a single entity, including a patent, a finance lease and obsolete inventory.
4 Explanation of the circumstances that give rise to a parent/subsidiary relationship other than a majority
shareholding, consolidated statement of financial position including negative goodwill and intra-group
trading.
November 2012
Section A
1 Direct and indirect taxes, development process of IFRSs, deferred tax calculation, IASB Framework
qualitative characteristics of reliability, modified audit opinion, Code of Ethics, elements of the statement
of cash flows, factors influencing accounting disclosure, adjusting event under IAS 10 Events after the
reporting period, recognition of revenue under IAS 18 Revenue.
Section B
2a Explain the enforcement powers given to tax authorities
2b Calculate the corporate tax payable
2c Define an operating segment and explain when a segment is reportable
2d Identify the requirements of VAT regulations and calculate net VAT balance
2e Calculate foreign tax and calculate tax due on foreign dividend
2f Explain the roles of IFRS Interpretations Committee and IFRS Advisory Council
Section C
3 Financial statements for a single entity, including adjustments to account for a patent, research costs, and
an operating lease.
4 Consolidated financial statements including fair value calculation, goodwill impairment, unrealised profit
on inventory and the intra-group transfer of property, plant and equipment.

Section A
1 Sources of tax rules, calculation of balancing charge, calculation of profit with VAT, scheduler system of
tax, determination of residency for tax purposes, Code of Ethics, IFRS Interpretations Committee,
calculation of tax on disposal of asset, accounting for a contract, IFRS 8.
Section B
2a Calculate income tax charge and explain impact of increase in tax rate on deferred tax
2b Explain methods of giving double taxation relief
2c Calculate tax payable for the year
2d Calculate revenue and cost and amount due from/to customers
2e Explain steps in IASBs standard setting process for IFRSs
2f Explain impact of two outstanding matters on the auditors report
Introduction xv
Section C
3 Financial statements for a single entity including suspense account and journals, outstanding litigation,
and customer liquidation post-reporting date.
4 Consolidated financial statements including intra-group trading, intra-group sale of asset, goodwill
calculation and an associate.
May 2012
Section A
1 OECD tax model, VAT calculation, tax on profit, list two powers of a tax authority, tax classification of
VAT, CIMAs Code of Ethics, responsibilities of IASB, treatment of items in FS, IFRS 5, IAS 37.
Section B
2a Explain benefits to users of accounts of statement of cash flows
2b Explain deferred tax, identify reason for increase in provision, and explain what it represents
2c Calculate corporate income tax
2d Explain excise duty/single stage sales tax and describe characteristics suitable for excise duty
2e Define income and equity and explain criteria for recognition
2f Prepare briefing note on benefits of external audit
Section C
3 Financial statements for a single entity including revenue recognition and impairment of intangible non-
current assets.
4 Consolidated financial statements including journal preparation and associate.
March 2012
Section A
1 Indirect tax, meaning of tax base, deferred tax balance, calculation of tax payable, meaning of
hypothecation, related party, recognition of asset in FS, explain disclosure of operating segments, IAS 18
four conditions for revenue recognition.
Section B
2a Calculate deferred tax movement and deferred tax balance
2b Explain zero rated/exempt from VAT and calculate VAT balance
2c Explain imputation system of corporate income tax
2d Identify four entities involved in developing and implementing IASs
2e Explain objective of external audit and explain three key areas of the audit report
2f Explain ethical problem in a given scenario
Section C
3 Financial statements for a single entity including research and development.
4 Consolidated financial statements including goodwill.
November 2011
Section A
1 Principles of modern tax systems, formal/effective incidence of VAT, deferred tax, capital gains tax,
definition of tax gap, related parties, intangible assets, events after the reporting date, IFRS 8 Operating
segments, revenue recognition.
xvi Introduction
Section B
2a Calculate income tax and income tax expense
2b Calculate VAT due and profit made
2c Explain tax base
2d Explain concepts of capital and capital maintenance
2e Define materiality and issuing an audit report
2f Ethics and the CIMA Code
Section C
3 Financial statements preparation for a single entity, including two construction contracts.
4 Preparation of consolidated statement of financial position, including the definition of control per IAS 27.

Section A
1 Direct tax, definition of capital gain, determining type of tax, definition of tax evasion, corporate
residence for tax purposes, related parties, rights issue of shares, calculation of goodwill on acquisition,
calculation of value of investment in associate, intra-group trading.
Section B
2a Explain single-stage sales tax and VAT, calculate VAT due
2b Explain deferred tax and how a deferred tax debit balance arises
2c Explain worldwide approach to tax and problems caused
2d Explain factors influencing accounting regulations
2e Define assets/liabilities, explain recognition criteria in the Framework
Section C
3 Financial statements preparation for a single entity, including a finance lease, inventory adjustments, and
treatment of cumulative redeemable preferred shares
4 Preparation of a property, plant and equipment note and a statement of cash flows for a single company.
May 2011
Section A
1 Type of tax system, PAYE, OECD corporate residence, excise duty and VAT, tax avoidance/evasion,
change in accounting policy, reportable segments under IFRS 8, calculation of goodwill on acquisition,
calculation of value of investment in associate, intra-group trading.
Section B
2a Calculate income tax and deferred tax
2b Explain capital gain and calculate tax due on capital gain
2c Explain underlying tax and calculate underlying tax
2d Principles-based vs prescriptive accounting standards
2e Explain the objective of financial statements and the underlying assumptions in the Framework
Section C
3 Financial statements preparation for a single entity, including a discontinued operation.
4 Preparation of a statement of cash flows for a single company, finance lease calculation.
Introduction xvii
November 2010
Section A
1 Interaction of corporate and personal tax, employee tax, formal incidence of VAT, administration of tax,
calculating VAT, audit opinions, treasury shares, IASBs Framework, related parties, IFRS 8 Operating
segments.
Section B
2a Relieving trading losses (company income tax)
2b Withholding tax, including calculation of double tax relief
2c Framework: qualitative characteristics
2d Group accounts: calculation of goodwill and IFRS 3
2e Group accounts: classification of investments
2f Provisions, events after the reporting period
Section C
3 Financial statements preparation for a single entity, including an income tax computation and deferred tax.
4 Preparation of a statement of cash flows for a single company, ethical considerations.
May 2010
Section A
1 Ideal tax principles, tax rate structures, deferred tax, IASBs Framework, qualitative characteristics,
revenue recognition, development expenditure, finance leases, discontinued operations, cash flows.
Section B
2a Tax evasion and tax avoidance
2b Indirect taxes
2c International tax
2d External audit and audit reports
2e Construction contracts
2f Discontinued operations, restructuring provisions, CIMAs Code of Ethics
Section C
3 Financial statements preparation for a single entity, including a share issue, operating lease and
revaluation of property, plant and equipment.
4 Preparation of consolidated statement of financial position and consolidated statement of comprehensive
income, calculation of income tax and deferred tax for the group.
Specimen paper
Section A
1 Tax avoidance and evasion, calculating income tax, VAT, systems of taxing corporate income, IASB
Framework, CIMA Code of Ethics, external audit, IFRS 3, inventories, related parties.
Section B
2a Tax residency
2b VAT explanation and calculation
2c Principles vs. rules based accounting standards
2d Discontinued operations
2e Accounting treatment of leases
2f Accounting treatment of preference shares
xviii Introduction
Section C
3 Financial statements preparation for a single entity, including deferred tax calculation.
4 Preparation of consolidated statement of financial position, including the treatment of an associate in
group accounts.
Introduction xix
What the examiner means

The table below has been prepared by CIMA to help you interpret exam questions.
Examples in
Learning objective Verbs used Definition the Kit
1 Knowledge
What you are expected List Make a list of 56(5)
to know State Express, fully or clearly, the details of/facts of 2(14)
Define Give the exact meaning of 16(3)
2 Comprehension
What you are expected Describe Communicate the key features of 50(10)
to understand Distinguish Highlight the differences between
Explain Make clear or intelligible/state the meaning or 14(b)
purpose of
Identify Recognise, establish or select after 70(e)
consideration
Illustrate Use an example to describe or explain 70(a)
something
3 Application
How you are expected Apply Put to practical use 55(d)
to apply your Calculate Ascertain or reckon mathematically 13(b)
knowledge /compute
Demonstrate Prove the certainty or exhibit by practical
means
Prepare Make or get ready for use 13(a)
Reconcile Make or prove consistent/compatible
Solve Find an answer to
Tabulate Arrange in a table
4 Analysis
How you are expected Analyse Examine in detail the structure of
to analyse the detail of Categorise Place into a defined class or division
what you have learned Compare and Show the similarities and/or differences
contrast between
Construct Build up or complete
Discuss Examine in detail by argument 17(a)
Interpret Translate into intelligible or familiar terms
Prioritise Place in order of priority or sequence for
action
Produce Create or bring into existence
5 Evaluation
How you are expected Advise Counsel, inform or notify
to use your learning to Evaluate Appraise or assess the value of
evaluate, make Recommend Propose a course of action
decisions or
recommendations
xx Introduction

We have already stressed that question practice should be right at the centre of your revision. Whilst you will
spend some time looking at your notes and the Paper F1 Passcards, you should spend the majority of your
revision time practising questions.
We recommend two ways in which you can practise questions.
Use BPP Learning Media's question plan to work systematically through the syllabus and attempt key
and other questions on a section-by-section basis
Build your own exams attempt the questions as a series of practice exams
These ways are suggestions and simply following them is no guarantee of success. You or your college may
prefer an alternative but equally valid approach.
BPP's question plan

The plan below requires you to devote a minimum of 40 hours to revision of Paper F1. Any time you can spend
over and above this should only increase your chances of success.
Review your notes and the chapter summaries in the Paper F1 Passcards for each section of the
syllabus.
Answer the key questions for that section. These questions have boxes round the question number
in the table below and you should answer them in full. Even if you are short of time you must
attempt these questions if you want to pass the exam. You should complete your answers without
referring to our solutions.
Attempt the other questions in that section.
Attempt Mock exams 1, 2 and 3 under strict exam conditions.

Introduction xxi
2013 Done
Syllabus Passcards Questions
section chapters in this Kit Comments
The regulatory 1 1 The MCQs are fairly simple here. The Section B questions
framework invite you to spend a lot of time, so don't do it practise
4 answering these question with notes and bullet points.
External audit 2, 3 2-3 Make sure you know the different types of audit report
and ethics qualification and be very strict and to the point on the
5, 6 Section B questions.
Financial 4,5 7-8 This area is very important IAS 1 and IAS 8. Do all of the
accounts MCQs. Make sure you can write out the formats.
presentation
Statements of 9 9, 10 These are good revision for the various components of the
cash flows statement, so do them before attempting the longer
questions.
Statements of 9 11-14 These are Section C questions on statements of cash flows.
cash flows Question 11 is a preparatory question which you should
attempt first.
Non-current 6, 7, 11 1518 These are fairly complex topics. If you have trouble with the
assets, MCQs, go back to the Study Text and revise the area.
inventories
and
construction
contracts
Capital 12 19 These MCQs cover most of the important issues in this
transactions area. Make sure you understand how to deal with
and financial redemption of capital and purchase of own shares.
instruments
Accounting 8, 10 20-23 These questions cover IAS 10, IAS 24, IAS 37 and IAS 17.
standards These are all important because they are relatively easy to
learn and apply, so if they come up they will be easy
marks. Make sure you can calculate finance lease interest
payments using both methods.
Financial 4, 5 24-35 Section C will have an accounts preparation question, so
statements practice on these.
Group 13, 14, 36-48 This is a new topic at this level so it needs a lot of practice.
financial 15, 16
statements
General 17, 18 49-51 Answer all of these MCQs. There will be more than one
principles of question on each topic, so you will get lots of practice.
taxation 53, 54 These are Section B-type questions. Make sure you do not
spend more than 9 minutes on each.
Company 19 51-52 Answer all of these MCQs. Make sure you really understand
taxation the adjustments necessary to get from accounting profit to
taxable profit and can do it easily.
55 These are Section B questions on company tax. Deferred
tax is the most difficult aspect. Just make sure you
understand the basics.
xxii Introduction
Build your own exams

Having revised your notes and the BPP Passcards, you can attempt the questions in the Kit as a series of
practice exams. You can organise the questions in the following way:
Marks
7-10 objective test questions 20
6 Section B questions 30
2 Section C questions 50
100
The easiest way to do this is to do one of the past exam papers in full.
Once you have completed the real exams you can make your own exams as follows.
For Section A of your exam, select from each of these banks (1 3, 7, 9, 15, 16, 19 21, 36, 49 52) to a
total of 20 marks. Tax usually features heavily in section A, so choose around 4 or 5 questions from banks 49
52. If you do a 3 or 4-mark question, reduce the number of questions accordingly.
For Section B, do 6 sub-questions from the following questions 4, 5, 6, 8, 10, 17, 22, 23, 53 - 55. Make
sure you do at least one question from Part A, one from Part B, one from Part C and one from Part D see the
Question and Answer Checklist.
Then chose two section C questions, one from questions 28 35, then one from either 12 14 or 37 48.
Also make sure you do the three mock exams.
IMPORTANT NOTE ON TERMINOLOGY
An amendment to IAS 1 was published in June 2011, applicable to annual periods beginning on or after 1 July
2012. This amendment changes the name of the full statement of comprehensive income to the statement of
profit or loss and other comprehensive income. The part of the statement previously known as the income
statement becomes the statement of profit or loss. The revised terminology is not mandatory, so you will still
meet the terms income statement and statement of comprehensive income not only in this Practice and Revision
Kit but in other publications and possibly in your F1 exam.
You may also hear or see the statement of financial position referred to as the balance sheet, and the statement
of cash flows referred to as the cash flow statement.
IMPORTANT NOTE ON IASB Conceptual Framework for Financial Reporting
From May 2013 CIMA have been examining the new Conceptual Framework for Financial Reporting and
questions in this 2014 Practice and Revision Kit have been updated to reflect this. The Study Text, however,
was published before this change was introduced by CIMA and it is therefore based on the previous version of
the Framework.
1
QUESTIONS
2
Questions 3
Part A: Regulation and Ethics of Financial Reporting

Questions 1 to 6 cover Regulation and Ethics of Financial Reporting, the subject of Part A of the BPP Study Text
for F1.
1 Objective test questions: The regulatory framework 92 mins

1 Which one of the following bodies is responsible for reviewing new financial reporting issues and issuing
guidance on the application of IFRSs?
A The IASB
B The IFRS Foundation
C The IFRS Interpretations Committee
D The IFRS Advisory Council (2 marks)
2 Which of the following is not an advantage of global harmonisation of accounting standards?

A Priority given to different user groups in different countries
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)
3 Which of the following bodies is responsible for the development of Draft Interpretations for public
comment?
A The IFRS Advisory Council
C The International Accounting Standards Board
D The IFRS Interpretations Committee (2 marks)
4 The International Accounting Standards Board's Conceptual Framework for Financial Reporting (2010) defines
five elements of financial statements. Three of the elements are asset, liability and income.
List the other two elements. (2 marks)
5 Which of the following, per the IASBs Conceptual Framework, is an underlying assumption relating to
financial statements?
A The accounts have been prepared on an accruals basis
B Users are assumed to have sufficient knowledge to be able to understand the financial statements
C The business is expected to continue in operation for the foreseeable future
D The information is free from material error or bias (2 marks)
6 Which two of the following are not elements of financial statements per the IASBs Conceptual
Framework?
1 Profits
2 Assets
3 Income
4 Equity
5 Losses
6 Expenses
A 2 and 4
B 1 and 5
C 3 and 4
D 5 and 6 (2 marks)
4 Questions
7 According to the IASBs Conceptual Framework, the statement of profit or loss and other comprehensive
income shows an entitys:
A Economic resources
B Financial performance
C Changes in resources and claims
D Financial adaptability (2 marks)
8 Which of the following is an underlying assumption in the IASBs Conceptual Framework for Financial
Reporting (2010)?
A Accruals
B Relevance
C Timeliness
D Going concern (2 marks)
9 The IASBs Conceptual Framework for Financial Reporting (2010) defines elements of financial
statements. One of the elements defined by the Conceptual Framework is an 'asset'.
In no more than 30 words define an asset. (2 marks)
10 The term GAAP is used to mean:

A Generally accepted accounting procedures
B General accounting and audit practice
C Generally agreed accounting practice
D Generally accepted accounting practice (2 marks)
11 Which one of the following is responsible for governance and fundraising in relation to the development of
International Financial Reporting Standards?
A International Accounting Standards Board
B IFRS Interpretations Committee
C IFRS Foundation Trustees
D IFRS Advisory Council (2 marks)
12 The setting of International Financial Reporting Standards is carried out by co-operation between a
number of committees and boards, which include:
1 IFRS Foundation
2 IFRS Advisory Council
3 IFRS Interpretations Committee
Which of the above reports to, or advises, the International Accounting Standards Board (IASB)?
Reports to: Advises:
A 1 and 3 2
B 1 and 2 3
C 3 2
D 2 1 (2 marks)
13 The IASB's Conceptual Framework for Financial Reporting (2010) provides definitions of the elements of
financial statements. One of the elements defined by the Conceptual Framework is 'expenses'.
In no more than 40 words, define expenses. (2 marks)
14 According to the International Accounting Standards Board's Conceptual Framework for Financial
Reporting (2010), what is the objective of financial reporting?
Write your answer in no more than 35 words. (2 marks)
Questions 5
15 Which of the following correctly defines equity according to the IASB's Conceptual Framework for
Financial Reporting (2010)?
A Equity is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefit
B Equity is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity
C Equity is the residual interest in the assets of the entity after deducting all its liabilities
D Equity is increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities (2 marks)
16 Which of the following are the responsibilities of the IFRS Foundation Trustees?
1 Issuing International Financial Reporting Standards
2 Approving the annual budget of the IASB
3 Enforcing International Financial Reporting Standards
4 Reviewing the strategy of the IASB and its effectiveness
5 Appointing the members of the IASB, the IFRS Interpretations Committee and the IFRS Advisory
Council
A 1, 2 and 5
B 2 and 4
C 1, 3 and 5
D 2, 4 and 5 (2 marks)
17 The International Accounting Standards Board's Conceptual Framework for Financial Reporting (2010)
categorises the qualitative characteristics of financial information as fundamental or enhancing.
State the fundamental qualitative characteristics. (2 marks)
18 Which of the following statements is/are true?

1 The IFRS Interpretations Committee is a forum for the IASB to consult with the outside world.
2 The IFRS Foundation produces IFRSs. The IFRS Foundation is overseen by the IASB.
3 One of the objectives of the IFRS Foundation is to bring about convergence of national accounting
standards and IFRSs.
A 1 and 3 only
B 2 only
C 2 and 3 only
D 3 only (2 marks)
19 The process leading to the publication of an International Financial Reporting Standard (IFRS) has a
number of stages.
List the four stages normally involved in developing an IFRS. (3 marks)
20 According to the IASBs Conceptual Framework which of the following is not an objective of financial
statements?
A Providing information regarding the economic resources and claims of a business
B Providing information regarding the performance of a business
C Enabling users to assess the performance of management to aid decision making
D Helping to assess the going concern status of a business (2 marks)
6 Questions
21 According to the IASB's Conceptual Framework, which two of the following make information a faithful
representation?
1 It is free from bias
2 It is relevant
3 It is complete
4 It is verifiable
A 1 and 2
B 2 and 4
C 1 and 3
D 3 and 4 (2 marks)
22 Listed below are some characteristics of financial information.

1 Comparability
2 Relevance
3 Completeness
4 Timeliness
Which of these characteristics are qualitative characteristics of useful financial information according to
the IASB's Conceptual Framework for Financial Reporting (2010)?
A 1, 2 and 3 only
B 1, 2 and 4 only
C 1, 3 and 4 only
D 2, 3 and 4 only (2 marks)
23 According to the IASB's Conceptual Framework for Financial Reporting (2010), which of the following
are enhancing characteristics of useful financial information?
A Timeliness, completeness, understandability, materiality
B Relevance, comparability, verifiability, materiality
C Completeness, timeliness, understandability, verifiability
D Verifiability, understandability, comparability, timeliness (2 marks)
24 Which body issues International Financial Reporting Standards?

C The International Accounting Standards Board
D The IFRS Interpretations Committee (2 marks)
25 Which of the following provides advice to the International Accounting Standards Board (IASB) as well as
informing the IASB of the implications of proposed standards for users and preparers of financial
statements?
B The IFRS Interpretations Committee
C The IFRS Foundation
D The Trustees (2 marks)
(Total = 51 marks)
Questions 7
2 Objective test questions: External audit 56 mins

1 An external audit:
A Guarantees that the financial statements are free from misstatements.
B Provides reasonable assurance that the financial statements are free from misstatements.
C Guarantees that the financial statements are free from material misstatements.
D Provides reasonable assurance that the financial statements are free from material misstatements.
(2 marks)
2 An external auditor gives a modified audit opinion that is a 'disclaimer of opinion'.

This means that the auditor:
A Has been unable to agree with an accounting treatment used by the directors in relation to a
material item.
B Has been prevented from obtaining sufficient appropriate audit evidence and concludes the effects
of undetected misstatements could be both material and pervasive.
C Has found extensive errors in the financial statements that are material and pervasive and so
concludes that they do not show a true and fair view.
D Has discovered a few immaterial differences that do not affect the auditor's opinion. (2 marks)
3 There is a major uncertainty facing Z, a limited liability company. Actions are pending against the
company for allegedly supplying faulty goods, causing widespread damage.
The directors have fully described the circumstances of the case in a note to the financial statements.
What form of audit opinion is appropriate in this case?
A Qualified opinion unable to obtain sufficient appropriate audit evidence
B Disclaimer of opinion
C Unmodified opinion with an additional emphasis of matter paragraph
D Qualified opinion misstatements are material, but not pervasive (2 marks)
4 Which of the following matters are normally covered by the auditors' report?
1 Whether the company has kept proper accounting records
2 Whether the accounts are in agreement with the accounting records
3 Whether the accounts have been prepared in accordance with the relevant legislation and
accounting standards
4 Whether other information presented with the financial statements is consistent with them
A 1 and 2 only
B 1, 2 and 3 only
C 3 and 4 only
D All four matters are normally covered (2 marks)
5 A company's auditors find insufficient evidence to substantiate the company's cash sales, which are
material in amount.
What form of modification of the audit opinion would normally be appropriate in this situation?
A Qualified opinion misstatements are material, but not pervasive
B Qualified opinion unable to obtain sufficient appropriate audit evidence
C Disclaimer of opinion
D Adverse opinion (2 marks)
8 Questions
6 A company's accounting records were largely destroyed by fire shortly after the year end. As a result, the
financial statements contain a number of figures based on estimates.
What form of modification of the audit opinion would be appropriate in this situation?
A Qualified opinion misstatements are material, but not pervasive
B Qualified opinion unable to obtain sufficient appropriate audit evidence
C Disclaimer of opinion
D Adverse opinion (2 marks)
7 Who is responsible for the preparation and fair presentation of financial statements of a company?
A External auditors of the company
B The finance department of the company
C Management of the company
D External auditors and Management are jointly responsible (2 marks)
8 When carrying out an audit an external auditor must satisfy himself of a number of matters. Which of the
following are not one of those matters?
A The accounts have been prepared by a qualified accountant
B Proper accounting records have been kept
C The accounts have been prepared in accordance with local legislation and relevant accounting
standards
D The accounts are in agreement with accounting records (2 marks)
9 If an external auditor does not agree with the directors' treatment of a material item in the accounts, the
first action they should take is to:
A Give a qualified opinion of the financial statements
B Give an unmodified opinion of the financial statements
C Force the directors to change the treatment of the item in the accounts
D Persuade the directors to change the treatment of the item in the accounts (2 marks)
10 The external auditor has a duty to report on the truth and fairness of the financial statements and to
report any reservations. The auditor is normally given a number of powers by statute to enable the
statutory duties to be carried out.
List three powers that are usually granted to the auditor by statute. (3 marks)
11 Which one of the powers listed below is unlikely to be granted to the auditor by legislation?
A The right access at all times to the books, records, documents and accounts of the entity
B The right to be notified of, attend and speak at meetings of equity holders
C The right to correct financial statements if the auditor believes the statements do not show a true
and fair view
D The right to require officers of the entity to provide whatever information and explanations thought
necessary for the performance of the duties of the auditor (2 marks)
12 Which of the following is the most appropriate definition of an external audit?

A An external audit is an exercise carried out by auditors in order to give an opinion on whether the
financial statements of a company are true and fair.
B An external audit is an exercise carried out by auditors in order to give assurance to shareholders
on the effectiveness and efficiency of management.
C An external audit is performed by management to identify areas of deficiency within a company
and to make recommendations to mitigate those deficiencies.
D The external audit is an exercise performed by auditors to provide assurance that the company will
continue to operate in the future. (2 marks)
Questions 9
13 The external auditors have completed the audit of GQ for the year ended 30 June 20X8 and have several
outstanding differences of opinion that they have been unable to resolve with the management of GQ.
The senior partner of the external auditors has reviewed these outstanding differences and concluded that
individually and in aggregate the differences are not material.
Which one of the following audit opinions will the external auditors use for GQ's financial statements for
the year ended 30 June 20X8?
A An unmodified opinion
B An adverse opinion
C An emphasis of matter
D A qualified opinion (2 marks)
14 In no more than 25 words, state the objective of an external audit. (2 marks)
15 The external auditors have completed the audit of SR. The auditors disagree with the accounting
treatment of a material item in the financial statements and have concluded that the effect of this issue is
material, but not pervasive to the financial statements.
Which one of the following audit opinions will the external auditors use for SR's financial statements?
A An unmodified opinion
B An adverse opinion
C An emphasis of matter
D A qualified opinion (2 marks)
(Total = 31 marks)
3 Objective test questions: Ethics 40 mins

1 A professional accountant in business may be involved in a wide variety of work. Which of these functions
will he not be carrying out?
A Preparing financial statements
B Auditing financial statements
C Preparing budgets and forecasts
D Preparing the management letter provided to the auditors (2 marks)
2 A professional accountant is required under the CIMA Code to comply with five fundamental principles.
These include:
A Integrity, Objectivity, Reliability
B Professional competence and due care, Confidentiality, Integrity
C Morality, Objectivity, Professional behaviour
D Efficiency, Confidentiality, Professional competence and due care (2 marks)
3 A qualified accountant holds a number of shares in his employing company, and has become eligible for a
profit-related bonus for the first time. What type of threat could this represent to his objectivity when
preparing the company's financial statements?
A Self-interest
B Self-review
C Intimidation
D Familiarity (2 marks)
4 Three of the following are recognised advantages of a principles based approach to ethical codes. Which
is the exception?
A Encourages proactive discussion of issues
B Encourages consistent application of rules
C Suits complex situations and evolving environments
D Encourages professional development (2 marks)
10 Questions
5 While out to lunch, you run into a client at the sandwich bar. In conversation, she tells you that she
expects to inherit from a recently deceased uncle, and asks you how she will be affected by inheritance
tax, capital gains tax and other matters which you have not dealt with, in detail, for some years.
Which of the following principles of the CIMA Code of Ethics is raised by this scenario?
A Professional competence and due care
B Integrity
C Professional behaviour
D Confidentiality (2 marks)
6 While at a party at the weekend, you meet a client of yours who is clearly very concerned about some
VAT issues. You know enough about VAT to carry out your daily work, but you are not an expert on the
areas of imports and exports on which your client is asking your opinion.
What ethical issue does this situation raise?
A Objectivity
B Professional competence and due care
C Professional behaviour
D Confidentiality (2 marks)
7 The CIMA Code of Ethics for Professional Accountants sets out five principles that a professional
accountant is required to comply with. Three of these principles are professional behaviour, integrity and
objectivity. List the other two. (2 marks)
8 Which of the following is an advantage of a principles-based ethical code?

A It can easily be legally enforced.
B It provides rules to be followed in all circumstances
C It encourages compliance by requiring a professional person to actively consider the issues.
D It can be narrowly interpreted, making it easy for the professional to see whether or not the Code
has been violated. (2 marks)
9 What is meant by the fundamental principle of 'professional behaviour'?

A Compliance with relevant laws and regulations and avoidance of any action that discredits the
profession
B Being straightforward and honest in all professional and business relationships
C Not allowing professional judgement to be affected by bias, undue influence or business
considerations
D Maintaining a high level of technical expertise through continuing professional development
(2 marks)
10 Which of the following is not a circumstance where disclosure of confidential information is permitted
under the CIMA Code?
A Disclosure of information when authorised by the client
B Disclosure of information to advance the interests of a new client
C Disclosure of information to protect the professional interests of an accountant in a legal action
D Disclosure of information when required by law (2 marks)
11 Which of these is not a source of ethical codes for accountants?

A IFAC
B CIMA
C APB
D HMRC (2 marks)
(Total = 22 marks)
Questions 11
4 Section B questions: Regulation 45 mins

(a) The International Accounting Standards Board (IASB)s Conceptual Framework for Financial Reporting
(2010) defines the elements of financial statements.
Required
Explain each of the elements, illustrating each with an example. (5 marks)
P7 5/08
(b) The IASB's Conceptual Framework identifies four enhancing qualitative characteristics of useful financial
information.
Required
Identify and explain each of the four enhancing qualitative characteristics of financial information listed in
the IASB's Conceptual Framework. (5 marks)
P7 11/05
(c) C is a small developing country which passed legislation to create a recognised professional accounting
body two years ago. At the same time as the accounting body was created, new regulations governing
financial reporting requirements of entities were passed. However, there are currently no accounting
standards in C.
C's government has asked the new professional accounting body to prepare a report setting out the
country's options for developing and implementing a set of high quality local accounting standards. The
government request also referred to the work of the IASB and its International Financial Reporting
Standards.
Required
As an advisor to the professional accounting body, outline three options open to C for the development of
a set of high quality local accounting standards. Identify one advantage and one disadvantage of each
option. (5 marks)
P7 5/06
(d) The Conceptual Framework for Financial Reporting was first published in 1989 and was amended in
2010. It has been adopted by The International Accounting Standards Board (IASB)
Explain the purposes of the Conceptual Framework. (5 marks)
P7 5/07
(e) The IFRS Foundation oversees a number of other International committees, two of which are the IFRS
Advisory Council and the IFRS Interpretations Committee.
Required
Explain the role of the IFRS Advisory Council and the IFRS Interpretations Committee in assisting with
developing and implementing International Financial Reporting Standards. (5 marks)
P7 11/08
(Total = 25 marks)
12 Questions
5 Section B questions: External audit 36 mins

(a) Selected balances in HF's financial records at 30 April 20X9 were as follows:
$000
Revenue 15,000
Profit 1,500
Property, plant and equipment net book value 23,000
Inventory 1,500
After completing the required audit work the external auditors of HF had the following observations:
(1) Inventory with a book value of $500 is obsolete and should be written off.
(2) Development expenditure net book value of $600,000, relating to the development of a new
product line, has been capitalised and amortised in previous years but the project has now been
abandoned, (after 30 April X9).
(3) Decommissioning costs relating to HF's production facilities, estimated to be $5,000,000 in 17
years time is being provided for, over 20 years, at $250,000 a year.
Assume there are no other material matters outstanding.
As external auditor you have just completed a meeting with HF management. At the meeting
HF management decided the following:
Item (1) is not material, so it is not necessary to write off the obsolete inventory.
Item (2) the development expenditure should be written off against current year profits.
Item (3) the decommissioning cost will continue to be provided for over 20 years.
Required
(i) Explain whether or not the management's decisions taken in the meeting are correct for items (1)
and (2). (2 marks)
(ii) Explain whether you agree with the management's treatment of the decommissioning costs in item
(3) and explain the type of audit opinion that should be issued, giving your reasons. (3 marks)
(Total = 5 marks)
P7 5/09
(b) Explain the circumstances in which an audit report will express each of the following:
(i) A qualified opinion
(ii) A disclaimer of opinion
(iii) An adverse opinion (5 marks)
(c) An auditor, in carrying out his statutory duty, may sometimes find himself to be in conflict with the
directors of the company. What statutory rights does he have to assist him in discharging his
responsibility to the shareholders? (5 marks)
(d) DC is carrying out three different construction contracts. The balances and results for the year to
30 September 20X6 were as follows:
Contract 1 2 3
Contract end date 30 Sept 20Y3 31 Dec 20Y0 30 Sept 20Y0
$m $m $m
Profit/(loss) recognised for year 2 2.3 (0.6)
Expected total profit/(loss) on contract 12 5.0 (3.0)
DC's management have included $3.7m profit in the profit for the year ended 30 September 20X6. DCs
financial statements show a profit for the year of $16.32m.
No allowance has been made in the statement of profit or loss and other comprehensive income for the
future loss expected to arise on contract 3, as management consider the loss should be offset against the
expected profits on the other two contracts.
Questions 13
EA & Co are DC's external auditors. EA & Co consider that the profit in relation to long term contracts for
the year ended 30 September 20X6 should be $1.3m, according to IAS 11 Construction Contracts. EA &
Co have been unable to persuade DC's management to change their treatment of the construction contract
profit/loss.
Required
(i) Explain the objective of an external audit.
(ii) Identify, with reasons, the type of audit opinion that would be appropriate for EA & Co to use for
DC's financial statements for the year ended 30 September 20X6. Briefly explain what information
should be included in the audit report in relation to the contracts.
(5 marks)
(Total = 20 marks)
6 Section B questions: Ethics 27 mins

(a) The CIMA Code of Ethics sets out fundamental principles and a conceptual framework for applying them.
How does this approach work and how does it differ from a rules-based system? (5 marks)
(b) The CIMA Code of Ethics sets out five fundamental principles. List and briefly explain each of these
principles. (5 marks)
(c) The CIMA Code of Ethics is principles based. Describe the advantages and disadvantages of a principles-
based ethical code. (5 marks)
(Total = 15 marks)
14 Questions
Part B: Single Company Financial Statements

Questions 7 to 35 cover Single Company Financial Accounts, the subject of Part B of the BPP Study Text for F1.
7 Objective test questions: Presentation 43 mins

1 Which, if any, of the following statements about limited liability companies are correct, according to IAS 1
(revised)?
1 Companies must produce their financial statements within one year after their reporting period.
2 The accounting policies adopted by a company must be disclosed by note.
3 The accounting records of a limited liability company must be open to inspection by a member of
the company at all times.
A 2 only
B 2 and 3 only
C 1 and 3 only
D None of the statements is correct (2 marks)
2 Which of the following items can appear in a company's statement of changes in equity, according to IAS
1 (revised) Presentation of financial statements?
1 Total comprehensive income for the period
2 Dividends paid
3 Surplus on revaluation of properties
4 Proceeds of issuance of share capital
A All four items
B 1, 2 and 3 only
C 1, 3 and 4 only
D 2 and 4 only (2 marks)
3 Which of the following items are required by IAS 1 (revised) Presentation of financial statements to be
disclosed in the financial statements of a limited liability company?
1 Authorised share capital
2 Finance costs
3 Staff costs
4 Depreciation
A 1 and 4 only
B 1 , 2 and 3 only
C 2, 3 and 4 only
D All four items (2 marks)
4 Which of the following constitute a change of accounting policy according to IAS 8 Accounting policies,
changes in accounting estimates and errors?
1 A change in the basis of valuing inventory
2 A change in depreciation method
3 Depreciation that was previously treated as part of cost of sales is now shown under administrative
expenses
4 Adopting an accounting policy for a new type of transaction not previously dealt with
A 1 and 2
B 2 and 3
C 1 and 3
D 2 and 4 (2 marks)
Questions 15
5 Which of the following items would qualify for treatment as a change in accounting estimate, according to
IAS 8 Accounting policies, changes in accounting estimates and errors?
1 Provision for obsolescence of inventory
2 Correction necessitated by a material error
3 A change as a result of the adoption of a new International Accounting Standard
4 A change in the useful life of a non-current asset
A All four items
B 2 and 3 only
C 1 and 3 only
6 A change in accounting policy is accounted for by:

A Changing the current year figures but not previous year's figures
B Retrospective application
C No alteration of any figures but disclosure in the notes
D No alteration of any figures nor disclosure in the notes (2 marks)
7 Which one of the following would be regarded as a change of accounting policy under IAS 8 Accounting
policies, changes in accounting estimates and errors?
A An entity changes its method of depreciation of machinery from straight line to reducing balance.
B An entity has changed its method of valuing inventory from FIFO to weighted average.
C An entity changes its method of calculating the provision for warranty claims on its products sold.
D An entity disclosed a contingent liability for a legal claim in the previous year's accounts. In the
current year, a provision has been made for the same legal claim. (2 marks)
8 Shah changes the depreciation method for its motor vehicles from the straight line method to the reducing
balance method. How would this be treated in the financial statements?
A Changing the current year figures but not previous year's figures
B Retrospective application
C No alteration of any figures but disclosure in the notes
D No alteration of any figures nor disclosure in the notes (2 marks)
9 IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors specifies the definition and
treatment of a number of different items. Which of the following is NOT specified by IAS 8?
A The effect of a change in an accounting estimate
B Prior period adjustments
C Provisions
D Errors (2 marks)
10 IAS 1 (revised) Presentation of financial statements requires some items to be disclosed on the face of
the financial statements and others to be disclosed in the notes.
1 Depreciation
2 Revenue
3 Closing inventory
4 Finance cost
5 Dividends
Which two of the above have to be shown on the face of the statement of profit or loss and other
comprehensive income, rather than in the notes:
A 1 and 4
B 3 and 5
C 2 and 3
D 2 and 4 (2 marks)
16 Questions
11 IAS 1 (revised) Presentation of Financial Statements encourages an analysis of expenses to be presented

on the face of the statement of profit or loss and other comprehensive income. The analysis of expenses
must use a classification based on either the nature of expense, or its function, within the entity such as:
1 Raw materials and consumables used
2 Distribution costs
3 Employee benefit costs
4 Cost of sales
5 Depreciation and amortisation expense
Which of the above would be disclosed on the face of the statement of profit or loss and other
comprehensive income if a manufacturing entity uses analysis based on function?
A 1, 3 and 4
B 2 and 4
C 1 and 5
12 Which one of the following would be regarded as a change of accounting estimate according to IAS 8
Accounting policies, changes in accounting estimates and errors?
A An entity started valuing inventory using the weighted average cost basis. Inventory was previously
valued on the FIFO basis.
B An entity started revaluing its properties, as allowed by IAS 16 Property, plant and equipment.
Previously, all property, plant and equipment had been carried at cost less accumulated
depreciation.
C A material error in the inventory valuation methods caused the closing inventory at 31 March
2008 to be overstated by $900,000.
D An entity created a provision for claims under its warranty of products sold during the year. 5% of
sales revenue had previously been set as the required provision amount. After an analysis of three
years sales and warranty claims the calculation of the provision amount has been changed to a
more realistic 2% of sales.
(2 marks)
(Total = 24 marks)
8 Section B questions: Presentation 18 mins

(a) Suggest reasons why companies should be expected to publish accounts using standard formats saying
why and to whom the specific information shown in the formats would be useful. (5 marks)
(b) The following is an extract from the trial balance of CE at 31 March 20X6:
$000 $000
Administration expenses 260
Cost of sales 480
Interest paid 190
Interest bearing borrowings 2,200
Inventory at 31 March 20X6 220
Property, plant and equipment at cost 1,500
Property, plant and equipment, depreciation to 31 March 20X5 540
Distribution costs 200
Revenue 2,000
Questions 17
Notes
(i) Included in the closing inventory at the year end was inventory at a cost of $35,000, which was
sold during April 20X6 for $19,000.
(ii) Depreciation is provided for on property, plant and equipment at 20% per year using the reducing
balance method. Depreciation is regarded as cost of sales.
(iii) A member of the public was seriously injured while using one of CE's products on 4 October 20X5.
Professional legal advice is that CE will probably have to pay $500,000 compensation.
Required
Prepare CE's statement of profit or loss and other comprehensive income for the year ended 31 March
20X6 down to the line 'profit before tax'. (5 marks)
P7 5/06
(Total = 10 marks)
9 Objective test questions: Statements of cash flows 43 mins

1 The following is an extract from a statement of cash flows prepared by a trainee accountant.
$000
Cash flows from operating activities
Profit before taxation 3,840
Adjustments for
Depreciation (1,060)
Loss on sale of building 210
2,990
Increase in inventories (490)
Decrease in trade payables 290
Net cash from operating activities 2,790
Which of the following criticisms of this extract are correct?

1 Depreciation should have been added, not deducted.
2 Loss on sale of building should have been deducted, not added.
3 Increase in inventories should have been added, not deducted.
4 Decrease in trade payables should have been deducted, not added.
A 1 and 4
B 2 and 3
C 1 and 3
D 2 and 4 (2 marks)
2 In the year ended 31 December 20X4 a company sold some plant which had cost $100,000 for
$20,000. At the time of sale the carrying value of the plant was $18,000.
Which of the following correctly states the treatment of the transaction in the company's statement of
cash flows?
Proceeds of sale Profit on sale
A Cash inflow under financing activities Deducted from profit in calculating cash
flow from operating activities.
B Cash inflow under investing activities Added to profit in calculating cash flow
from operating activities.
C Cash inflow under financing activities Added to profit in calculating cash flow
from operating activities.
D Cash inflow under investing activities Deducted from profit in calculating cash
flow from operating activities. (2 marks)
18 Questions
3 Which of the following items should not appear in a company's statement of cash flows?
1 Proposed dividends
2 Dividends received
3 Bonus issue of shares
4 Surplus on revaluation of a non-current asset
5 Proceeds of sale of an investment not connected with the company's trading activities
A 1, 2, 3 and 5
B 3 and 4 only
C 1, 3 and 4
D 2 and 5 (2 marks)
4 Which, if any, of the following statements about statements of cash flows are correct according to IAS 7
Statement of cash flows?
1 The direct and indirect methods produce different figures for operating cash flow.
2 In calculating operating cash flow using the indirect method, an increase in inventory is added to
operating profit.
3 Figures shown in the statement of cash flows should include sales taxes.
4 The final figure in the statement of cash flows is the increase or decrease in cash at bank.
A 1 and 4
B 2 and 3
C 2 only
D None of the statements is correct. (2 marks)
5 The statement of financial position of R, a limited liability company, at 31 December 20X3 and 20X4
included these figures.
31 December
20X3 20X4
$m $m
Property, plant and equipment: cost 40 50
Accumulated depreciation (10) (14)
30 36
The statement of profit or loss and other comprehensive income for the year ended 31 December 20X4
showed the following figures.
Depreciation charge for year $6m
Loss on sales of property, plant and equipment $1m
The company purchased new property, plant and equipment costing $16m during the year.
What figure should appear in the company's statement of cash flows for 20X4 for receipts from the sale of
property, plant and equipment?
A $3m
B $5m
C $4m
D The figure cannot be calculated from the information provided. (2 marks)
Questions 19
6 A statement of cash flows shows the increase or decrease in cash and cash equivalents in the period.
Which of the following items are included in this movement?
1 Cash at bank
2 Overdraft at bank
3 Current asset investments readily convertible into known amounts of cash and which can be sold
without disrupting the company's business.
4 Equity investments.
A All four items
B 1, 2 and 3 only
C 1 and 2 only
7 Which of the following should appear in a statement of cash flows according to IAS 7 Statement of cash
flows?
1 Dividends paid on preference shares
2 Interest capitalised as part of the cost of a non-current asset
3 Cash flows resulting from share issues
A All three items
B 1 and 2 only
C 1 and 3 only
8 The IAS 7 format for a statement of cash flows using the indirect method opens with adjustments to net
profit before taxation to arrive at cash flow from operating activities.
Which of the following lists consists only of items that would be deducted in that calculation?
A Loss on sale of non-current assets, increase in inventories, decrease in trade payables
B Depreciation, increase in trade receivables, decrease in trade payables
C Increase in trade receivables, profit on sale of non-current assets, decrease in trade payables
D Profit on sale of non-current assets, increase in trade payables, decrease in trade receivables
(2 marks)
9 A company's accounting records contain the following figures.

$000
Sales for year 3,600
Purchases for year 2,400
Receivables: 31 December 20X2 600
31 December 20X3 700
Payables: 31 December 20X2 300
31 December 20X3 450
Salaries and other expenses paid during 20X3, excluding interest 760
What figure should appear in the company's statement of cash flows for 20X3 for cash generated from
operations, based on these figures?
A $490,000
B $390,000
C $1,250,000
D None of these figures (2 marks)
20 Questions
10 At 30 September 20X5, BY had the following balances, with comparatives:

As at 30 September 20X5 20X4
$000 $000
Non-current tangible assets
Property, plant and equipment 260 180
Equity and reserves
Property, plant and equipment revaluation surplus 30 10
The statement of profit or loss and other comprehensive income for the year ended 30 September 20X5
included:
Gain on disposal of an item of equipment $10,000
Depreciation charge for the year $40,000
Notes to the accounts:
Equipment disposed of had cost $90,000. The proceeds received on disposal were $15,000.
Required
Calculate the property, plant and equipment purchases that BY would show in its statement of cash flows
for the year ended 30 September 20X5, as required by IAS 7 Statement of cash flows. (4 marks)
11 At 1 October 20X4, BK had the following balance:

Accrued interest payable $12,000 credit
During the year ended 30 September 20X5, BK charged interest payable of $41,000 to its statement of
profit of loss and other comprehensive income. The closing balance on accrued interest payable account
at 30 September 20X5 was $15,000 credit.
How much interest paid should BK show on its statement of cash flows for the year ended 30 September
20X5?
A $38,000
B $41,000
C $44,000
D $53,000 (2 marks)
(Total = 24 marks)
10 Section B questions: Statements of cash flows 9 mins

(a) The following financial information relates to FC for the year ended 31 March 20X8.
FC
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 31 MARCH 20X8
$000
Revenue 445
Cost of sales (220)
Gross profit 225
Other income 105
330
Administrative expenses (177)
Finance costs (20)
Profit before tax 133
Income tax expense (43)
Profit for the year 90
Questions 21
The following administrative expenses were incurred in the year.

$000
Wages 70
Other general expenses 15
Depreciation 92
177
Other income:
Rentals received 45
Gain on disposal of non-current assets 60
105
Statement of financial position extracts at:

31 March 20X8 31 March 20X7
$000 $000
Inventories 40 25
Trade receivables 50 45
Trade payables (30) (20)
Required
Prepare FC's statement of cash flows for the year ended 31 March 20X8, down to the line 'Cash generated from
operations', using the direct method. (5 marks)
P7 5/08
22 Questions
Statements of cash flows section C questions

The following tax regime data is applicable to questions 11 14, which cover the preparation of statements of
cash flows.
Country X Tax regime
Relevant tax rules

Corporate Profits
Unless otherwise specified, only the following rules for taxation of corporate profits will be relevant, other taxes
can be ignored:
(a) Accounting rules on recognition and measurement are followed for tax purposes.
(b) All expenses other than depreciation, amortisation, entertaining, taxes paid to other public bodies and
donations to political parties are tax deductible.
(c) Tax depreciation is deductible as follows:
50% of additions to property, plant and equipment in the accounting period in which they are recorded
25% per year of the written-down value (ie cost minus previous allowances) in subsequent
accounting periods except that in which the asset is disposed of
No tax depreciation is allowed on land
(d) The corporate tax on profits is at a rate of 25%.
(e) No indexation is allowable on the sale of land.
(f) Tax losses can be carried forward to offset against future taxable profits from the same business.
Value Added Tax
Country X has a VAT system which allows entities to reclaim input tax paid. In Country X the VAT rates are:
Zero rated 0%
Standard rated 15%
Questions 23
11 Dickson 27 mins
Below are the statements of financial position of Dickson Co as at 31 March 20X6 and 31 March 20X5,
together with the statement of profit or loss and other comprehensive income for the year ended 31 March
20X6.
STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH
20X6 20X5
$000 $000
Non-current assets
Goodwill 100 100
Development expenditure 290 160
1,215 897
Current assets
Inventories 360 227
Investments 143 46
Cash 29 117
806 714
Total assets 2,021 1,611
Equity
Share capital $1 ordinary shares 500 400
Share premium 350 100
Revaluation surplus 160 60
Retained earnings 151 152
1,161 712
Non-current liabilities
6% loan notes 150 100
Finance lease liabilities 100 80
Deferred tax 48 45
298 225
Current liabilities
Trade payables 274 352
Finance lease liabilities 17 12
Current tax 56 153
Loan note interest 5
Dividends 78 103
Bank overdraft 132 54
562 674
Total equity and liabilities 2,021 1,611

$000
Revenue 1,476
Cost of sales (962)
Gross profit 514
Other expenses (157)
Finance costs (15)
24 Questions
Notes
(1) Goodwill arose on the acquisition of unincorporated businesses. During the year ended 31 March 20X6
expenditure on development projects totalled $190,000.
(2) During the year ended 31 March 20X6 items of property, plant and equipment with a carrying value of
$103,000 were sold for $110,000. Depreciation charged in the year on property, plant and equipment
totalled $57,000. Dickson purchased $56,000 of property, plant and equipment by means of finance
leases, payments being made in arrears on the last day of each accounting period.
(3) The current asset investments are government bonds and management has decided to class them as cash
equivalents.
(4) The new loan notes were issued on 1 April 20X5. Finance cost includes loan note interest and finance
lease finance charges only.
(5) During the year Dickson made a 1 for 8 bonus issue capitalising its retained earnings followed by a rights
issue.
(6) Dividends declared during the period totalled $131,000.
Required
Prepare a statement of cash flows for the year ended 31 March 20X6 for Dickson Co in accordance with IAS 7
Statement of cash flows, using the indirect method. Your answer should include notes for Property, plant and
equipment and for Cash and cash equivalents. (15 marks)
12 UV (9/11) 45 mins
UVs draft financial statements for the year ended 30 June 2011 and financial statements for the year ended 30
June 2010 are as follows:
STATEMENTS OF FINANCIAL POSITION AS AT 30 JUNE
Other 2011 2010
Information
Non-current assets $000 $000
Property, plant & equipment (i) to (v) 5,675 4,785
Deferred development expenditure (vi) 170 69
5,845 4,854
Current assets
Inventory 95 80
Cash and cash equivalents 95 160
380 385
6,225 5,239
Equity and liabilities
Equity
Share capital (vii) 910 760
Share premium (vii) 665 400
Revaluation reserve 600 0
Retained earnings 2,899 1,982
5,074 3,142
Deferred tax 410 0
Long-term loans 250 1,500
660 1,500
Current liabilities
Income tax 321 305
Interest payable 5 32
Provision for restructuring costs (ix) 0 100
Provision for legal claim (viii) 105 75
491 597
6,225 5,239
Questions 25

FOR THE YEAR ENDED 30 JUNE 2011
$000
Revenue 2,300
Cost of Sales (450)
Gross profit 1,850
Administration expenses and distribution costs (200)
Loss on disposal of plant (15)
Profit from operations 1,635
Interest payable (95)
Profit before tax 1,540
Income tax (455)
Profit after tax 1,085
Other comprehensive income
Revaluation of property, net of deferred tax 600
Total comprehensive income 1,685
Other information:
(i) Non-current assets property, plant and equipment, balances at 30 June 2010 were:
Cost or valuation: $000 $000
Property 4,150
Plant 2,350
Equipment 985
7,485
Depreciation:
Property 450
Plant 1,350
Equipment 900
2,700
Carrying amount 4,785
(ii) Equipment was purchased during the year at a cost of $275,000 and plant was purchased for
$215,000.
(iii) During the year UV disposed of plant with a carrying amount of $30,000 and accumulated depreciation
of $60,000.
(iv) On 1 July 2010 property was revalued to $4,500,000. At that time the average remaining life of property
was 90 years. Property is depreciated on a straight line basis.
(v) Depreciation for the year was $280,000 and $40,000 for plant and equipment respectively.
(vi) Development expenditure incurred during the year to 30 June 2011 was $114,000. Deferred
development expenditure is amortised over its useful economic life.
(vii) UV issued equity shares during the year at a premium.
(viii) Provision was made by UV for outstanding legal claims against the entity at the year end.
(ix) The restructuring costs relate to a comprehensive restructuring and reorganisation of the entity that began
in 2009. UVs financial statements for the year ended 30 June 2010 included a provision for
restructuring costs of $100,000. Restructuring costs incurred in the year to 30 June 2011 were
$160,000. No further restructuring and reorganisation costs are expected to occur. UV treats
restructuring costs as a cost of sales.
26 Questions
Required
(a) Prepare a property, plant and equipment note for UV for the year ended 30 June 2011, in
accordance with the requirements of IAS 16 Property, plant and equipment. (6 marks)
(b) Prepare a statement of cash flows, for UV for the year ended 30 June 2011 using the indirect
method, in accordance with the requirements of IAS 7 Statement of Cash Flows. (19 marks)
(Total = 25 marks)
13 OP (5/11) 45 mins
Extracts of OPs financial statements for the year ended 31 March 20X1 are as follows.
OP STATEMENTS OF FINANCIAL POSITION AS AT:
31 March 20X1 31 March 20X0
Assets $000 $000 $000 $000
Non-current assets
Brand name 30 40
1,067 768
Current assets
Inventory 446 450
895 795

Equity shares of $1 each 400 200
1,282 818
Long term borrowings 100 250
Deferred tax 130 120
230 370
Current liabilities
Current tax 250 260
Accrued interest 10 20
Other provisions 40 0
450 375
Questions 27
OP STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

$000 $000
Revenue 10,400
Cost of sales (4,896)
Gross profit 5,504
Distribution costs (1,890)
Administrative expenses (2,510)
Finance cost (15)
Taxation (280)
Loss on revaluation of property (65)
Total comprehensive income 744
Additional information
(i) Property, plant and equipment comprises:
Cost at 31 Cost at 31 Depreciation
March 20X1 March 20X0 to 31 March
20X0
$000 $000 $000
Land 426 320 0
Buildings 840 610 366
Plant and equipment 166 180 81
1,432 1,110 447
(ii) Depreciation for the year ended 31 March 20X1 was:

$000
Buildings 17
Plant and equipment 25
(iii) Plant and equipment disposed of during the year had a carrying amount of $11,000 (cost $45,000). The
loss on disposal of $6,000 is included in cost of sales.
(iv) All land was revalued on 31 March 20X1, the decrease in value of $65,000 was deducted from the
revaluation reserve.
(v) Cost of sales includes $15,000 for development expenditure amortised during the year and $10,000 for
impairment of the purchased brand name.
(vi) On 1 November 20X0, OP issued $1 equity shares at a premium. No other finance was raised during the
year.
(vii) OP paid a dividend during the year.
(viii) Other provisions relate to legal claims made against OP during the year ended 31 March 20X1. The
amount provided is based on legal opinion at 31 March 20X1 and is included in cost of sales.
Required
(a) Prepare a statement of cash flows, using the indirect method, for OP for the year ended 31 March 20X1,
in accordance with IAS 7 Statement of cash flows. (19 marks)
The following information should not be included in your answer to part (a). It is only required for your answer
to part (b) of the question.
OPs directors acquired equipment on 1 April 20X1 on a finance lease.

The finance lease terms are:
Lease for a ten year period
Rentals paid annually in arrears on 31 March
28 Questions
Each annual rental is $44,000

Original cost of the equipment was $248,610
The interest rate implicit in the lease is 12% per year
Required
(b) Calculate the amounts in respect of this finance lease that would be included in OPs:
(i) Statement of profit or loss and other comprehensive income for the year ended 31 March 20X2
(ii) Statement of financial position as at 31 March 20X2
(ii) Statement of cash flows for the year ended 31 March 20X2 (6 marks)
(Total = 25 marks)
14 YG (11/10) 45 mins
The financial statements of YG are given below.
STATEMENTS OF FINANCIAL POSITION AS AT:
31 OCTOBER 20X9 31 OCTOBER 20X8
Assets $000 $000 $000 $000
Non-current assets
Property, plant and equipment 4,676 4,248
5,093 4,742
Current assets
Inventory 606 509
Cash and cash equivalents 1,989 205
3,051 1,086

Equity shares of $1 each 3,780 2,180
Share premium 1,420 620
Revaluation surplus 560 260
7,074 4,310
570 885
Current liabilities
Current tax 70 170
Accrued interest 5 3
Provision for redundancy costs 0 150
500 633
Questions 29

FOR THE YEAR ENDED 31 OCTOBER 20X9
$000
Revenue 6,640
Gross profit 3,110
Distribution costs (788)
Finance cost (16)
Other comprehensive income:
Gain on revaluation of property, plant and equipment 300
Total comprehensive income for the year 446
Additional information:
(i) On 1 November 20X8, YG issued 1,600,000 $1 ordinary shares at a premium of 50%. No other finance
was raised during the year.
(ii) YG paid a dividend during the year.
(iii) Plant and equipment disposed of in the year had a carrying amount of $70,000; cash received on
disposal was $66,000. Any gain or loss on disposal has been included under cost of sales.
(iv) Cost of sales includes $145,000 for development expenditure amortised during the year.
(v) Depreciation charged for the year was $250,000.
(vi) The income tax expense for the year to 31 October 20X9 is made up as follows:
$000
Corporate income tax 80
Deferred tax 40
120
(vii) During the year to 31 October 20X8 YG set up a provision for redundancy costs arising from the closure
of one of its activities. During the year to 31 October 20X9, YG spent $177,000 on redundancy costs,
the additional cost being charged to administrative expenses.
Required
(a) Prepare a statement of cash flows, using the indirect method, for YG for the year ended 31 October
20X9, in accordance with IAS 7 Statement of cash flows. (20 marks)
(b) Someone you have known for many years has heard that you work for YG, a well known international
entity. There are rumours in the press that YGs latest share issue was to raise cash to enable it to launch
a takeover bid for another entity. Your friend wants to treat you to dinner at an expensive local restaurant,
so that you can give him details of the proposed takeover before it is made public.
Explain how you would respond to your friend. Your answer should include reference to CIMAs Code of
Ethics for Professional Accountants. (5 marks)
(Total = 25 marks)
30 Questions
15 Objective test questions: Non-current assets, inventories and

construction contracts I 49 mins
1 The components of the cost of a major item of equipment are given below.
$
Purchase price 780,000
Import duties 117,000
Sales tax (refundable) 78,000
Site preparation 30,000
Installation 28,000
Initial operating losses before the asset reaches planned performance 50,000
Estimated cost of dismantling and removal of the asset, recognised as a provision
under IAS 37 Provisions, contingent liabilities and contingent assets 100,000
1,183,000
What amount may be recognised as the cost of the asset, according to IAS 16 Property, plant and
equipment?
A $956,000
B $1,105,000
C $1,055,000
D $1,183,000 (2 marks)
2 Which of the following statements about IAS 36 Impairment of assets are correct?
1 Non-current assets must be checked annually for evidence of impairment.
2 An impairment loss must be recognised immediately in the statement of profit or loss and other
comprehensive income, except that all or part of a loss on a revalued asset should be charged
against any related revaluation surplus.
3 If individual assets cannot be tested for impairment, it may be necessary to test a group of assets
as a unit.
A 1 and 2 only
B 1 and 3 only
C 2 and 3 only
3 Which of the following statements is/are correct?

1 Negative goodwill should be shown in the statement of financial position as a deduction from
positive goodwill.
2 IAS 38 allows goodwill to be written off immediately against reserves as an alternative to
capitalisation.
3 As a business grows, internally generated goodwill may be revalued upwards to reflect that growth.
4 Internally developed brands must not be capitalised.
A 1 and 4
B 2 and 3
C 3 only
D 4 only (2 marks)
Questions 31
4 Which of the following accounting policies would contravene International Financial Reporting Standards
if adopted by a company?
1 Goodwill on acquisitions is written off immediately against reserves.
2 Land on which the company's buildings stand is not depreciated.
3 Internally generated brands are capitalised at fair value as advised by independent consultants.
4 In calculating depreciation, the estimated useful life of an asset is taken as half the actual
estimated useful life as a measure of prudence.
A 1, 3 and 4
B 2 and 4 only
C 1 and 3 only
D All four are unacceptable (2 marks)
5 Which of the following items should be included in arriving at the cost of the inventory of finished goods
held by a manufacturing company, according to IAS 2 Inventories?
1 Carriage inwards on raw materials delivered to factory
2 Carriage outwards on goods delivered to customers
3 Factory supervisors' salaries
4 Factory heating and lighting
5 Cost of abnormally high idle time in the factory
6 Import duties on raw materials
A 1, 3, 4 and 6
B 1, 2, 4 ,5 and 6
C 3, 4 and 6
6 Which of the following statements about IAS 2 Inventories is/are correct?

1 Production overheads should be included in cost on the basis of a company's actual level of
activity in the period.
2 In arriving at the net realisable value of inventories, trade discounts and settlement discounts must
be deducted.
3 In arriving at the cost of inventories, FIFO, LIFO and weighted average cost formulas are
acceptable.
4 It is permitted to value finished goods inventories at materials plus labour cost only, without
adding production overheads.
A 1 only
B 2 only
C 3 only
D None of them (2 marks)
7 The position of a construction contract at 30 June 20X6 is as follows.

$
Contract price 900,000
At 30 June 20X6
Costs to date 720,000
Estimated costs to completion 480,000
Progress payments invoiced and received 400,000
Percentage complete 60%
32 Questions
What figures should appear for this contract in the accounts at 30 June 20X6, according to IAS 11
Construction contracts?
SPLOCI Statement of financial position
A Sales revenue $540,000 Receivables $140,000
Costs $840,000
B Sales revenue $540,000
Costs $720,000
C Sales revenue $540,000 Amount due from customer $20,000
Costs $840,000
D Sales revenue $540,000 Receivables $140,000
Costs $720,000
(2 marks)
8 The following measures relate to a non-current asset:

(i) Net book value $20,000
(ii) Net realisable value $18,000
(iii) Value in use $22,000
(iv) Replacement cost $50,000
The recoverable amount of the asset is
A $18,000
B $20,000
C $22,000
D $50,000 (2 marks)
9 BL started a contract on 1 November 20X4. The contract was scheduled to run for two years and has a
sales value of $40 million.
At 31 October 20X5, the following details were obtained from BL's records:
$m
Costs incurred to date 16
Estimated costs to completion 18
Percentage complete at 31 October 20X5 45%
Applying IAS 11 Construction contracts, how much revenue and profit should BL recognise in its
statement of profit or loss and other comprehensive income for the year ended 31 October 20X5?
(2 marks)
10 CI purchased equipment on 1 April 20X2 for $100,000. The equipment was depreciated using the
reducing balance method at 25% per year. CI's year end is 31 March.
Depreciation was charged up to and including 31 March 20X6. At that date, the recoverable amount was
$28,000.
Calculate the impairment loss on the equipment according to IAS 36 Impairment of assets. (3 marks)
The following data is to be used for sub-questions 11 and 12 below

CN started a three year contract to build a new university campus on 1 April 20X5. The contract had a fixed
price of $90 million.
CN incurred costs to 31 March 20X6 of $77 million and estimated that a further $33 million would need to be
spent to complete the contract.
CN uses the percentage of cost incurred to date to total cost method to calculate stage of completion of the contract.
11 Calculate revenue earned on the contract to 31 March 20X6, according to IAS 11 Construction contracts.
(2 marks)
12 State how much gross profit/loss CN should recognise in its statement of profit or loss and other
comprehensive income for the year ended 31 March 20X6, according to IAS 11 Construction contracts.
(2 marks)
Questions 33
13 IAS 16 Property, plant and equipment requires an asset to be measured at cost on its original recognition
in the financial statements.
EW used its own staff, assisted by contractors when required, to construct a new warehouse for its own
use.
Which one of the following costs would not be included in attributable costs of the non-current asset?
A Clearance of the site prior to work commencing.
B Professional surveyors' fees for managing the construction work.
C EW's own staff wages for time spent working on the construction.
D An allocation of EW's administration costs, based on EW staff time spent on the construction as a
percentage of the total staff time. (2 marks)
(Total = 27 marks)
16 Objective test questions: Non-current assets, inventories and

construction contracts II 63 mins
1 A company purchased a machine for $50,000 on 1 January 20X1. It was judged to have a 5-year life
with a residual value of $5,000. On 31 December 20X2 $15,000 was spent on an upgrade to the
machine. This extended its remaining useful life to 5 years, with the same residual value. During 20X3,
the market for the product declined and the machine was sold on 1 January 20X4 for $7,000.
What was the loss on disposal?
A $31,000
B $35,000
C $31,600
D $35,600 (2 marks)
2 A cash generating unit comprises the following:

$m
Building 20
Goodwill 5
Current assets 10
45
Following a downturn in the market, an impairment review has been undertaken and the recoverable
amount of the cash generating unit is estimated to be $25m.
What is the carrying value of the building after adjusting for the impairment loss?
A $11m
B $10m
C $12.5m
D $20m (2 marks)
3 In less than 30 words, define 'impairment'. (2 marks)

34 Questions
4 Which of the following is not true regarding IAS 2 Inventories?

A Fixed production overheads must be allocated to items of inventory on the basis of the normal level
of production.
B Plant lying idle will lead to a higher fixed overhead allocation to each unit.
C An abnormally high level of production will lead to a lower allocation of fixed production overhead to
each unit
D Unallocated overheads must be recognised as an expense in the period in which they are incurred.
(2 marks)
5 In less than 20 words, define 'fair value'. (2 marks)
The following data is to be used to answer sub-questions 6 and 7 below

X acquired the business and assets from the owners of an unincorporated business: the purchase price was
satisfied by the issue of 10,000 equity shares with a nominal market value of $10 each and $20,000 cash. The
market value of X shares at the date of acquisition was $20 each.
The assets acquired were:
Net tangible non-current assets with a book value of $20,000 and current value of $25,000.
Patents for a specialised process valued by a specialist valuer at $15,000.
Brand name, valued by a specialist brand valuer on the basis of a multiple of earnings at $50,000.
Publishing rights of the first text from an author that the management of X expects to become a best
seller. The publishing rights were a gift from the author to the previous owners at no cost. The
management of X has estimated the future value of the potential best seller at $100,000. However, there
is no reliable evidence available to support the estimate of the management.
6 In no more than 30 words, explain the accounting treatment to be used for the publishing rights of the
first text. (2 marks)
7 Calculate the value of goodwill to be included in the accounts of X for this purchase. (4 marks)
8 An item of plant and equipment was purchased on 1 April 20X1 for $100,000. At the date of acquisition
its expected useful life was 10 years. Depreciation was provided on a straight line basis, with no residual
value.
On April 1 20X3, the asset was revalued to $95,000. On 1 April 20X4, the useful life of the asset was
reviewed and the remaining useful life was reduced to 5 years, a total useful life of 8 years.
Calculate the amounts that would be included in the statement of financial position for the asset
cost/valuation and provision for accumulated depreciation at 31 March 20X5. (4 marks)
9 IAS 16 Property, plant and equipment provides definitions of terms relevant to non-current assets.
Complete the following sentence, in no more than 10 words.
'Depreciable amount is ' (2 marks)
Questions 35
10 Which one of the following items would CM recognise as subsequent expenditure on a non-current asset
and capitalise it as required by IAS 16 Property, plant and equipment?
A CM purchased a furnace five years ago, when the furnace lining was separately identified in the
accounting records. The furnace now requires relining at a cost of $200,000. When the furnace is
relined it will be able to be used in CM's business for a further five years.
B CM's office building has been badly damaged by a fire. CM intends to restore the building to its
original condition at a cost of $250,000.
C CM's delivery vehicle broke down. When it was inspected by the repairers it was discovered that it
needed a new engine. The engine and associated labour costs are estimated to be $5,000.
D CM closes its factory for two weeks every year. During this time, all plant and equipment has its
routine annual maintenance check and any necessary repairs are carried out. The cost of the
current year's maintenance check and repairs was $75,000. (2 marks)
11 DS purchased a machine on 1 October 20X2 at a cost of $21,000 with an expected useful economic life
of six years, with no expected residual value. DS depreciates its machines using the straight line basis.
The machine has been used and depreciated for three years to 30 September 20X5. New technology was
invented in December 20X5, which enabled a cheaper, more efficient machine to be produced; this
technology makes DS's type of machine obsolete. The obsolete machine will generate no further economic
benefit or have any residual value once the new machines become available. However, because of
production delays, the new machines will not be available on the market until 1 October 20X7.
Calculate how much depreciation DS should charge to profit or loss for the year ended 30 September
20X6, as required by IAS 16 Property, plant and equipment. (3 marks)
12 IAS 38 Intangible assets sets out six criteria that must be met before an internally generated intangible
asset can be recognised.
List four of IAS 38's criteria for recognition. (4 marks)
13 Details from DV's long-term contract, which commenced on 1 May 20X6, at 30 April 20X7:
$000
Invoiced to client for work done 2,000
Costs incurred to date:
Attributable to work completed 1,500
Inventory purchased, but not yet used 250
Progress payment received from client 900
Expected further costs to complete project 400
Total contract value 3,000
DV uses the percentage of costs incurred to total costs to calculate attributable profit.
Calculate the amount that DV should recognise in its statement of profit or loss and other comprehensive
income for the year ended 30 April 20X7 for revenue, cost of sales and attributable profits on this
contract according to IAS 11 Construction contracts. (4 marks)
(Total = 35 marks)
36 Questions
17 Section B questions: Non-current assets, inventories and

construction contracts 63 mins
(a) (i) Discuss the criteria which IAS 38 Intangible assets states should be used when considering whether
research and development expenditure should be written off in an accounting period or carried forward.
(ii) Discuss to what extent these criteria are consistent with the fundamental accounting assumptions
within IAS 1. (5 marks)
(b) 'The cost of inventories should comprise all costs of purchase, costs of conversion and other costs
incurred in bringing the inventories to their present location and condition' (IAS 2).
This statement results in problems of a practical nature in arriving at the amount at which inventories and
short term work in progress are stated in the accounts.
Required
Comment on the above statement identifying and discussing both the accounting policy and the problems
'of a practical nature' that may arise when computing the amount at which inventories and short term
work in progress are stated in financial accounts. (5 marks)
(c) A new type of delivery vehicle, when purchased on 1 April 20X0 for $20,000, was expected to have a
useful life of four years. It now appears that the original estimate of the useful life was too short, and the
vehicle is now expected to have a useful life of six years, from the date of purchase. All delivery vehicles
are depreciated using the straight-line method and are assumed to have zero residual value.
Required
As the trainee management accountant, draft a memo to the transport manager explaining whether it is
possible to change the useful life of the new delivery vehicle. Using appropriate International Financial
Reporting Standards, explain how the accounting transactions relating to the delivery vehicle should be
recorded in the statement of profit or loss and other comprehensive income for the year ended 31 March
20X3 and the statement of financial position at that date (5 marks)
P7 Pilot paper
(d) BI owns a building which it uses as its offices, warehouse and garage. The land is carried as a separate
non-current tangible asset in the statement of financial position.
BI has a policy of regularly revaluing its non-current tangible assets. The original cost of the building in
October 20X2 was $1,000,000; it was assumed to have a remaining useful life of 20 years at that date,
with no residual value. The building was revalued on 30 September 20X4 by a professional valuer at
$1,800,000.
BI also owns a brand name which it acquired 1 October 20X0 for $500,000. The brand name is being
amortised over 10 years.
The economic climate had deteriorated during 20X5, causing BI to carry out an impairment review of its
assets at 30 September 20X5. BI's building was valued at a market value of $1,500,000 on 30
September 20X5 by an independent valuer. A brand specialist valued BI's brand name at market value of
$200,000 on the same date.
BI's management accountant calculated that the brand name's value in use at 30 September 20X5 was
$150,000.
Required
Explain how BI should report the events described above and quantify any amounts required to be
included in its financial statements for the year ended 30 September 20X5. (5 marks)
P7 11/05
Questions 37
(e) DV purchased two buildings on 1 September 1996. Building A cost $200,000 and had a useful
economic life of 20 years. Building B cost $120,000 and had a useful life of 15 years. DV's accounting
policies are to revalue buildings every five years and depreciate them over their useful economic lives on
the straight line basis. DV does not make an annual transfer from revaluation surplus to retained profits
for excess depreciation.
DV received the following valuations from its professionally qualified external valuer:
31 August 2001 Building A $180,000
Building B $75,000
31 August 2006 Building A $100,000
Building B $30,000
Required
Calculate the gains or impairments arising on the revaluation of Buildings A and B at 31 August 2006
and identify where they should be recognised in the financial statements of DV. (5 marks)
P7 11/06
(f) HS, a contractor, signed a two year fixed price contract on 31 March 20X8 for $300,000 to build a
bridge. Total costs were originally estimated at $240,000.
At 31 March 20X9, HS extracted the following figures from its financial records:
$000
Contract value 300
Costs incurred to date 170
Estimated costs to complete 100
Progress payments received 130
Value of work completed 165
HS calculates the stage of completion of contracts using the value of work completed as a proportion of
total contract value.
Required
Calculate the following amounts for the contract that should be shown in HS's financial statements:
Statement of profit or loss and other comprehensive income:
Revenue recognised for the year ended 31 March 20X9
Profit recognised for the year ended 31 March 20X9
Statement of financial position:
Gross amount due to/from the customer at 31 March 20X9, stating whether it is an asset or
liability (5 marks)
P7 5/09
(g) EK publishes various types of book and occasionally produces films which it sells to major film
distributors.
(i) On 31 March 20X7, EK acquired book publishing and film rights to the next book to be written by
an internationally acclaimed author, for $1 million. The author has not yet started writing the book
but expects to complete it in 20X9.
(ii) Between 1 June and 31 July 20X7, EK spent $500,000 exhibiting its range of products at a major
international trade fair. This was the first time EK had attended this type of event. No new orders
were taken as a direct result of the event, although EK directors claim to have made valuable
contacts that should generate additional sales or additional funding for films in the future. No
estimate can be made of additional revenue at present.
(iii) During the year, EK employed an external consultant to redesign EK's corporate logo and to create
advertising material to improve EK's corporate image. The total cost of the consultancy was
$800,000.
EK's directors want to treat all of the above items of expenditure as assets.
38 Questions
Required
Explain how EK should treat these items of expenditure in its financial statements for the year ended 31
October 20X7 with reference to the International Accounting Standard Board's Conceptual Framework for
Financial Reporting (2010) and relevant International Financial Reporting Standards. (5 marks)
P7 5/08
(Total = 35 marks)
18 Geneva 27 mins
Geneva Co is a company involved in the building industry and often has a number of major construction
contracts which fall into two or more accounting periods.
During the year ended 31 December 20X8, Geneva Co enters into three construction contracts as follows:
Contract
Lausanne Bern Zurich
$000 $000 $000
Fixed contract price 2,000 2,000 2,000
Payments on account 1,080 950 800
Costs incurred to date 1,000 1,100 640
Estimated costs to complete the contract 600 1,100 1,160
Estimate percentage of work completed 60% 50% 35%
Required
Show how each contract would be reflected in the statement of financial position and statement of profit or loss
and other comprehensive income of Geneva Co for the year ended 31 December 20X8. (5 marks each)
(Total = 15 marks)
Questions 39
19 Objective test questions: Capital transactions and financial

instruments 43 mins
1 A company made an issue of 100,000 ordinary shares of 50c at $1.10 each. The cash received was
correctly recorded in the cash book but the whole amount was entered into ordinary share capital
account.
Which of the following journal entries will correct the error made in recording the issue?
Debit Credit
$ $
A Share capital account 10,000
Share premium account 10,000
B Cash 60,000
C Share capital account 60,000
D Share premium account 60,000
Share capital account 60,000
(2 marks)
2 A company issued 1,000,000 $1 shares at $1.50 each payable as follows.

On application (including premium ) 70c
On allotment 30c
First and final call 50c
All monies were received except for the call due from a holder of 10,000 shares. These shares were
subsequently forfeited and reissued at $1.60 per share.
What total will be credited to share premium account as a result of this issue?
A $501,000
B $506,000
C $511,000
D None of the above (2 marks)
3 At 1 January 20X4, a company's share capital consisted of 1,000,000 ordinary shares of 50c each, and
there was a balance of $800,000 on its share premium account.
During 20X4, the following events took place.
1 March The company made a bonus issue of 1 share for every 2 held, using the share premium
account.
1 July The company issued 600,000 shares at $2 per share.
1 October The company made a rights issue of 1 share for every 3 held at $1.80 per share.
What are the balances on the company's share capital and share premium accounts at 31 December
20X4?
Share capital Share premium
$ $
A 1,400,000 2,860,000
B 2,800,000 1,460,000
C 1,800,000 2,320,000
D 1,400,000 2,360,000 (2 marks)
40 Questions
4 Which of the following statements regarding share issues is incorrect?

A Application is where potential shareholders apply for shares in the company and send cash to
cover their application
B Allotment is when the company allocates shares to the successful applicants and returns cash to
unsuccessful applicants
C A call is where the purchase value is payable in instalments. The company will 'call' for
instalments.
D If a shareholder fails to pay a call his allotment is cancelled and his money returned to him. His
shares may then be reissued. (2 marks)
5 An entity has the following categories of funding in its statement of financial position:
1 A preference share that is redeemable for cash at a 10% premium on 30 May 2015.
2 An ordinary share which is not redeemable and has no restrictions on receiving dividends.
3 A loan note that is redeemable at par in 2020.
4 A cumulative preference share that is entitled to receive a dividend of 7% a year.
Applying IAS 32 Financial instruments: presentation, how would each of the above be categorised on the
statement of financial position?
As an equity As a financial
instrument liability
A 1 and 2 3 and 4
B 2 and 3 1 and 4
C 2 1, 3 and 4
D 1, 2 and 3 4 (2 marks)
6 BN purchased 100,000 of its own equity shares in the market and classified them as treasury shares. BN
still held the treasury shares at the year end.
How should BN classify the treasury shares on its closing statement of financial position in accordance
with IAS 32 Financial instruments: presentation?
A As a non-current asset investment.
B As a deduction from equity.
C As a current asset investment.
D As a non-current liability. (2 marks)
The following data applies to questions 7 and 8.

On 1 January 20X7 PX issued 10m 7% $1 preference shares, redeemable after 4 years at a 5% premium.
Issue charges amount to $500,000 and the effective interest rate is 10%.
7 Calculate the total finance charge on the issue of the preference shares. (3 marks)
8 Calculate the amount the preference shares will be shown at in the statement of financial position at 31
December 20X8. (3 marks)
9 Which one of the following gives the true meaning of "treasury shares"?
A Shares owned by a country's Treasury
B An entity's own shares purchased by the entity and still held at the period end
C An entity's own shares purchased by the entity and resold before the period end at a gain
D An entity's own shares purchased by the entity and cancelled
(2 marks)
Questions 41
10 At 31 December 20X1 the capital structure of a company was as follows:

$
Ordinary share capital
100,000 shares of 50c each 50,000
During 20X2 the company made a bonus issue of 1 share for every 2 held, using the share premium
account for the purpose, and later issued for cash another 60,000 shares at 80c per share.
What is the company's capital structure at 31 December 20X2?
Ordinary share capital Share premium account
$ $
A 130,000 173,000
B 105,000 173,000
C 130,000 137,000
D 105,000 137,000
(2 marks)
11 At 30 June 20X2 a company's capital structure was as follows:

$
Ordinary share capital
500,000 shares of 25c each 125,000
In the year ended 30 June 20X3 the company made a rights issue of 1 share for every 2 held at $1 per
share and this was taken up in full. Directly attributable issue costs amounted to $1,200. Later in the
year the company made a bonus issue of 1 share for every 5 held, using the share premium account for
the purpose.
Calculate the balance on the share premium account at 30 June 20X3. (2 marks)
(Total = 24 marks)
20 Objective test questions: Accounting standards I 65 mins

1 A company leases some plant on 1 January 20X4. The cash price of the plant is $9,000, and the
company leases it for four years, paying four annual instalments of $3,000 beginning on 31 December
20X4.
The company uses the sum-of-the-digits method to allocate interest.
What is the interest charge for the year ended 31 December 20X5?
A $900
B $600
C $1,000
D $750 (2 marks)
2 A company leases some plant on 1 January 20X4. The cash price is $9,000, and the company is to pay
four annual instalments of $3,000, beginning on 1 January 20X4.
The company uses the sum-of-the-digits method to allocate interest.
What is the interest charge for the year ended 31 December 20X5?
A $750
B $500
C $900
D $1,000 (2 marks)
42 Questions
3 Which of the following statements about IAS 10 Events after the reporting period are correct?
1 A material event that occurs before the financial statements are authorised that provides more
evidence of conditions that already existed at the reporting date should be adjusted for in the
financial statements.
2 The notes to the financial statements must give details of non-adjusting events affecting the users'
ability to understand the company's financial position.
3 Financial statements should not be prepared on a going concern basis if after the end of the
reporting period but before the financial statements are authorised the directors have decided to
liquidate the company.
A All three statements are correct.
B 1 and 2 only
C 1 and 3 only
4 A company's statement of profit or loss and other comprehensive income showed a profit before tax of
$1,800,000
After the year end and before the financial statements were authorised for issue, the following events took
place.
1 The value of an investment held at the year end fell by $85,000.
2 A customer who owed $116,000 at the year end went bankrupt owing a total of $138,000.
3 Inventory valued at cost $161,000 in the statement of financial position was sold for $141,000.
4 Assets with a carrying value at the year end of $240,000 were unexpectedly expropriated by
government.
What is the company's profit after making the necessary adjustments for these events?
A $1,399,000
B $1,579,000
C $1,664,000
D None of these figures (2 marks)
5 Which of the following events after the reporting period would normally be classified as adjusting,
according to IAS 10 Events after the reporting period?
1 Destruction of a major non-current asset
2 Issue of shares and loan notes
3 Discovery of error or fraud
4 Evidence of impairment in value of a property as at the year end
5 Purchases and sales of non-current assets
A 1, 2 and 5 only
B 3 and 4 only
C 3, 4 and 5 only
6 Which of the following events after the reporting period would normally be classified as non-adjusting,
according to IAS 10 Events after the reporting period?
1 Opening new trading operations
2 Sale of goods held at the year end for less than cost
3 A customer is discovered to be insolvent
4 Announcement of plan to discontinue an operation
5 Expropriation of major assets by government
A 2 and 3 only
B 1, 2 and 3 only
C 2, 3, 4 and 5 only
Questions 43
7 In compiling its financial statements, the directors of a company have to decide on the correct treatment
of the following items.
1 An employee has commenced an action against the company for wrongful dismissal. The company's
solicitors estimate that the ex-employee has a 40 per cent chance of success in the action.
2 The company has guaranteed the overdraft of another company, not at present in any financial
difficulties. The possibility of a liability arising is thought to be remote.
3 Shortly after the year end, a major installation owned by the company was destroyed in a flood.
The company's going concern status is not affected.
What are the correct treatments for these items, assuming all are of material amount?
A All three should be disclosed by note.
B A provision should be made for item 1 and items 2 and 3 disclosed by note.
C Items 1 and 3 should be disclosed by note, with no disclosure for item 2.
D Item 1 should be disclosed by note. No disclosure is required for items 2 and 3. (2 marks)
8 Which of the following statements about IAS 37 Provisions, contingents liabilities and contingent assets
are correct?
1 Provisions should be made for constructive obligations (those arising from a company's pattern of
past practice) as well as for obligations enforceable by law.
2 Discounting may be used when estimating the amount of a provision if the effect is material.
3 A restructuring provision must include the estimated costs of retraining or relocating continuing
staff.
4 A restructuring provision may only be made when a company has a detailed plan for the
reconstruction and a firm intention to carry it out.
A All four statements are correct
B 1, 2 and 4 only
C 1, 3 and 4 only
9 Which of the following criteria must be present in order for a company to recognise a provision?
1 There is a present obligation as a result of past events.
2 It is probable that a transfer of economic benefits will be required to settle the obligation.
3 A reliable estimate of the obligation can be made.
A All three criteria must be present.
B 1 and 2 only
C 1 and 3 only
10 Which one of the following would be treated as a non-adjusting event after the reporting period, as
required by IAS 10 Events after the reporting period, in the financial statements of AN for the period
ended 31 January 20X5? The financial statements were approved for publication on 15 May 20X5.
A Notice was received on 31 March 20X5 that a major customer of AN had ceased trading and was
unlikely to make any further payments.
B Inventory items at 31 January 20X5, original cost $30,000, were sold in April 20X5 for $20,000.
C During 2004, a customer commenced legal action against AN. At 31 January 20X5, legal advisers
were of the opinion that AN would lose the case, so AN created a provision of $200,000 for the
damages claimed by the customer. On 27 April 20X5, the court awarded damages of $250,000
to the customer.
D There was a fire on 2 May 20X5 in AN's main warehouse which destroyed 50% of AN's total
inventory. (2 marks)
44 Questions
11 DT's final dividend for the year ended 31 October 20X5 of $150,000 was declared on 1 February 20X6
and paid in cash on 1 April 20X6. The financial statements were approved on 31 March 20X6.
The following statements refer to the treatment of the dividend in the accounts of DT:
1 The payment clears an accrued liability set up as at 31 October 20X5.
2 The dividend is shown as a deduction in the statement of profit or loss and other comprehensive
income for the year ended 31 October 20X6.
3 The dividend is shown as an accrued liability as at 31 October 20X6.
4 The $150,000 dividend was shown in the notes to the financial statements at 31 October 20X5.
5 The dividend is shown as a deduction in the statement of changes in equity for the year ended
31 October 20X6.
Which of the above statements reflect the correct treatment of the dividend?
A 1 and 2
B 1 and 4
C 3 and 5
D 4 and 5 (2 marks)
12 List the three criteria specified in IAS 37 Provisions, contingent liabilities and contingent assets that
must be satisfied before a provision is recognised in the financial statements. (3 marks)
13 DH has the following two legal claims outstanding:

A legal action against DH claiming compensation of $700,000, filed in February 20X7. DH has
been advised that it is probable that the liability will materialise.
A legal action taken by DH against another entity, claiming damages of $300,000, started in
March 20X4. DH has been advised that it is probable that it will win the case.
How should DH report these legal actions in its financial statements for the year ended 30 April 20X7?
Legal action against DH Legal action taken by DH
A Disclose by a note to the accounts No disclosure
B Make a provision No disclosure
C Make a provision Disclose as a note
D Make a provision Accrue the income (2 marks)
14 Define an operating segment as per IFRS 8 Operating segments. (3 marks)
15 Which one of the following is a criteria for determining a reportable segment under IFRS 8 Operating
segments?
A Its revenue is 15% or more of the total revenue of all segments
B Its revenue is 10% or more of the total revenue of all operating segments
C Its assets are 10% or more of the combined assets of all operating segments
D Its assets are 15% or more of the combined assets of all operating segments (2 marks)
Questions 45
16 Which one of the following material items would be classified as a non-adjusting event in HL's financial
statements for the year ended 31 December 20X8 according to IAS 10 Events after the reporting period?
HL's financial statements were approved for publication on 8 April 20X9.
A On 1 March 20X9, HL's auditors discovered that, due to an error during the count, the closing
inventory had been undervalued by $250,000.
B Lightning struck one of HL's production facilities on 31 January 20X9 and caused a serious fire.
The fire destroyed half of the factory and its machinery. Output was severely reduced for six
months.
C One of HL's customers commenced court action against HL on 1 December 20X8. At 31
December 20X8, HL did not know whether the case would go against it or not. On 1 March 20X9,
the court found against HL and awarded damages of $150,000 to the customer.
D On 15 March 20X9, HL was advised by the liquidator of one of its customers that it was very
unlikely to receive any payments for the balance of $300,000 that was outstanding at 31
December 20X8. (2 marks)
17 Which of the following are required by IFRS 8 Operating segments to be disclosed in an entity's financial
statements, if they are included in the measure of segment profit or loss to be reported to the chief
operating decision maker?
(i) Revenues from transactions with other operating segments within the entity
(ii) Cost of sales
(iii) Amortisation
(iv) Income tax expense
(v) Administrative expenses and distribution costs
A (i), (ii) and (v)
B (ii), (iii) and (iv)
C (ii), (iii) and (v)
D (i), (iii) and (iv)
(2 marks)
(Total = 36 marks)
21 Objective test questions: Accounting standards II 86 mins

1 IAS 37 Provisions, contingent liabilities and contingent assets governs the recognition of contingent
items. Which of the following statements about contingencies, if any, are correct according to IAS 37?
1 A contingent liability should be disclosed by note if it is probable that an obligation will arise and
its amount can be estimated reliably.
2 A contingent asset should be disclosed by note if it is probable that it will arise.
3 An entity should not recognise a contingent asset.
A None of the statements is correct.
B 1 and 2
C 2 and 3
D All of the statements are correct. (2 marks)
46 Questions
2 IAS 24 Related party disclosures governs disclosures required for transactions between a company and
parties deemed to be related to it.
Which of the following parties will normally be held to be related parties of a company?
1 Its subsidiary companies
2 Its directors
3 Close family of the company's directors
4 Providers of finance to the company
5 A customer or supplier with whom the company has a significant volume of business
A All of the parties listed
B 1, 2, 3 and 4 only
C 1, 2 and 3 only
3 Which of the following statements defines a finance lease?

A A short term hire agreement
B A long term hire agreement where the legal title in the asset passes on the final payment
C A long term hire agreement where substantially all the risks and rewards of ownership are transferred
D A long term hire agreement where the hirer is responsible for maintenance of the asset (2 marks)
4 An asset is hired under a finance lease with a deposit of $30,000 on 1 January 20X1 plus 8 six monthly
payments in arrears of $20,000 each. The fair value of the asset is $154,000. The finance charge is to
be allocated using the sum-of-the-digits method.
What is the finance charge for the year ending 31 December 20X3?
A $7,000
B $8,000
C $10,000
D $11,000 (2 marks)
5 The directors of Robin (year end 31 December 20X6) were informed on 27 February 20X7 that a serious
fire at one of the company's factories had stopped production there for at least six months to come. On 3
March 20X7 the directors of Robin were informed that a major customer had gone into liquidation owing
a substantial amount to Robin as at the year end. The liquidator was pessimistic about the prospect of
recovering anything for unsecured creditors. The financial statements for the year ended 31 December
20X6 were approved on 20 March 20X7.
In accordance with IAS 10 Events after the reporting period, how should the two events be treated in the
financial statements?
Fire Liquidation
A Accrued in accounts Disclosed in notes
B Disclosed in notes Disclosed in notes
C Accrued in accounts Accrued in accounts
D Disclosed in notes Accrued in accounts (2 marks)
Questions 47
6 In which of the following circumstances would a provision be recognised under IAS 37 Provisions,
contingent liabilities and contingent assets in the financial statements for the year ending 31 March
20X6?
1 A board decision was made on 15 March to close down a division with potential costs of
$100,000. At 31 March the decision had not been communicated to managers, employees or
customers.
2 There are anticipated costs from returns of a defective product in the next few months of $60,000.
In the past all returns of defective products have always been refunded to customers.
3 It is anticipated that a major refurbishment of the company Head Office will take place from June
onwards costing $85,000.
A 1 and 2 only
B 2 and 3 only
C 2 only
D 3 only (2 marks)
7 According to IAS 24 Related party disclosures, which of the following would be presumed to be a related
party of Fredo unless it can be demonstrated otherwise?
A The bank which has given a loan to Fredo
B The husband of the managing director of Fredo
C Fredo's major supplier
D The assistant accountant of Fredo (2 marks)
8 List the three criteria set out in IAS 37 Provisions, contingent liabilities and contingent assets for the
recognition of a provision. (3 marks)
9 AP has the following two legal claims outstanding:

A legal action claiming compensation of $500,000 filed against AP in March 20X4.
A legal action taken by AP against a third party, claiming damages of $200,000 was started in
January 20X3 and is nearing completion.
In both cases, it is more likely than not that the amount claimed will have to be paid.
How should AP report these legal actions in its financial statements for the year ended 31 March 20X5?
Legal action against AP Legal action by AP
A Disclose by a note No disclosure
B Make a provision No disclosure
C Make a provision Disclose as a note
D Make a provision Accrue the income (2 marks)
10 Which one of the following would be regarded as a related party of BS?

A BX, a customer of BS.
B The president of the BS Board, who is also the chief executive officer of another entity, BU, that
supplies goods to BS.
C BQ, a supplier of BS.
D BY, BS's main banker. (2 marks)
11 An item of machinery leased under a five year finance lease on 1 October 20X3 had a fair value of
$51,900 at date of purchase.
The lease payments were $12,000 per year, payable in arrears.
If the sum of digits method is used to apportion interest to accounting periods, calculate the finance cost
for the year ended 30 September 20X5. (3 marks)
48 Questions
12 Which one of the following would require a provision to be created by BW at its year end of 31 October
20X5?
A The government introduced new laws on data protection which come into force on 1 January
20X6. BW's directors have agreed that this will require a large number of staff to be retrained. At
31 October 20X5, the directors were waiting on a report they had commissioned that would
identify the actual training requirements.
B At the year end, BW is negotiating with its insurance provider about the amount of an insurance
claim that it had filed. On 20 November 20X5, the insurance provider agreed to pay $200,000.
C BW makes refunds to customers for any goods returned within 30 days of sale, and has done so
for many years.
D A customer is suing BW for damages alleged to have been caused by BW's product. BW is
contesting the claim and, at 31 October 20X5, the directors have been advised by BW's legal
advisers it is very unlikely to lose the case. (2 marks)
13 IAS 18 Revenue defines when revenue may be recognised on the sale of goods.
List four of the five conditions that IAS 18 requires to be met for income to be recognised. (4 marks)
The following data is given for sub-questions 14 and 15 below

CS acquired a machine, using a finance lease, on 1 January 20X4. The machine had an expected useful life of
12,000 operating hours, after which it would have no residual value.
The finance lease was for a five-year term with rentals of $20,000 per year payable in arrears. The cost price of
the machine was $80,000 and the implied interest rate is 7.93% per year. CS used the machine for 2,600
hours in 20X4 and 2,350 hours in 20X5.
14 Using the actuarial method, calculate the non-current liability and current liability figures required by IAS
17 Leases to be shown in CS's statement of financial position at 31 December 20X5. (3 marks)
15 Calculate the non-current asset property, plant and equipment net book value that would be shown in
CS's statement of financial position at 31 December 20X5. Calculate the depreciation charge using the
machine hours method. (2 marks)
16 On 31 March 20X7, 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 20X7, DT had not completed credit referencing of XX and had not despatched any goods.
DT is considering the following possible entries for this transaction in its financial statements for the year
ended 31 March 20X7.
1 Include $900,000 in statement of profit or loss and other comprehensive income revenue for the
year
2 Include $90,000 in statement of profit or loss and other comprehensive income revenue for the
year
3 Do not include anything in statement of profit of loss and other comprehensive income revenue for
the year
4 Create a trade receivable for $810,000
5 Create a trade payable for $90,000
According to IAS 18 Revenue, how should DT record this transaction in its financial statements for the
year ended 31 March 20X7?
A 1 and 4
B 2 and 5
C 3 and 4
D 3 and 5 (2 marks)
Questions 49
The following data is to be used in sub questions 17 and 18 below

Company X closed one of its divisions 12 months ago. It has yet to dispose of one remaining machine. The
carrying value of the machine at the date when business ceased was $750,000. It was being depreciated at
25% on a reducing balance basis. Company X has been advised that the fair value of the machine is $740,000
and expects to incur costs of $10,000 in making the sale. It has located a probable buyer but the sale will not
be completed before the year end.
17 At what amount should the machine be shown in the year end financial statements of Company X?
A $750,000
B $562,500
C $740,000
D $730,000 (2 marks)
18 Where should the carrying value of the machine be shown in Company X's statement of financial position?
A Under non-current assets
B Under current assets
C Included within inventory
D Included within receivables (2 marks)
19 GD's financial reporting period is 1 September 2007 to 31 August 2008.

Which one of the following would be classified as a non-adjusting event according to IAS 10 Events after
the reporting period?
Assume all amounts are material and that GD's financial statements have not yet been approved for
publication.
A On 30 October 2008, GD received a communication stating that one of its customers had ceased
trading and gone into liquidation. The balance outstanding at 31 August 2008 was unlikely to be
paid.
B At 31 August 2008, GD had not provided for an outstanding legal action against the local
government administration for losses suffered as a result of incorrect enforcement of local business
regulations. On 5 November 2008, the court awarded GD $50,000 damages.
C On 1 October 2008, GD made a rights issue of 1 new share for every 3 shares held at a price of
$175. The market price on that date was $200.
D At 31 August 2008, GD had an outstanding insurance claim of $150,000. On 10 October 2008,
the insurance company informed GD that it would pay $140,000 as settlement. (2 marks)
20 Which one of the following would not normally be treated as a related party of HJ in accordance with IAS
24 Related party disclosures?
A XX, HJ's largest customer, accounts for 75% of HJ's turnover
B HJ2, a subsidiary of HJ, that does not trade with HJ
C HJA, an associate of HJ
D A shareholder of HJ, holding 25% of HJ's equity shares
(2 marks)
21 HP entered into an operating lease for a machine on 1 May 20X7 with the following terms:
Five years non-cancellable lease
12 months rent free period from commencement
Rent of $12,000 per annum payable at $1,000 a month from month 13 onwards
Machine useful life 15 years
Calculate the amount that should be charged to profit or loss in HP's financial statements in respect of
the lease, for each of the years ended 30 April 20X8 and 30 April 20X9. (3 marks)
(Total = 48 marks)
50 Questions
22 Section B questions: Accounting standards I 72 mins

(a) The following definitions have been taken from the IASBs Conceptual Framework for Financial
Reporting.
'An asset is a resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.'
'A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.'
IAS 17 Leases requires lessees to capitalise finance leases in their financial statements.
Required
Explain how IAS 17's treatment of finance leases applies the definitions of assets and liabilities.
(5 marks)
(b) NDL drilled a new oil well, which started production on 1 March 20X3. The licence granting permission
to drill the new oil well included a clause that requires NDL to 'return the land to the state it was in before
drilling commenced'.
NDL estimates that the oil well will have a 20-year production life. At the end of that time, the oil well
will be de-commissioned and work carried out to reinstate the land. The cost of this de-commissioning
work is estimated to be $20 million.
Required
As the trainee management accountant, draft a memo to the production manager explaining how NDL
must treat the de-commissioning costs in its financial statements for the year to 31 March 20X3. Your
memo should refer to appropriate International Financial Reporting Standards. (5 marks)
P7 Pilot paper
(c) BJ is an entity that provides a range of facilities for holidaymakers and travellers.
At 1 October 20X4 these included:
A short haul airline operating within Europe; and
A travel agency specialising in arranging holidays to more exotic destinations, such as Hawaii and Fiji.
BJ's airline operation has made significant losses for the last two years. On 31 January 20X5, the
directors of BJ decided that, due to a significant increase in competition on short haul flights within
Europe, BJ would close all of its airline operations and dispose of its fleet of aircraft. All flights for holiday
makers and travellers who had already booked seats would be provided by third party airlines. All
operations ceased on 31 May 20X5.
On 31 July 20X5, BJ sold its fleet of aircraft and associated non-current assets for $500 million, the
carrying value at that date was $750 million.
At the reporting date, BJ were still in negotiation with some employees regarding severance payments. BJ
has estimated that in the financial period October 20X5 to September 20X6, they will agree a settlement
of $20 million compensation.
The closure of the airline operation caused BJ to carry out a major restructuring of the entire entity. The
restructuring has been agreed by the directors and active steps have been taken to implement it. The cost
of restructuring to be incurred in year 20X5/20X6 is estimated at $10 million.
Required
Explain how BJ should report the events described above and quantify any amounts required to be
included in its financial statements for the year ended 30 September 20X5. (Detailed disclosure notes are
not required.) (5 marks)
P7 11/05
Questions 51
(d) CB is an entity specialising in importing a wide range of non-food items and selling them to retailers.
George is CB's president and founder and owns 40% of CB's equity shares:
CB's largest customer, XC, accounts for 35% of CB's revenue. XC has just completed negotiations
with CB for a special 5% discount on all sales.
During the accounting period, George purchased a property from CB for $500,000. CB had
previously declared the property surplus to its requirements and had valued it at $750,000.
George's son, Arnold, is a director in a financial institution, FC. During the accounting period, FC
advanced $2 million to CB as an unsecured loan at a favourable rate of interest.
Required
Explain, with reasons, the extent to which each of the above transactions should be classified and
disclosed in accordance with IAS 24 Related party disclosures in CB's financial statements for the period.
(5 marks)
P7 5/06
(e) CR issued 200,000 $10 redeemable 5% preference shares at par on 1 April 20X5. The shares were
redeemable on 31 March 20Y0 at a premium of 15%. Issue costs amounted to $192,800.
Required
(i) Calculate the total finance cost over the life of the preference shares. (2 marks)
(ii) Calculate the annual charge to the statement of profit or loss and other comprehensive income for
finance expense, as required by IAS 39 Financial instruments: recognition and measurement, for
each of the five years 20X6 to 20Y0. Assume the constant annual rate of interest as 10%.
(3 marks)
(Total = 5 marks)
P7 5/06
(f) You are in charge of the preparation of the financial statements for DF. You are nearing completion of the
preparation of the accounts for the year ended 30 September 20X6 and two items have come to your
attention.
(i) Shortly after a senior employee left in April 20X6, a number of accounting discrepancies were
discovered. With further investigation, it became clear that fraudulent activity had been going on.
DF has calculated that, because of the fraud, the profit for the year ended 30 September 20X5
had been overstated by $45,000.
(ii) On 1 September 20X6, DF received an order from a new customer enclosing full payment for the
goods ordered; the order value was $90,000. DF scheduled the manufacture of the goods to
commence on 28 November 20X6. The cost of manufacture was expected to be $70,000. DF's
management want to recognise the $20,000 profit in the statement of profit or loss and other
comprehensive income for the year ended 30 September 20X6. It has been suggested that the
$90,000 should be recognised as revenue and a provision of $70,000 created for the cost of
manufacture.
DF's statement of profit of loss and other comprehensive income for the year ended 30 September 20X5
showed a profit of $600,000. The draft statement of profit of loss and other comprehensive income for the
year ended 30 September 20X6 showed a profit of $700,000. The 30 September 20X5 accounts were
approved by the directors on 1 March 20X6.
Required
Explain how the events described above should be reported in the financial statements of DF for the years
ended 30 September 20X5 and 20X6. (5 marks)
P7 11/06
52 Questions
(g) On 1 June 20X6 the directors of DP commissioned a report to determine possible actions they could take
to reduce DP's losses. The report, which was presented to the directors on 1 December 20X6, proposed
that DP cease all of its manufacturing activities and concentrate on its retail activities. The directors
formally approved the plan to close DP's factory. The factory was gradually shut down, commencing on 5
December 20X6, with production finally ceasing on 15 March 20X7. All employees had ceased working
or had been transferred to other facilities in the company, by 29 March 20X7. The plant and equipment
was removed and sold for $25,000 (net book value $95,000) on 30 March 20X7.
The factory and building are being advertised for sale but had not been sold by 31 March 20X7. The
carrying value of the land and building at 31 March 20X7, based on original cost, was $750,000. The
estimated net realisable value of the land and building at 31 March 20X7 was $1,125,000.
Closure costs incurred (and paid) up to 31 March 20X7 were $620,000.
The cash flows, revenues and expenses relating to the factory were clearly distinguishable from DP's other
operations. The output of the factory was sold directly to third parties and to DP's retail outlets. The
manufacturing facility was shown as a separate segment in DP's segmental information.
Required
With reference to relevant International Financial Reporting Standards, explain how DP should treat the
factory closure in its financial statements for the year ended 31 March 20X7. (5 marks)
P7 5/07
(h) On 1 September 20X7, the Directors of EK decided to sell EK's retailing division and concentrate activities
entirely on its manufacturing division.
The retailing division was available for immediate sale, but EK had not succeeded in disposing of the
operation by 31 October 20X7. EK identified a potential buyer for the retailing division, but negotiations
were at an early stage. The Directors of EK are certain that the sale will be completed by 31 August
20X8.
The retailing division's carrying value at 31 August 20X7 was:
$000
Non-current tangible assets property, plant and equipment 300
Non-current tangible assets goodwill 100
Net current assets 43
Total carrying value 443
The retailing division has been valued at $423,000, comprising:
$000
Non-current tangible assets property, plant and equipment 320
Non-current tangible assets goodwill 60
Net current assets 43
Total carrying value 423
EK's directors have estimated that EK will incur consultancy and legal fees for the disposal of $25,000.
Required
(i) Explain whether EK can treat the sale of its retailing division as a 'discontinued operation', as
defined by IFRS 5 Non-current assets held for sale and discontinued operations, in its financial
statements for the year ended 31 October 20X7. (3 marks)
(ii) Explain how EK should treat the retailing division in its financial statements for the year ended 31
October 20X7, assuming the sale of its retailing division meets the classification requirements for a
disposal group (IFRS 5). (2 marks)
(Total = 5 marks)
P7 11/07
(Total = 40 marks)
Questions 53
23 Section B questions: Accounting standards II 72 mins

(a) IAS 37 defines the meaning of a provision and sets out when a provision should be recognised.
Required
Using the IAS 37 definition of a provision, explain how a provision meets the International Accounting
Standards Board's Conceptual Framework for Financial Reporting definition of a liability. (5 marks)
P7 Pilot paper
(b) A lessee leases a non-current asset on a non-cancellable lease contract of five years, the details of which
are:
The asset has a useful life of five years.
The rental is $21,000 per annum payable at the end of each year.
The lessee also has to pay all insurance and maintenance costs.
The fair value of the asset was $88,300.
The lessee uses the sum of digits method to calculate finance charges on the lease.
Required
Prepare statement of profit of loss and other comprehensive income and statement of financial position
extracts for years one and two of the lease. (5 marks)
P7 Pilot paper
(c) AE has a three year contract which commenced on 1 April 20X4. At 31 March 20X5, AE had the
following balances in its ledger relating to the contract:
$000 $000
Cost incurred up to 31 March 20X5:
Attributable to work completed 21,000
Inventory purchased for use in 20X5/6 3,000 24,000
Progress payments received 25,000
Other information:
Expected further costs to completion 19,000
At 31 March 20X5, the contract was certified as 50% complete.
Required
Prepare the statement of profit of loss and other comprehensive income and statement of financial
position extracts showing the balances relating to this contract, as required by IAS 11 Construction
contracts. (5 marks)
P7 5/05
(d) A five year finance lease commenced on 1 April 20X3. The annual payments are $30,000 in arrears. The
fair value of the asset at 1 April 20X3 was $116,000. Use the sum of digits method for interest
allocations and assume that the asset has no residual value at the end of the lease term.
Required
In accordance with IAS 17 Leases:
(i) Calculate the amount of finance cost that would be charged to the statement of profit of loss and
other comprehensive income for the year ended 31 March 20X5
(ii) Prepare statement of financial position extracts for the lease at 31 March 20X5. (5 marks)
P7 5/05
(e) CD is a manufacturing entity that runs a number of operations including a bottling plant that bottles
carbonated soft drinks. CD has been developing a new bottling process that will allow the bottles to be
filled and sealed more efficiently.
The new process took a year to develop. At the start of development, CD estimated that the new process
would increase output by 15% with no additional cost (other than the extra bottles and their contents).
54 Questions
Development work commenced on 1 May 20X5 and was completed on 20 April 20X6. Testing at the end
of the development confirmed CD's original estimates.
CD incurred expenditure of $180,000 on the above development in 20X5/X6.
CD plans to install the new process in its bottling plant and start operating the new process from 1 May
20X6.
CD's year end is 30 April.
Required
(i) Explain the requirements of IAS 38 Intangible assets for the treatment of development costs.
(3 marks)
(ii) Explain how CD should treat its development costs in its financial statements for the year ended
30 April 20X6. (2 marks)
(Total = 5 marks)
P7 5/06
(f) On 1 April 20X5, DX acquired plant and machinery with a fair value of $900,000 on a finance lease. The
lease is for five years with the annual lease payments of $228,000 being paid in advance on 1 April each
year. The interest rate implicit in the lease is 13.44%. The first payment was made on 1 April 20X5.
Required
(i) Calculate the finance charge in respect of the lease that will be shown in DX's statement of profit
or loss and other comprehensive income for the year ended 31 March 20X7.
(ii) Calculate the amount to be shown as a current liability and a non-current liability in DX's
statement of financial position at 31 March 20X7.
(All workings should be to the nearest $000.) (5 marks)
P7 5/07
(g) The objective of IAS 24 Related party disclosures is to ensure that financial statements disclose the effect
of the existence of related parties.
Required
With reference to IAS 24, explain the meaning of the terms 'related party' and 'related party transaction'.
(5 marks)
P7 11/07
(h) EJ publishes trade magazines and sells them to retailers. EJ has just concluded negotiations with a large
supermarket chain for the supply of a large quantity of several of its trade magazines on a regular basis.
EJ has agreed a substantial discount on the following terms:
The same quantity of each trade magazine will be supplied each month;
Quantities can only be changed at the end of each six month period;
Payment must be made six monthly in advance.
The supermarket paid $150,000 on 1 September 20X7 for six months supply of trade magazines to 29
February 20X8. At 31 October 20X7, EJ had supplied two months of trade magazines.
EJ estimates that the cost of supplying the supermarket each month is $20,000.
Required
(i) State the criteria in IAS 18 Revenue for income recognition. (2 marks)
(ii) Explain, with reasons, how EJ should treat the above in its financial statements for the year ended
31 October 20X7. (3 marks)
(Total = 5 marks)
P7 11/07
(Total = 40 marks)
Questions 55
Published accounts section C questions

The following tax regime data is applicable to questions 24 35 which cover the preparation of financial
statements for single companies.
Relevant tax rules

Corporate Profits
can be ignored:
50% of additions to property, plant and equipment in the accounting period in which they are
recorded
Value Added Tax
Zero rated 0%
Standard rated 15%
56 Questions
24 SA (5/13) 45 mins
SA has two divisions, division A and division B. On 31 March 2013, SAs management board agreed to dispose
of its loss-making division B. In previous accounting periods the two divisions had been classified as separate
operating segments in accordance with IFRS 8 Operating Segments.
On 31 March 2013 division B was classified as held for sale in accordance with IFRS 5 Noncurrent assets
held for sale and discontinued operations. All net assets, income and expenditure of division B are included in
the trial balance.
SA trial balance at 31 March 2013 is shown below:
Notes $000 $000
Long term borrowings (vii) 450
Administrative expenses (vi) 263
Cash and cash equivalents 202
Distribution costs (vi) 145
Equity dividend paid 55
Inventory at 31 March 2013 68
Buildings at valuation (i); (iv) 995
Loan interest paid 13
Ordinary shares $1 each 800
Plant and equipment at cost (i); (iv) 1,010
Provision for deferred tax at 31 March 2012 (ii) 72
Provision for plant & equipment depreciation at 31 March 2012 (iii); (iv) 360
Provision for buildings depreciation at 31 March 2012 (iii); (iv) 50
Retained earnings at 31 March 2012 183
Revaluation reserve at 31 March 2012 80
Sales revenue division B 185
Sales revenue division A 2,784
Cost of goods sold division B 230
Cost of goods sold division A 1900
Trade payables 51
Division B disposal costs 78
Trade receivables 56
5,015 5,015
(i) There were no sales of non-current assets during the year ended 31 March 2013.
(ii) The tax due for the year ended 31 March 2013 is estimated to be $50,000. This includes a tax reduction
of $40,000 that relates to discontinued operations. The deferred tax provision relates to division A and
should be reduced to $69,000.
(iii) Plant and equipment depreciation is provided at 20% per year on the reducing balance basis. Buildings
are depreciated at 2.5% per year on a straight line basis. All depreciation is charged to administrative
expenses. SAs policy is to charge a full years depreciation in the year of acquisition and no depreciation
in the year of disposal.
(iv) Division Bs assets included in the trial balance at 31 March 2013 are:
The plant and equipment cost and related provision for depreciation include the following amounts for
division B:
Plant and equipment cost $180,000
Plant and equipment, provision for depreciation $140,000
The buildings balances in the trial balance include:
Cost Depreciation
$000 $000
Factory division B 460 23
Division B has no further assets at 31 March 2013.
(v) The fair value of division Bs net assets at 31 March 2013 was $431,000.
Questions 57
(vi) The running costs of division B for the period 1 April 2012 to 31 March 2013 (included in the trial
balance) are:
Administrative expenses $30,000
Distribution costs $125,000
(vii) The long term borrowings incur an annual interest rate of 6%.
Required
(a) Explain the criteria that have to be met in order to classify division B as held for sale in accordance with
IFRS 5 Non-current assets held for sale and discontinued operations. (3 marks)
(b) Prepare the statement of profit or loss and a statement of changes in equity for SA for the year to 31
March 2013 and a statement of financial position at that date, in accordance with the requirements of
International Financial Reporting Standards. (22 marks)
Notes to the financial statements are not required, but all workings must be clearly shown. Do not prepare a
statement of accounting policies.
(Total = 25 marks)
25 CQ (3/13) 45 mins
CQs trial balance at 31 December 2012 is shown below:
Notes $000 $000
Bank loan (i) 375
Administrative expenses 395
Finance lease payment (iii) 12
Income tax (iv) 32
Inventory at 31 December 2011 (v) 196
Land and buildings at cost at 1January 2012 (vi) 1,415
Bank loan interest paid (i) 30
Equity shares $1 each, fully paid at 1 January 2012 500
Patent (ii) 180
Amortisation of patent at 1 January 2012 (ii) 90
Plant and equipment at cost at 1 January 2012 (vii) 482
Provision for deferred tax at 1 January 2012 (viii) 210
Accumulated depreciation - buildings at 1 January 2012 (vi) 120
Accumulated depreciation - plant and equipment at 1 January (vii) 279
2012
Purchase of goods for resale 996
Retained earnings at 1 January 2012 168
Sales revenue 1,992
Share premium 150
Trade payables 140
Proceeds of issue of equity shares (ix) 325
4,349 4,349
(i) The bank loan is a 10 year 8% loan received in 2007 and repayable in 2017. Interest is paid annually in
December.
(ii) The patent was purchased on 1 January 2007, it was estimated to have a useful life of 10 years with no
residual value. At 31 December 2012 the fair value of the patent was $65,000. Amortisation should be
included in cost of sales.
58 Questions
(iii) CQ acquired a motor vehicle on a finance lease on 1 January 2012. The present value of the minimum
lease payments are $46,260 and legal title will not pass to CQ at the end of the lease. The lease terms
are 5 annual payments of $12,000 due on 1 January commencing 1 January 2012. The rate of interest
implicit in the lease is 15%. Depreciation on vehicles should be included in cost of sales. The only entry
made for this transaction was to record the first rental payment.
(iv) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31
December 2011.
(v) An inventory count at 31 December 2012 valued inventory at $183,000. This value includes inventory
that had originally cost $15,000 but it is now obsolete and its estimated scrap value is $2,000.
(vi) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land
included in land and buildings is $1,015,000. Buildings depreciation is treated as an administrative
expense. There were no sales of non-current assets during the year ended 31 December 2012.
(vii) Depreciation is charged on owned plant and equipment using the reducing balance method at 25% per
year. Plant and equipment depreciation should be included as a cost of sales.
(viii) The tax due for the year ended 31 December 2012 is estimated at $77,000 and the deferred tax
provision should be decreased by $42,000.
(ix) On 30 September 2012 CQ issued 250,000 $1 equity shares at a premium of 30%. The proceeds were
received before 31 December 2012.
Required
Prepare the statement of comprehensive income and a statement of changes in equity for CQ for the year to 31
December 2012 and a statement of financial position at that date, in accordance with the requirements of
International Financial Reporting Standards.
Notes to the financial statements are not required, but all workings must be clearly shown.
Do not prepare a statement of accounting policies.
(Total = 25 marks)
Questions 59
26 YZ (11/12) 45 mins
YZ is a manufacturing entity which produces and sells a range of products.
YZs trial balance at 30 September 2012 is shown below:
Note $000 $000
Borrowings @ 7% per year 3,000
Buildings at cost at 30 September 2011 3,400
Cash received on disposal of machinery (i) 8
Cost of raw materials purchased in year to 30 September 2012 2,220
Direct production labour costs 670
Equity shares $1 each, fully paid at 30 September 2012 (xi) 1,700
Income tax (viii) 30
Inventory of finished goods at 30 September 2011 (vii) 190
Inventory of raw materials at 30 September 2011 (vii) 275
Land at valuation at 30 September 2011 (ii) 9,000
Plant and equipment at cost at 30 September 2011 (i) 3,900
Production overheads (excluding depreciation) 710
Provision for deferred tax at 30 September 2011 (ix) 430
Accumulated depreciation at 30 September 2011:
Buildings (iii) 816
Plant and equipment (iv) 2,255
Patent (v) 526
Retained earnings at 30 September 2011 3,117
Revaluation reserve at 30 September 2011 1,800
Sales revenue 9,820
Share premium 100
Trade payables 940
Trade receivables 1,130
23,986 23,986
(i) During the year YZ disposed of obsolete machinery for $8,000. The cash received is included in the trial
balance. The obsolete machinery had originally cost $35,000 and had accumulated depreciation of
$32,000.
(ii) On 30 September 2012 YZ revalued its land to $9,500,000.
(iii) Buildings are depreciated at 2% per annum on the straight line basis. Buildings depreciation should be
treated as an administrative expense. No buildings were fully depreciated at 30 September 2011.
(iv) Plant and equipment is depreciated at 25% per annum using the reducing balance method and is treated
as a production overhead.
(v) The patent for one of YZs products was purchased on 1 October 2009. The patent had a useful life of 10
years when it was purchased and is being amortised on a straight line basis with no residual value
anticipated. Amortisation of the patent is treated as cost of sales when charged to the statement of profit
or loss and other comprehensive income. Research is carried out on a continuous basis to develop the
patented process and ensure that the product range continues to meet customer demands. The patent
figure in the trial balance is made up as follows:
$000
Original cost of patent 420
less amortisation to 30 September 2011 (84)
336
Research costs incurred in the year to 30 September 2012 190
Total 526
60 Questions
(vi) YZs accounting policy for amortisation and depreciation is to charge a full year in the year of acquisition
and none in the year of disposal.
(vii) Inventory of raw materials at 30 September 2012 was $242,000. Inventory of finished goods at 30
September 2012 was $180,000.
(viii) The directors estimate the income tax charge on the years profits at $715,000. The balance on the
income tax account represents the under-provision for the previous years tax charge.
(ix) The deferred tax provision is to be reduced by $47,000.
(x) YZ entered into a non-cancellable 4 year operating lease on 1 October 2011, to acquire machinery to
replace the old machinery sold. Under the terms of the lease YZ will pay no rent for the first year. $8,000
is payable for each of 3 years commencing on 1 October 2012. The machine is estimated to have a
useful economic life of 10 years.
(xi) During the year YZ issued 200,000 $1 equity shares at a premium of 50%. The total proceeds were
received before 30 September 2012 and are reflected in the trial balance figures.
Required
Prepare YZs statement of profit or loss and other comprehensive income and a statement of changes in
equity for the year to 30 September 2012 and a statement of financial position at that date, in
accordance with the requirements of International Financial Reporting Standards. (All workings should be
to the nearest $000).
Notes to the financial statements are not required, but all workings must be clearly shown. Do not
prepare a statement of accounting policies.
(Total = 25 marks)
27 QWE (9/12) 45 mins

QWEs trial balance at 31 March 2012 is shown below:
Notes $000 $000
4% Loan notes (redeemable 2020) 500
Amortisation of deferred development expenditure 30
Deferred development expenditure (i) 150
Equity dividend paid 1 September 2011 62
Income tax (ii) 8
Cost of sales 1,605
Land and buildings at cost at 1 April 2011 2,410
Ordinary Shares $1 each, fully paid at 1 April 2011 930
Plant and equipment at cost at 1 April 2011 560
Provision for deferred tax at 1 April 2011 (iii) 86
Provision for buildings depreciation at 1 April 2011 (v) 386
Provision for plant and equipment depreciation at 1 April 2011 (v) 185
Retained earnings at 1 April 2011 621
Sales revenue 2,220
Share premium at 1 April 2011 310
Trade payables 190
Suspense account (iv) 5
5,458 5,458
Questions 61
(i) Deferred development expenditure is being amortised at 10% pa on the straight line basis.
(ii) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31
March 2011.
(iii) The tax due for the year ended 31 March 2012 is estimated at $83,000 and the deferred tax provision
needs to be increased by $25,000.
(iv) The suspense account is comprised of two items:
Expenditure of $20,000 incurred during the year on original research aimed at possibly finding a
new material for QWE to use in manufacturing its products.
$15,000 cash received from disposal of some plant and equipment that had an original cost of
$82,000 and a carrying value of $3,000.
The only entries made in QWEs ledgers for these items were in cash and cash equivalents and suspense
account.
(v) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land
included in land and buildings is $800,000. Buildings depreciation should be included in administrative
expenses.
Depreciation of plant and equipment is at 12.5% on the reducing balance basis and is treated as part of
the cost of sales.
QWEs policy is to charge a full years depreciation in the year of acquisition and no depreciation in the
year of disposal.
(vi) On 1 July 2011 one of QWEs customers started litigation against QWE, claiming damages caused by an
allegedly faulty product. QWE has been advised that it will probably lose the case and the claim for
$25,000 will probably succeed.
(vii) On 1 August 2012 QWE was advised that one of its customers, that had been in some financial
difficulties at 31 March 2012, had gone into liquidation and that the $32,000 balance outstanding at 31
March 2012 was very unlikely to be paid.
(viii) QWE has not previously made any provisions for legal claims or irrecoverable debts.
Required
(a) Prepare journal entries, with a short narrative, to eliminate the balance on QWEs suspense
account. (3 marks)
(b) Prepare the statement of profit or loss and other comprehensive income and a statement of
changes in equity for QWE for the year to 31 March 2012 and a statement of financial position at
that date, in accordance with the requirements of International Financial Reporting Standards.
prepare a statement of accounting policies. (22 marks)
(Total = 25 marks)
62 Questions
28 DFG (5/12) 45 mins

DFGs trial balance at 31 March 2012 is shown below:
Notes $000 $000
5% Loan notes (issued 2010, redeemable 2020) 280
Amortisation of patent at 1 April 2011 27
Cost of sales 554
Equity dividend paid 1 September 2011 55
Income tax (i) 10
Land and buildings at cost (ii) 960
Ordinary Shares $1 each, fully paid at 1 April 2011 550
Patent (vii) 90
Plant and equipment at cost (ii) 480
Provision for deferred tax at 1 April 2011 (iii) 75
Provision for buildings depreciation at 1 April 2011 (iv) 33
Provision for plant and equipment depreciation at 1 April 2011 (v) 234
Retained earnings at 1 April 2011 121
Sales revenue (vi) 1,200
Share premium 110
Trade payables 61
2,747 2,747
(i) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31
March 2011.
(ii) There were no sales of non-current assets during the year ended 31 March 2012.
should be increased by $15,000.
(iv) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land
included in land and buildings is $260,000. Buildings depreciation is treated as an administrative
expense.
(v) Up to 31 March 2011 all plant and equipment was depreciated using the straight line method at 12.5%.
However some plant and equipment has been wearing out and needing to be replaced on average after six
years. DFG management have therefore decided that from 1 April 2011 the expected useful life of this
type of plant and equipment should be changed to a total of six years from acquisition. The plant and
equipment affected was purchased on 1 April 2007 and had an original cost of $120,000. This plant
and equipment is estimated to have no residual value. All plant and equipment depreciation should be
charged to cost of sales.
(vi) The sales revenue for the year to 31 March 2012 includes $15,000 received from a new overseas customer.
The $15,000 was a 10% deposit for an order of $150,000 worth of goods. DFG is still waiting for the results
of the new customers credit reference and at 31 March 2012 has not despatched any goods.
(vii) On 1 April 2008 DFG purchased a patent for a secret recipe and manufacturing process for one of its
products. Due to recent world economic difficulties DFG has carried out an impairment review of its
patent. At 31 March 2012 the patent was found to have the following values:
Value in use $50,000
Fair value less cost to sell $47,000
(viii) On 1 July 2011 one of DFGs customers started litigation against DFG, claiming damages caused by an
allegedly faulty product. DFG has been advised that it will probably lose the case and that the claim for
$35,000 will probably succeed.
Questions 63
Required
(a) Briefly explain how items (vi) and (vii) should be treated by DFG in its financial statements for the
year ended 31 March 2012. (6 marks)
(b) Prepare DFGs statement of profit or loss and other comprehensive income and statement of
changes in equity for the year to 31 March 2012 AND a statement of financial position at that
date in accordance with the requirements of International Financial Reporting Standards.
(19 marks)
(Total = 25 marks)
29 RTY (3/12) 45 mins

RTYs trial balance at 31 January 2012 is shown below:
Notes $000 $000
Administrative expenses 1,225
Cash received on disposal of non-current assets (i) 2,068
Cost of goods sold 4,939
Equity dividend paid (iii) 138
Equity Shares $1 each, fully paid at 31 January 2011 1,375
Income tax (vi) 35
Interest paid half year to 31 July 2011 69
Inventory at 31 January 2012 330
Long term borrowings (redeemable 2025) (v) 2,740
Plant and equipment at cost 31 January 2011 (i) 5,750
Property at valuation 31 January 2011 (i) 17,120
Provision for deferred tax at 31 January 2011 (vii) 1,064
Provision for plant and equipment depreciation at 31 January 2011 (i) 3,900
Provision for property depreciation at 31 January 2011 (i) 2,610
Research and development (ii) 689
Retained earnings at 31 January 2011 2,785
Revaluation reserve at 31 January 2011 2,900
Sales revenue 9,320
Share premium at 31 January 2011 2,750
Trade payables 1,080
Trade receivables (iv) 1,476
32,592 32,592
Additional information provided:
(i) Property, plant and equipment
The property valuation at 31 January 2011 of $17,120,000 consisted of land $6,220,000 and buildings
$10,900,000. On 1 February 2011 RTY revalued its properties to $15,750,000 (land $6,850,000 and
buildings $8,900,000).
During the year RTY disposed of non-current assets as follows:
A piece of surplus land was sold on 1 March 2011 for $2,060,000.
Obsolete plant was sold for $8,000 scrap value on the same date.
All the cash received is included in the trial balance.
Details of the assets sold were:
Revalued Accumulated
Asset type Cost amount depreciation
Land $1,000,000 $1,800,000 $0
Plant and equipment $820,000 $800,000
64 Questions
Buildings are depreciated at 5% per annum on the straight line basis. No buildings were fully depreciated at 31
January 2011. Plant and equipment is depreciated at 25% per annum using the reducing balance method. All
depreciation is treated as a cost of sales. RTY charges a full years depreciation in the year of acquisition and
none in the year of disposal.
(ii) Research and development
RTY carries out research and development on a continuous basis to ensure that its product range
continues to meet customer demands. The research and development figure in the trial balance is made
up as follows:
$000
Development costs capitalised in previous years 1,199
Less amortisation to 31 January 2011 744
455
Research costs incurred in the year to 31 January 2012 163
Development costs (all meet IAS 38 Intangible Assets criteria) incurred in the year to
31 January 2012 71
Total 689
Development costs are amortised on a straight line basis at 20% per year. No development costs were fully
amortised at 31 January 2011. Research and development costs are treated as cost of sales when charged to
the statement or profit or loss and other comprehensive income. RTY charges a full years amortisation in the
year of acquisition.
(iii) During the year RTY paid a final dividend for the year to 31 January 2012.
(iv) On 1 March 2012, RTY was informed that one of its customers, BVC, had ceased trading. The liquidators
advised RTY that it was very unlikely to receive payment of any of the $48,000 due from BVC at 31
January 2012.
(v) The long term borrowings incur annual interest at 5% per year paid six monthly in arrears.
(vi) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31
January 2011. The directors estimate the income tax charge on the years profits to 31 January 2012 at
$765,000.
(vii) The deferred tax provision is to be decreased by $45,000.
Required
Prepare RTYs statement of profit of loss and other comprehensive income and statement of changes in equity
for the year to 31 January 2012 AND a statement of financial position at that date in accordance with the
requirements of International Financial Reporting Standards.
(25 marks)
Questions 65
30 ABC (11/11) 45 mins

ABC sells goods to the building industry and carries out construction contracts for clients. ABC's trial balance at
30 September 2011 is shown below:
Notes $000 $000
Administrative expenses 1,020
Cash received on account from construction contract clients during
year to 30 September 2011 contract 1 (i) 4,000
Cash received on account from construction contract clients during
year to 30 September 2011 contract 2 (i) 1,800
Cash received on disposal of plant and equipment (iii) 15
Construction contract 1 - work in progress for year to 30 September
2011 (i) 3,750
Construction contract 2 - work in progress for year to 30 September
2011 (i) 2,250
Equity dividend paid (viii) 250
Equity Shares $1 each, fully paid at 30 September 2011 2,500
Income tax (v) 15
Interest paid half year to 31 March 2011 58
Inventory at 30 September 2011 (excluding construction contracts) 310
Long term borrowings (redeemable 2021) (iv) 2,300
Plant and equipment at cost 30 September 2011 (iii) 4,930
Property at valuation 30 September 2010 (ii) 11,000
Provision for deferred tax at 30 September 2010 (vi) 250
Provision for plant and equipment depreciation at 30 September
2010 (iii) 2,156
Provision for property depreciation at 30 September 2010 (ii) 3,750
Cost of goods sold (excluding construction contracts) 3,210
Retained earnings at 30 September 2010 627
Sales revenue 9,500
Share premium at 30 September 2011 1,500
Trade payables 235
Trade receivables (viii) 810
28,633 28,633

(i) At 30 September 2011 ABC had two construction contracts in progress.
Contract 1 Contract 2
Contract length 3 years 2 years
Date commenced 1 October 2010 1 April 2011
Fixed contract value $11,000,000 $8,000,000
Contract detail for year ended 30 September 2011
Contract 1 Contract 2
Proportion of work certified as completed 40% 25%
$000 $000
Construction contract work in progress 3,750 2,250
Estimated cost to complete contract 5,400 6,750
Cash received on account from construction contract clients during year 4,000 1,800
Both contracts use the value of work completed method to recognise attributable profit for the year.
(ii) Property consists of land $3,500,000 and buildings $7,500,000. Buildings are depreciated at 5% per
year on the straight line basis. No buildings were fully depreciated at 30 September 2011.
(iii) Plant and equipment is depreciated at 25% per year using the reducing balance method. During the year
to 30 September 2011 ABC sold obsolete plant for $15,000. The plant had cost $75,000 and had been
depreciated by $65,000. All depreciation is considered to be part of cost of sales. ABC's policy is to
charge a full year's depreciation in the year of acquisition and no depreciation in the year of disposal. This
disposal has not been accounted for in the trial balance.
66 Questions
(iv) The long term borrowings incur annual interest at 5% paid six monthly in arrears.
(v) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 30
September 2010. The directors estimate the income tax charge on the profit of the year to 30 September
2011 at $910,000.
(vi) The deferred tax provision is to be increased by $19,000.
(vii) On 1 August 2011, ABC was informed that one of its customers, EF, had ceased trading. The liquidators
advised ABC that it was very unlikely to receive payment of any of the $25,000 due from EF at 30
September 2011.
(viii) ABC made no new share issues during the year. ABC paid a final dividend for the year to 30 September
2010.
Required
Prepare ABC's statement of profit of loss and other comprehensive income and statement of changes in equity
for the year to 30 September 2011 AND a statement of financial position at that date in accordance with the
statement of accounting policies. (25 marks)
31 ZY (9/11) 45 mins
ZYs trial balance at 30 June 2011 is shown below:
Notes $000 $000
Cash received on disposal of vehicles (ii) 10
Equity dividend paid (v) 90
Equity Shares $1 each, fully paid at 30 June 2011 500
Finance lease rental paid (iii) 30
Income tax (viii) 15
Interest paid half year to 31 December 2010 8
Inventory at 30 June 2010 (vii) 358
Long term borrowings (repayable 2020) (iv) 320
Plant and equipment at 30 June 2010 864
Preferred shares, 4% cumulative redeemable 2021 (vi) 150
Property at valuation 30 June 2010 (i) 844
Provision for deferred tax at 30 June 2010 (ix) 45
Provision for plant and equipment depreciation at 30 June 2010 (i) 249
Provision for property depreciation at 30 June 2010 (i) 8
Purchase of goods for resale 987
Retained earnings at 30 June 2010 288
Revaluation reserve at 30 June 2010 (i) 220
Sales revenue 2,084
Share premium at 30 June 2011 270
Trade payables 120
Trade receivables (x) 280
4,264 4,264

(i) Property is depreciated at 1% per year and plant and equipment is depreciated at 20% per year straight
line. Depreciation is charged to cost of sales. ZYs policy is to charge a full years depreciation in the year
of acquisition and no depreciation in the year of disposal. Property is revalued every three years.
(ii) ZY disposed of its old vehicles on 1 October 2010 for $10,000. The original cost was $95,000 and the
net book value at the date of disposal was zero. Vehicles are included in plant and equipment. No
adjusting entries have yet been made to ZYs plant and equipment for this disposal.
Questions 67
(iii) ZY purchased new vehicles using a finance lease on 1 July 2010. The finance lease terms are:
Lease for a five year period
Rentals paid annually in arrears on 30 June
Each annual rental is $30,000
The fair value of the vehicles was $120,000
The interest rate implicit in the lease is 7.93% per year
(iv) The long term borrowings incur annual interest at 5% per year, and is paid six monthly in arrears.
(v) During the current accounting period ZY paid a final dividend for the year ended 30 June 2010 of
$50,000 and an interim dividend for the year ended 30 June 2011 of $40,000.
(vi) On 1 January 2011 ZY issued $150,000 4% cumulative redeemable preferred shares. At 30 June 2011
no dividend had been paid.
(vii) Inventory at 30 June 2011 amounted to $390,000 at cost. A review of inventory items revealed the need
for some adjustments for two inventory lines.
Items which had cost $100,000 and which would normally sell for $220,000 were found to have
deteriorated. Remedial work costing $30,000 would be needed to enable the items to be sold for
$110,000.
Some items sent to customers on sale or return terms had been omitted from inventory and
included as sales in June 2011. The cost of these items was $15,000 and they were included in
sales at $30,000. On 30 June 2011, the items were returned in good condition by the customers
but no entries have been made to record this.
(viii) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 30
June 2010. The directors estimate the income tax charge on the profits of the year ended 30 June 2011
at $56,000.
(ix) The deferred tax provision is to be reduced to $38,000.
(x) On 1 August 2011, ZY was informed that one of its customers, X, had ceased trading. The liquidators
advised ZY that it was very unlikely to receive payment of any of the $48,000 due from X at 30 June
2011.
Required
Prepare ZYs statement of profit or loss and other comprehensive income and statement of changes in
equity for the year to 30 June 2011 AND a statement of financial position at that date, in accordance
with the requirements of International Financial Reporting Standards.
(25 marks)
68 Questions
32 MN (5/11) 45 mins
MN operates a number of retail outlets around the country. One retail outlet was closed on 31 March 20X1
when trading ceased and the outlet was put up for sale. All income and expenses of the outlet are included in
the trial balance. The retail outlet is regarded as a cash generating unit, all its assets are being sold as one unit.
At 31 March 20X1 the directors are certain that the outlet meets the requirements of IFRS 5 Non-current Assets
Held for Sale and Discontinued Operations for treatment as non-current assets held for sale.
MNs trial balance at 31 March 20X1 is shown below:
Further information $000 $000
Administration expenses (ii) 160
Cost of goods sold (ii) 622
Distribution costs (ii) 170
Equity shares $1 each, fully paid 600
Property, plant and equipment
net book value at 31 March 20X0 (i) to (iii) 2,073
Provision for deferred tax at 31 March 20X0 (vi) 83
Provision for repairs under warranty at 31 March 20X0 (iv) 76
Retained earnings at 31 March 20X0 777
Revenue (ii) 1,120
Share premium at 31 March 20X0 200
Trade payables 51
3,221 3,221
Further information
(i) The book values of the property, plant and equipment at 31 March 20X0 were as follows:
Asset type Cost Cost Accumulated Accumulated Net book
continuing discontinued depreciation depreciation value
activities operations continuing discontinued
activities operations
$000 $000 $000 $000 $000
Land 1,220 150 0 0 1,370
Buildings 700 40 140 20 580
Plant & equipment 240 60 142 35 123
2,160 250 282 55 2,073
(ii) The fair value less cost to sell of the assets of the closed retail outlet at 31 March 20X1 was $176,000.
The results of the closed outlet for the period 1 April 20X0 to 31 March 20X1 were as follows:
$000
Revenue 80,000
Administration expenses (40,000)
(iii) MN depreciates buildings at 5% per annum on the straight-line basis and plant and equipment at 20%
per annum using the reducing balance method. Depreciation is included in cost of sales.
(iv) MN sells electronic goods with a one year warranty. At 31 March 20X0 MN created a provision of
$76,000 for the cost of honouring the warranties at that date. On 31 March 20X1 the outstanding
warranties were reviewed and the following estimates prepared:
Scenario Probability Anticipated cost
Worst case 10% $190,000
Best case 15% $20,000
Most likely 75% $80,000
All warranties relate to continuing activities. Actual repair costs incurred during the year were charged to
cost of sales.
Questions 69
(v) The directors estimate the income tax charge on the years profits at $67,000, of this a tax reduction of
$10,000 relates to discontinued operations.
(vi) The deferred tax provision is to be reduced to $78,000.
(vii) The long term borrowings incur annual interest at 4% per year paid annually in arrears.
Required
Prepare MNs statement of profit or loss and other comprehensive income and statement of changes in equity for
the year to 31 March 20X1 AND a statement of financial position at that date, in a form suitable for presentation
to the shareholders and in accordance with the requirements of International Financial Reporting Standards.
(25 marks)
33 XB (11/10) 45 mins
XBs trial balance at 31 October 20Y0 is shown below:
Notes $000 $000
Cost of sales 237
Donations to political party 5
Entertaining expenses 12
Equity dividend paid (i) 50
Interest paid (ii) 3
Inventory at 31 October 20Y0 18
Land at cost 31 October 20X9 (iii) 730
Long term borrowings (ii) 200
Ordinary Shares $1 each, fully paid at 31 October 20Y0 (iv) 630
Property, plant and equipment at cost 31 October 20X9 (iii) 320
Provision for deferred tax at 31 October 20X9 10
Provision for property, plant and equipment depreciation at 31 October (v) 192
20X9
Purchase of property, plant and equipment during the year (v) 110
Retained earnings at 31 October 20X9 168
Revenue 690
Share premium at 31 October 20Y0 (iv) 99
Suspense (vi) 3
Taxation (vii) 6
Trade payables 77
2,066 2,066
(i) The final dividend for the year to 31 October 20X9 of $50,000 was paid on 31 March 20Y0.
(ii) Long-term borrowings consist of a loan taken out on 1 May 20X9 at 3% interest per year. Six months
loan interest has been paid in the year to 31 October 20Y0.
(iii) At 31 October 20X9 the tax written down value of XBs assets was $90,000. None of these assets were
fully depreciated at this date.
(iv) XB issued 330,000 equity shares on 30 June 20Y0 at a premium of 30%.
(v) Property, plant and equipment is depreciated at 20% per annum using the straight line method.
Depreciation of property, plant and equipment is considered to be part of cost of sales. XBs policy is to
charge a full years depreciation in the year of acquisition and no depreciation in the year of disposal.
70 Questions
(vi) Purchased goods, invoiced at $3,000 received in September 20Y0 were returned to the supplier in
October. At 31 October 20Y0 the supplier had not issued a
credit note. XB had correctly deducted the amount from purchases with the corresponding double entry
posted to the suspense account.
(vii) The balance on the taxation account is the income tax underestimated in the previous years financial
statements.
(viii) XB is resident in Country X.
Required
(a) Prepare XBs statement of profit or loss and other comprehensive income for the year to 31 October
20Y0, including a calculation of income tax expense.
(Note there are up to 8 marks available for the taxation computation) (14 marks)
(b) Prepare XBs statement of changes in equity for the year to 31 October 20Y0 and a statement of financial
position at that date. (11 marks)
All statements should be in a form suitable for presentation to the shareholders and in accordance with the
Note. Your answer should be to the nearest $000.
(Total = 25 marks)
34 EZ (5/10) 45 mins
EZs trial balance at 31 March 20X9 is shown below:
Notes $000 $000
Cost of goods sold 418
Equity dividend paid (v) 92
Land market value 31 March 20X8 (i) 700
Lease (ix) 15
Equity Shares $1 each, fully paid at 31 March 20X9 (vi) 600
Property, plant and equipment at cost 31 March 20X8 (iii) 480
Provision for deferred tax at 31 March 20X8 (ii) 30
Provision for property, plant and equipment dep'n at 31 March 20X8 (iv) 144
Revaluation reserve at 31 March 20X8 10
Revenue 720
Share premium at 31 March 20X9 (vi) 300
Suspense (iii) 2
Trade payables 32
Trade receivables (viii) 275
2,269 2,269

(i) Land is carried in the financial statements at market value. The market value of the land at 31 March
20X9 was $675,000. There were no purchases or sales of land during the year.
(ii) The tax due for the year ended 31 March 20X9 is estimated at $18,000. Deferred tax is estimated to
decrease by $10,000.
Questions 71
(iii) During the year EZ disposed of old equipment for $2,000. No entry has been made in the accounts for
this transaction except to record the cash received in the cash book and in the suspense account. The
original cost of the equipment sold was $37,000 and its book value at 31 March 20X8 was $7,000.
(iv) Property, plant and equipment is depreciated at 10% per year straight line. Depreciation of property,
plant and equipment is considered to be part of cost of sales. EZ's policy is to charge a full year's
depreciation in the year of acquisition and no depreciation in the year of disposal.
(v) During the year EZ paid a final dividend of $92,000 for the year ended 31 March 20X8.
(vi) EZ issued 200,000 equity shares on 30 September 20X8 at a premium of 50%.
(vii) Long term borrowings consist of a loan taken out on 1 April 20X8 at 4% interest per year. No loan
interest has been paid at 31 March 20X9.
(viii) On 22 April 20X9 EZ discovered that ZZZ, its largest customer, had gone into liquidation. EZ has been
informed that it is very unlikely to receive any of the $125,000 balance outstanding at 31 March 20X9.
(ix) On 1 April 20X8 EZ acquired additional vehicles on a 2 year (30 months) operating lease. The lease
included an initial 6 months rent-free period as an incentive to sign the lease. The lease payments were
$2,500 per month commencing on 1 October 20X8.
Required
Prepare EZ's statement of profit or loss and other comprehensive income and statement of changes in equity for
the year to 31 March 20X9 and a statement of financial position at that date, in a form suitable for presentation
to the shareholders and in accordance with the requirements of International Financial Reporting Standards.
Notes to the financial statements are NOT required, but all workings must be clearly shown. Do not prepare a
(25 marks)
35 XY (Specimen paper) 45 mins

XY's trial balance at 31 March 20X9 is shown below:
Notes $000 $000
Available for sale investments (ii) 564
Cash received on disposal of land 48
Cost of goods sold 908
Equity dividend paid (ix) 50
Income tax (iii) 12
Land at cost 31 March 20X8 (v) 782
Long term borrowings (viii) 280
Ordinary Shares $1 each, fully paid at 31 March 20X9 (vii) 500
Property, plant and equipment at cost 31 March 20X8 (vi) 630
Provision for deferred tax at 31 March 20X8 (iv) 19
Property, plant and equipment depreciation at 31 March 20X8 (vi) 378
Revaluation surplus at 31 March 20X8 160
Revenue 1,770
Share premium at 31 March 20X9 200
Trade payables 56
3,732 3,732
72 Questions

(i) XY is resident in Country X.
(ii) Available for sale investments are carried in the financial statements at market value. The market value of
the available for sale investments at 31 March 20X9 was $608,000.There were no purchases or sales of
available for sale investments during the year.
(iii) The income tax balance in the trial balance is a result of the underprovision of tax for the year ended 31
March 20X8.
(iv) The taxation due for the year ended 31 March 20X9 is estimated at $96,000. The tax depreciation
cumulative allowances at 31 March 20X8 for property, plant and equipment were $453,000.
(v) Land sold during the year had a book value of $39,000. The fair value of the remaining land at 31 March
20X9 was $729,000.
(vi) Property, plant and equipment is depreciated at 20% per annum straight line. Depreciation of property,
plant and equipment is considered to be part of cost of sales. XY's policy is to charge a full year's
(vii) XY issued 100,000 equity shares on 31 October 20X8 at a premium of 50%. The cash received was
correctly entered into the financial records and is included in the trial balance.
(viii) Long term borrowings consist of a loan taken out on 1 April 20X8 at 5% interest per year. No loan
interest has been paid at 31 March 20X9.
(ix) XY paid a final dividend of $50,000 for the year ended 31 March 20X8.
Required
(a) Calculate the deferred tax amounts relating to property, plant and equipment, that are required to be
included in XY's statement of profit or loss and other comprehensive income for the year ended 31 March
20X9 and its statement of financial position at that date. Ignore all other deferred tax implications.
(5 marks)
(b) Prepare XY's statement of profit or loss and other comprehensive income and statement of changes in
equity for the year to 31 March 20X9 and a statement of financial position at that date, in a form suitable
for presentation to the shareholders and in accordance with the requirements of International Financial
Reporting Standards. (20 marks)
Notes to the financial statements are NOT required, but all workings must be clearly shown. Do not prepare a
(Total = 25 marks)
Questions 73
Part C: Group Financial Statements

Questions 36 to 48 cover Group Financial Statements, the subject of Part C of the BPP Study Text for F1.
36 Objective test questions: Group financial statements 38 mins

1 Fanta acquired 100% of the ordinary share capital of Tizer on 1 October 20X7.
On 31 December 20X7 the share capital and retained earnings of Tizer were as follows:
$000
Ordinary shares of $1 each 400
Retained earnings at 1 January 20X7 100
Retained profit for the year ended 31 December 20X7 80
580
The profits of Tizer have accrued evenly throughout 20X7. Goodwill arising on the acquisition of Tizer
was $30,000.
What was the cost of the investment in Tizer?
A $400,000
B $580,000
C $610,000
D $590,000 (2 marks)
2 Mercedes has owned 100% of Benz for many years. At 31 March 20X9 the retained earnings of
Mercedes were $450,000 and the consolidated retained earnings of the group were $560,000.
Mercedes has no other subsidiaries.
During the year ended 31 March 20X9, Benz had sold goods to Mercedes for $50,000. Mercedes still
had these goods in inventory at the year end. Benz uses a 25% mark up on all goods.
What were the retained earnings of Benz at 31 March 20X9?
A $110,000
B $60,000
C $170,000
D $120,000 (2 marks)
3 Oldsmobile, a company with subsidiaries, purchased 35% of the ordinary share capital of Chevrolet for
$50,000 on 1 April 20X8.
Chevrolet's statement of financial position at 31 March 20X9 was as follows:
$000
Net assets 55
Ordinary share capital ($1 shares) 15
Retained earnings at 1 April 20X8 20
Net profit for the year ended 31 March 20X9 20
55
During the year to 31 March 20X9 Chevrolet paid out a total dividend to its shareholders of $10,000.
Oldsmobile considers that its investment in Chevrolet has been impaired by $6,000.
At what amount should Oldsmobile's investment in Chevrolet be shown in its consolidated statement of
financial position as at 31 March 20X9?
A $57,000
B $50,500
C $47,500
D $44,000 (2 marks)
74 Questions
4 Ruby owns 30% of Emerald. During the year to 31 December 20X8 Emerald sold goods to Ruby for
$160,000. Emerald applies a one-third mark up on cost. Ruby 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 $40,000
B $3,000
C $10,000
D $4,000 (2 marks)
5 Colossal acquired 100% of the $100,000 ordinary share capital of Enormous for $300,000 on 1 January
20X9 when the retained earnings of Enormous were $156,000. At the date of acquisition the fair value
of plant held by Enormous was $20,000 higher than its carrying value. This plant had a remaining life of
4 years at the acquisition date.
At 31 December 20X9 retained earnings are as follows:
$
Colossal 275,000
Enormous 177,000
Colossal considers that goodwill on acquisition is impaired by 50%.
What are group retained earnings at 31 December 20X9?
A $279,000
B $284,000
C $296,000
D $291,000 (3 marks)
6 On 1 April 20X7 Rhino acquired 40% of the share capital of Hippo for $120,000, when the retained
earnings of Hippo were $80,000. During the year Rhino sold goods to Hippo for $30,000, including a
profit margin of 25%. These goods were still in inventory at the year end.
At 31 March 20X8 the retained earnings of Hippo were $140,000.
At what amount should Rhino's interest in Hippo be shown in the consolidated statement of financial
position at 31 March 20X8?
A $173,000
B $144,000
C $141,000
D $105,000 (2 marks)
The following information is relevant for questions 7 and 8

On 1 January 20X6 A purchased 100,000 ordinary shares in B for $210,000. At that date B's retained
earnings amounted to $90,000 and the fair value of its assets was equal to their book values.
Four years later, on 31 December 20X9, the statements of financial position of the two companies were:
A B
$ $
Sundry net assets 200,000 260,000
Shares in B 210,000 -
410,000 260,000
Ordinary shares of $1 200,000 100,000

410,000 260,000
The share capital of B has remained unchanged since 1 January 20X6. Goodwill is impaired by 50%.
Questions 75
7 What amount should appear in the group consolidated statement of financial position at 31 December
20X9 for goodwill?
A $25,000
B $20,000
C $10,000
D $14,000 (2 marks)
8 What amount should appear in the consolidated statement of financial position at 31 December 20X9 for
group retained earnings?
A $270,000
B $338,000
C $370,000
D $280,000 (2 marks)
The following information is relevant for questions 9 and 10

H acquired 100% of the share capital of S on 1 January 20X9 for $350,000.
The statements of financial position of the two companies at 31 December 20X9 were as follows:
H S
$ $
Sundry assets 590,000 290,000
Investment in S 350,000 -
940,000 290,000
Issued share capital - $1 shares 400,000 140,000

Share premium account 320,000 50,000
Retained earnings at 1 January 20X9 140,000 60,000
Profit for year to 31 December 20X9 80,000 40,000
940,000 290,000
There have been no changes in the share capital or share premium account of either company since 1
January 20X9. There was no impairment of goodwill.
9 What figure for goodwill should appear in the consolidated statement of financial position of the H group
at 31 December 20X9?
A $60,000
B $100,000
C $150,000
D $160,000 (2 marks)
10 What figure for group retained earnings should appear in the consolidated statement of financial position
of the H group at 31 December 20X9?
A $260,000
B $220,000
C $320,000
D $200,000 (2 marks)
(Total = 21 marks)
76 Questions
Group Financial Statements section C questions

The following tax regime data is applicable to questions 37 48 which cover the preparation of group financial
statements.
Relevant tax rules

Corporate Profits
can be ignored:
recorded
Value Added Tax
Zero rated 0%
Standard rated 15%
37 Club, Green and Tee (5/13) 45 mins

The draft statements of financial position at 31 March 2013 and statements of profit or loss for the year ended
31 March 2013 for three entities, are given below:
Statements of financial position as at 31 March 2013
Notes Club Green Tee
$000 $000 $000
Non-current Assets
Property, plant and equipment (vi) 50,050 30,450 28,942
Investments:
17,370,000 Ordinary shares
in Green at cost (i);(ii);(iii) 35,610
3,980,000 Ordinary shares
in Tee at cost (iv) 8,000
93,660 30,450 28,942
Current Assets
Inventory (v) 34,910 9,310 2,580
Trade receivables 38,790 16,530 2,660
Cash and cash equivalents (vii) 5,010 1,480 318
78,710 27,320 5,558
Total Assets 172,370 57,770 34,500
Questions 77
Equity and Liabilities

Equity shares of $1 each 112,620 17,370 15,920
Share premium 0 3,470 0
Retained earnings 15,630 10,650 3,590
128,250 31,490 19,510
Long term borrowings 32,000 15,000 9,140
Current liabilities
Trade payables 11,320 10,830 5,530
Loan interest payable 800 450 320
12,120 11,280 5,850
Total equity and liabilities 172,370 57,770 34,500
Summarised statements of profit or loss for the year ended 31 March 2013
Club Green Tee
$000 $000 $000
Revenue 130,000 67,410 31,890
Cost of sales (75,470) (40,470) (18,920)
Gross profit 54,530 26,940 12,970
Expenses (37,660) (20,230) (9,460)
16,870 6,710 3,510
Finance cost (1,600) (900) (640)
15,270 5,810 2,870
Income tax expense (3,050) (1,160) (580)
Profit for the year 12,220 4,650 2,290
(i) Club acquired all of Greens equity shares on 1 April 2011 in a share for share exchange. The agreed
purchase consideration was $35,610,000. Greens retained earnings were $3,000,000 on 1 April 2011.
(ii) The fair value of Greens property, plant and equipment on 1 April 2011 exceeded its carrying value by
$1,200,000. The excess of fair value over carrying value was attributed to buildings owned by Green. At
the date of acquisition these buildings had a remaining useful life of 12 years. Clubs accounting policy is
to depreciate all property, plant and equipment using the straight line basis with no residual value.
(iii) Club carried out an impairment review of the goodwill arising on acquisition of Green and found that as at
31 March 2013 the goodwill had NOT been impaired but had actually increased in value by $50,000.
(iv) Club purchased its shareholding in Tee on 1 April 2012 for $8,000,000. The fair value of Tees net
assets was the same as its carrying value at that date. Club exercises significant influence over all aspects
of Tees financial and operating policies.
(v) Club occasionally trades with Green. During February 2013 Club sold Green goods for $960,000. Green
had not paid for the goods by 31 March 2013. Club uses a mark-up of 331/3% on cost. 20% of the
goods had been sold by Green at 31 March 2013.
(vi) Club sold a piece of machinery to Green on 1 April 2012 for $115,000. The machinery had previously
been used in Clubs business and had been included in Clubs property, plant and equipment at a carrying
value of $90,000. Club had recognised the profit on disposal in revenue. The machinery had a remaining
useful life of 5 years on 1 April 2012.
(vii) Green transferred $115,000 to Club on 31 March 2013 which was not recorded by Club until April
2013.
Required
(a) Explain how a post acquisition increase in goodwill, for example in note (iii) above, should be treated
in consolidated financial statements. (2 marks)
(b) Prepare the consolidated statement of financial position for Club as at 31 March 2013, in accordance
with the requirements of International Financial Reporting Standards. (23 marks)
(Total = 25 marks)
78 Questions
38 TX, SX and LW (3/13) 45 mins

The draft statements of financial position at 31 December 2012 for three entities, TX, SX and LW are given
below:
Statements of Financial Position as at 31 December 2012:
Notes TX SX LW
$000 $000 $000
Non-current Assets
Property, plant and equipment 545 480 468
Investments at cost:
SX (i),(ii) 530 0 0
LW (150,000 equity shares) (iii) 190 0 0
1,265 480 468
Current Assets
Inventory (iv) 221 55 170
Trade receivables 98 75 124
Cash and cash equivalents (v) 72 0 110
Total Assets 391 130 404
1,656 610 872
Equity shares of $1 each 800 360 500
Share premium 400 0 100
Retained earnings 300 140 120
1,500 500 720
Current liabilities
Trade payables 156 47 152
Bank overdraft 0 63 0
156 110 152
Total Equity and Liabilities 1,656 610 872
(i) TX acquired all of SXs equity shares on 1 January 2012 for an agreed purchase consideration of
$530,000. SXs retained earnings were $110,000 on 1 January 2012.
(ii) The fair value of SXs property on 1 January 2012 exceeded its carrying value by $72,000. The excess of
fair value over carrying value was attributed to buildings with a remaining useful life of 18 years. TXs
accounting policy is to depreciate buildings using the straight line basis with no residual value.
(iii) TX purchased its shareholding in LW on 1 January 2012 for $190,000 when LWs retained earnings
were $70,000. The fair value of all LWs net assets was the same as their carrying value at that date. TX
exercises significant influence over all aspects of LWs financial and operating policies.
(iv) During September 2012 TX sold SX goods for $44,000 at a mark up of 331/3% on cost. At 31 December
2012 all the goods remained in SXs closing inventory. At 31 December 2012 TX had not recorded any
payment for the goods.
(v) SX made a part payment to TX for $15,000 on 29 December 2012 which was not recorded by TX until 4
January 2013.
Required
(a) If an entity, TX, owns more than half the equity (voting) shares of another entity, SX, then SX will be
deemed to be the subsidiary of TX. However a parent/subsidiary relationship can exist even when the
parent owns less than 50% of the equity shares.
Explain the circumstances that can give rise to a parent/subsidiary relationship other than a majority
shareholding. (5 marks)
Questions 79
(b) Prepare the consolidated statement of financial position for TX as at 31 December 2012, in
accordance with the requirements of International Financial Reporting Standards. (20 marks)
(Total = 25 marks)
39 AZ, PQ and SY (11/12) 45 mins

The draft statements of financial position at 30 September 2012 for three entities, AZ, PQ and SY are given
below:
Statements of Financial Position at 30 September 2012:
Notes AZ PQ SY
$000 $000 $000
Non-current Assets
Property, plant and equipment (vii) 400 297 380
Investments:
100,000 Equity shares in (i) to (iii) 500
PQ at cost
80,000 Equity shares in SY at cost (iv) 125
1,025 297 380
Current Assets
Inventory (vi) 190 60 160
Cash and cash equivalents (viii) 48 21 73
382 144 321
Total Assets 1,407 441 701

Equity shares of $1 each 900 100 400
Retained earnings (v) 111 112 95
Revaluation reserve 60
1,311 322 595
Current liabilities
(i) AZ acquired all of PQs equity shares on 1 October 2010 for $500,000. PQs retained earnings at 1
October 2010 were $38,000.
(ii) AZ commissioned a professional valuer to value PQs net assets at 1 October 2010. The results were as
follows:
Original Cost Carrying value Valuation
$000 $000 $000
Property 100 200 300
Plant and equipment 200 97 117
All other assets and Equal to carrying
liabilities value
Plant and equipment had an average remaining useful life of 5 years at 1 October 2010.
AZs accounting policy is to depreciate plant and equipment using the straight line basis with no residual
value.
(iii) AZ carried out an impairment review of the goodwill arising on acquisition of PQ and found that as at 30
September 2012 the goodwill had been impaired by $20,000.
80 Questions
(iv) AZ purchased its shareholding in SY on 1 October 2011 for $125,000. The fair value of all SYs net
assets was the same as their carrying value at that date. AZ exercises significant influence over all aspects
of SYs financial and operating policies.
(v) The Statements of Profit or Loss and Other Comprehensive Income for the year ended 30 September
2012 showed the following amounts for the profit for the year for each entity:
$000
AZ 67
PQ 49
SY 55
(vi) During August 2012 PQ sold goods to AZ for $52,000 at a mark up of 33% on cost. At 30 September
2012 all of the goods remained in AZs closing inventory and AZ had not paid for the goods.
(vii) AZ sold a piece of machinery to PQ on 1 October 2011 for $74,000. The machinery had previously been
used in AZs business and had been included in AZs property, plant and equipment at a carrying value of
$50,000. The machinery had a remaining useful life of 4 years at that date. Profit on disposal was
included in revenue.
(viii) AZ made a payment to PQ for $60,000 on 30 September 2012 which was not recorded by PQ until 5
October 2012.
Required
(a) (i) Explain the meaning of fair value according to IFRS 13 Fair value measurement.
(ii) Calculate the fair value of PQs net assets acquired by AZ on 1 October 2010. (4 marks)
(b) Prepare the consolidated statement of financial position for AZ as at 30 September 2012, in
(Total = 25 marks)
40 Wood, Plank and Bush (9/12) 45 mins

The draft statements of financial position at 31 March 2012 and statements of profit or loss and other
comprehensive income for the year ended 31 March 2012 for three entities, Wood, Plank and Bush are given
below:
Statements of financial position at 31 March 2012
Notes Wood Plank Bush
$000 $000 $000
Non-current Assets
Property, plant and equipment (iii)/(vii) 11,820 7,240 6,730
Investments:
6,000,000 Ordinary shares in
Plank at cost (ii) 9,200
Loan to Plank (ii) 3,100
1,540,000 Ordinary shares in Bush at cost (v) 2,420
26,540 7,240 6,730
Current Assets
Inventory (vi) 12,060 3,215 890
Trade receivables 13,400 5,710 920
Cash and cash equivalents (ix) 1,730 510 110
27,190 9,435 1,920
Total Assets 53,730 16,675 8,650
Share premium 5,520 0 0
Questions 81
49,820 9,680 6,740

Loan from Wood 0 3,100 0
Current liabilities
Trade payables 3,910 3,740 1,910
Loan interest payable 0 155 0
3,910 3,895 1,910
Total Equity and Liabilities 53,730 16,675 8,650
Statements of profit or loss and other comprehensive income for the year ended 31 March 2012
Wood Plank Bush
$000 $000 $000
Revenue 15,500 6,900 2,300
Cost of sales (8,700) (3,080) (840)
Gross profit 6,800 3,820 1,460
Expenses (1,250) (750) (340)
5,550 3,070 1,120
Finance cost (810) (440) (120)
4,740 2,630 1,000
Tax (1,250) (230) (170)
Profit for the year 3,490 2,400 830
(i) Wood holds shares in two other entities, Plank and Bush.
(ii) Wood acquired all of Planks equity shares on 1 April 2011 for $9,200,000 when Planks retained
earnings were $1,280,000. Wood also advanced Plank a 10 year loan of $3,100,000 on 1 April 2011.
(iii) The fair value of Planks property, plant and equipment on 1 April 2011 exceeded its carrying value by
$1,350,000. The excess of fair value over carrying value was attributed to buildings owned by Plank. At
the date of acquisition these buildings had a remaining useful life of 15 years. Woods accounting policy
is to depreciate buildings using the straight line basis with no residual value.
(iv) Wood carried out an impairment review of the goodwill arising on acquisition of Plank and found that as
at 31 March 2012 the goodwill had been impaired by $80,000.
(v) Wood purchased its shareholding in Bush on 1 April 2011 for $2,420,000 when Bushs retained
earnings were $410,000. The fair value of Bushs net assets was the same as its carrying value at that
date. Wood exercises significant influence over all aspects of Bushs financial and operating policies.
(vi) Wood occasionally trades with Plank. During February 2012 Wood sold Plank goods for $520,000.
Wood uses a mark up of 100% on cost. At 31 March 2012 all the goods remained in Planks closing
inventory and Plank had not paid for the goods.
(vii) Wood sold a piece of machinery to Plank on 30 September 2011 for $95,000. The machinery had
previously been used in Woods business and had been included in Woods property, plant and equipment
at a carrying value of $75,000. The machinery had a remaining useful life of ten years at 30 September
2011.
(viii) At 31 March 2012 $155,000 loan interest was due and had not been paid. Plank had accrued the loan
interest due at the year-end but Wood had not accrued any interest income.
(ix) Plank posted a cheque to Wood for $210,000 on 31 March 2012 which did not arrive until 5 April
2012.
Required
(a) Explain how item (vii) above should be treated in Woods consolidated financial statements for the
year ended 31 March 2012. (3 marks)
82 Questions
(b) Prepare the consolidated statement of profit or loss and other comprehensive income for Wood for
the year ended 31 March 2012 AND the consolidated statement of financial position for Wood as
at 31 March 2012, in accordance with the requirements of International Financial Reporting
Standards. (22 marks)
Notes to the financial statements are not required but all workings must be shown.
(Total = 25 marks)
41 Loch, River and Stream (5/12) 45 mins

The draft statements of financial position at 31 March 2012 and statements of profit or loss and other
comprehensive income for the year ended 31 March 2012 for three entities, Loch, River and Stream are given
below:
STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 2012:
Notes Loch River Stream
$000 $000 $000
Non-current Assets
Property, plant and equipment (iv) 1,193 767 670
Investments:
Loan to River (iii) 300 0 0
156,000 Ordinary shares (vi)
in Stream at cost 223 0 0
1,716 767 670
Current Assets
Inventory (vii) 1,107 320 87
Trade receivables 1,320 570 90
Current a/c with River (viii) 101 0 0
Cash and cash equivalents 62 58 14
2,590 948 191
Total Assets 4,306 1,715 861
Equity shares of $1 each 3,500 600 520
3,913 985 645
Loan from Loch (iii) 0 300 0
Current liabilities
Loan interest payable (ix) 0 15 0
Current a/c with Loch (viii) 0 75 0
393 430 216
Total Equity and Liabilities 4,306 1,715 861
STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 MARCH 2012
Loch River Stream
$000 $000 $000
Revenue 1,500 693 227
Cost of sales (865) (308) (84)
Gross profit 635 385 143
Expenses (124) (70) (35)
511 315 108
Finance cost (80) (40) (12)
431 275 96
Income tax expense (118) (20) (16)
Profit for the year 313 255 80
Questions 83
(i) Loch holds shares in two other entities, River and Stream.
(ii) Loch acquired all of Rivers equity shares on 1 April 2011 in a share for share exchange. The agreed
purchase consideration was $950,000, however Loch has not yet recorded the acquisition in its
accounting records. On the 1 April 2011 Lochs shares had a market value of $2.00 each. Rivers
retained earnings were $130,000 on 1 April 2011.
(iii) On 1 April 2011 Loch advanced River a 10 year loan of $300,000.
(iv) The fair value of Rivers property, plant and equipment on 1 April 2011 exceeded its carrying value by
$144,000. The excess of fair value over carrying value was attributed to buildings owned by River. At the
date of acquisition these buildings had a remaining useful life of 12 years. Lochs accounting policy is to
depreciate buildings using the straight line basis with no residual value.
(v) Loch carried out an impairment review of the goodwill arising on acquisition of River and found that as at
31 March 2012 the goodwill had been impaired by $20,000.
(vi) Loch purchased its shareholding in Stream on 1 April 2011 for $223,000 when Streams retained
earnings were $45,000. The fair value of Streams net assets was the same as its carrying value at that
date. Loch exercises significant influence over all aspects of Streams financial and operating policies.
(vii) Loch occasionally trades with River. During September 2011 Loch sold River goods for $220,000. Loch
uses a mark-up of 50% on cost. At 31 March 2012 all the goods remained in Rivers closing inventory.
(viii) River posted a cheque to Loch for $26,000 on 29 March 2012 which did not arrive until 7 April 2012.
(ix) At 31 March 2012 $15,000 loan interest was due and had not been paid. River had accrued the loan
interest due at the year end but Loch had not accrued any interest income.
Required
(a) Prepare the journal entry to record the purchase of River in Lochs accounting records. (3 marks)
(b) Prepare the consolidated statement of profit or loss and other comprehensive income for Loch for
the year ended 31 March 2012 AND a consolidated statement of financial position for Loch as at
31 March 2012, in accordance with the requirements of International Financial Reporting
Standards. (22 marks)
(Total = 25 marks)
42 Tree, Branch and Leaf (3/12) 45 mins

The draft statements of financial position at 31 January 2012 and statements of profit or loss and other
comprehensive income for the year ended 31 January 2012 for three entities, Tree, Branch and Leaf are given
below:
STATEMENTS OF FINANCIAL POSITION AT 31 JANUARY 2012
Notes Tree Branch Leaf
$000 $000 $000
Non-current Assets
Property, plant and equipment 1,535 1,155 1,025
Investments:
790,000 Ordinary shares in Branch at cost (ii); (iii) 1,500
Loan to Branch (ii) 600
332,000 Ordinary shares in Leaf at cost (iv) 550
4,185 1,155 1,025
Current Assets
Inventory (v) 1,360 411 123
Current account with Branch (vii) 123 0 0
Trade receivables 1,540 734 142
Cash and cash equivalents 47 75 55
3,070 1,220 320
Total Assets 7,255 2,375 1,345
84 Questions

4,565 1,285 1,050
Long term borrowings 0 600 0
Current liabilities
Trade payables 2,690 365 295
Loan interest payable (vi) 0 30 0
Current account with Tree (vii) 0 95 0
2,690 490 295

FOR THE YEAR ENDED 31 JANUARY 2012
Tree Branch Leaf
$000 $000 $000
Revenue 2,200 777 411
Cost of sales 1,112 456 146
Gross profit 1,088 321 265
Expenses 221 115 62
867 206 203
Finance cost 102 59 34
765 147 169
Taxation 145 32 19
(i) Tree holds shares in two other entities, Branch and Leaf.
(ii) Tree acquired all of Branchs equity shares on 1 February 2011 for $1,500,000 when Branchs retained
earnings were $380,000. Tree also advanced Branch a ten year loan of $600,000 on 1 February 2011.
(iii) The fair value of Branchs property, plant and equipment on 1 February 2011 exceeded its book value by
$240,000. The excess of fair value over book value was attributed to buildings owned by Branch. At the
date of acquisition these buildings had a remaining useful life of 10 years. Trees accounting policy is to
depreciate buildings using the straight line basis.
(iv) Tree purchased its shareholding in Leaf on 1 February 2011 for $550,000 when Leafs retained earnings
were $70,000. The fair value of Leafs net assets was the same as its net book value at that date. Tree
exercises significant influence over all aspects of Leafs strategic and operational decisions.
(v) Tree occasionally trades with Branch. During September 2011 Tree sold Branch goods for $180,000.
Tree uses a mark up of fifty percent on cost. By 31 January 2012 Branch had sold one third of the goods,
$120,000 being included in Branchs closing inventory.
(vi) At 31 January 2012 $30,000 loan interest was due and had not been paid. Branch had accrued this
amount at the year end but Tree had not accrued any interest income.
(vii) Branch posted a cheque to Tree for $28,000 on 29 January 2012 which did not arrive until 7 February
2012.
(viii) No dividends are proposed by any of the entities.
Required
Prepare a consolidated statement of profit of loss and other comprehensive income for the Tree group of entities
for the year ended 31 January 2012 AND a consolidated statement of financial position for the Tree group of
entities as at 31 January 2012, in accordance with the requirements of International Financial Reporting
Standards.
(25 marks)
Questions 85
43 PH, SU and AJ (11/11) 45 mins

The Draft summarised Statements of Financial Position at 30 September 2011 for three entities, PH, SU and AJ
are given below:
PH SU AJ
$000 $000 $000
Non-current Assets
Investments:
48,000,000 Ordinary shares in SU at cost 75,590
Loan to SU 12,600
8,000,000 Ordinary shares in AJ at cost 16,400
154,980 57,590 41,270
Current Assets
Inventory 10,160 14,410 10,260
Current account with SU 10,000
Cash and cash equivalents 1,260 3,600 3,580
42,820 31,210 25,780
Total Assets 197,800 88,800 67,050

152,500 63,600 52,800
Long term borrowings 32,700 12,600 11,800
Current liabilities
Trade payables 12,600 5,400 2,450
Current account with PH 0 7,200 0
12,600 12,600 2,450
(i) PH acquired all of SU's equity shares on 1 October 2010 for $75,590,000 when SU's retained earnings
were $7,680,000. PH also advanced SU a ten year loan of $12,600,000 on 1 October 2010.
(ii) The fair value of SU's property, plant and equipment on 1 October 2010 exceeded its book value by
$1,300,000. The excess of fair value over book value was attributed to buildings owned by SU. At the
date of acquisition these buildings had a remaining useful life of 20 years. PH's accounting policy is to
(iii) At 30 September 2011 $90,000 loan interest was due on the loan made by PH to SU and had not been
paid. Both PH and SU had accrued this amount at the year end.
(iv) PH purchased 8,000,000 of AJ's equity shares on 1 October 2010 for $16,400,000 when AJ's retained
earnings were $24,990,000. PH exercises significant influence over all aspects of AJ's strategic and
operational decisions.
(v) SU posted a cheque to PH for $2,800,000 on 29 September 2011 which did not arrive until 7 October
2011.
(vi) No dividends are proposed by any of the entities.
(vii) PH occasionally trades with SU. In September 2011 PH sold SU goods for $4,800,000. PH uses a
mark-up of one third on cost. On 30 September 2011 all the goods were included in SU's closing
inventory.
Required
(a) Define what is meant by control and explain how this is determined according to IFRS 10
Consolidated financial statements. (5 marks)
86 Questions
(b) Prepare the consolidated statement of financial position for the PH group of entities as at 30
September 2011, in accordance with the requirements of International Financial Reporting
Standards.
(20 marks)
(Total = 25 marks)
44 AX (5/10) 45 mins
AX holds shares in two other entities, AS and AA.
AX purchased 100% of AS shares on 1 April 20X8 for $740,000, when the fair value was $75,000 more than
book value. The excess of fair value over book value was attributed to land held by AS.
At 1 April 20X8 the retained earnings of AS showed a debit balance of $72,000.
AX purchased 120,000 ordinary shares in AA on 1 April 20X8 for $145,000 when AA's retained earnings were
$49,000. AX is able to exercise significant influence over all aspects of AA's strategic and operational decisions.
At 1 April 20X8 the fair values of AA's assets were the same as their net book value.
The draft summarised financial statements for the three entities as at 31 March 20X9 are given below.
DRAFT SUMMARISED STATEMENTS OF FINANCIAL POSITION AS AT 31 MARCH 20X9
AX AS AA
$000 $000 $000 $000 $000 $000
Non-current Assets
Property, plant and equipment 1,120 700 740
Investments:
600,000 Ordinary shares in AS at cost 740
120,000 Ordinary shares in AA at cost 145
2,005 700 740
Current Assets
Inventory 205 30 14
585 76 55
Total Assets 2,590 776 795

2,018 615 650
Borrowings 360 80 109
Deferred tax 120 16 10
480 96 119
Current liabilities
Tax (see additional information (i)) 16 11
Bank overdraft 20
92 65 26
Questions 87
SUMMARISED STATEMENTS OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

AX AS AA
$000 $000 $000
Revenue 820 285 147
Cost of sales (406) (119) (52)
414 166 95
Administrative expenses (84) (36) (14)
Distribution costs (48) (22) (11)
(282) (108) (70)
Finance cost (18) (5) (8)
264 103 62
Income Tax (see additional information (i)) (16) (11)
Profit for the year 87 51
(i) AX is deemed resident in Country X for tax purposes.
(ii) AX has not yet calculated its tax charge for the year to 31 March 20X9. AX's cost of sales includes a
depreciation charge of $31,000 for property, plant and equipment. Included in administrative expenses
are entertaining expenses of $4,000. AX's property, plant and equipment qualified for tax depreciation
allowances of $49,000 for the year ended 31 March 20X9.
(iii) In the year since acquisition AS sold goods for $55,000 to AX of which $25,000 remained in AX's closing
inventory at 31 March 20X9. AS uses a mark up of 25% on cost. All invoices from AS for the goods had
been paid by the year end.
(iv) No dividends are proposed by any of the entities.
Required
(a) Calculate the estimated amount of corporate income tax that AX will be due to pay for the year
ended 31 March 20X9 and any required adjustment to the provision for deferred tax at that date.
(5 marks)
(b) Prepare a consolidated statement of profit or loss and other comprehensive income for the AX
Group of entities for the year ended 31 March 20X9 and a consolidated statement of financial
position as at that date.
Notes to the financial statements are not required but all workings must be shown. (20 marks)
(Total = 25 marks)
45 PSA (Specimen Paper) 45 mins

The draft summarised statements of financial position at 31 March 20X9 for three entities, P, S and A are given
below.
P S A
$000 $000 $000 $000 $000 $000
Non-current Assets
Investments:
40,000 Ordinary shares in S at cost 60,000
Loan to S 10,000
8,000 Ordinary shares in A at cost 13,000
123,000 48,000 34,940
Current Assets
Inventory 8,000 12,000 8,693
Current a/c with S 8,000
Cash and cash equivalents 1,000 3,000 3,033
34,000 26,000 21,832
Total Assets 157,000 74,000 56,772
88 Questions

121,000 53,000 27,800
Borrowings 26,000 10,000 10,000
Current liabilities
Trade payables 10,000 5,000 18,972
Current a/c with P 6,000
10,000 11,000 18,972
(i) P acquired all of S's equity shares on 1 April 20X8 for $60,000,000 when S's retained earnings were
$6,400,000. P also advanced S a ten year loan of $10,000,000 on 1 April 20X8.
(ii) The fair value of S's property, plant and equipment on 1 April 20X8 exceeded its book value by
$1,000,000. The excess of fair value over book value was attributed to buildings owned by S. At the date
of acquisition these buildings had a remaining useful life of 20 years. P's accounting policy is to
(iii) At 31 March 20X9 $250,000 loan interest was due and had not been paid. Both P and S had accrued
this amount at the year end.
(iv) P purchased 8,000,000 of A's equity shares on 1 April 20X8 for $13,000,000 when A's retained
earnings were $21,000,000. P exercises significant influence over all aspects of A's strategic and
operational decisions.
(v) S posted a cheque to P for $2,000,000 on 30 March 20X9 which did not arrive until 7 April 20X9.
(vi) No dividends are proposed by any of the entities.
(vii) P occasionally trades with S. In March 20X9 P sold S goods for $4,000,000. P uses a mark up of one
third on cost. On 31 March 20X9 all the goods were included in S's closing inventory and the invoice for
the goods was still outstanding.
(viii) P's directors do not want to consolidate A. They argue that they do not control A, therefore it does not
need to be consolidated. They insist that A should appear in the consolidated statement of financial
position at cost of $13,000,000.
Required
(a) Draft a response that explains to P's directors the correct treatment of A in the consolidated financial
statements. Include comments on any ethical issues involved. (5 marks)
(b) Prepare a consolidated statement of financial position for the P Group of entities as at 31 March 20X9, in
Total = 25 marks)
Questions 89
46 Parsley 45 mins
You are provided with the following financial statements for Parsley, a limited liability company, and its
subsidiary Sage.
FOR THE YEAR ENDED 31 DECEMBER 20X9
Parsley Sage
$000 $000
Sales revenue 135,000 74,000
Cost of sales (70,000) (30,000)
Gross profit 65,000 44,000
Distribution costs (7,500) (6,200)
Administrative expenses (19,000) (7,784)
Income from Sage: loan note interest 4
dividends 8,000
Profit before tax 46,504 30,000
Income tax expense (10,000) (9,000)
Profit for the year 36,504 21,000
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X9

Parsley Sage
Assets $000 $000 $000 $000
Non-current assets
Investments:
$1 ordinary shares in Sage at cost 30,000
Sage loan notes 50
104,050 39,050
Current assets
Inventory 10,630 4,498
Receivables 18,460 12,230
Bank 13,400 1,344
42,490 18,072

Equity
$1 ordinary shares 80,000 25,000
117,540 40,000
8% Loan note 200
Current liabilities
Payables 6,000 1,922
Tax 11,000 7,000
Dividends payable 12,000 8,000
29,000 16,922
The following information is also available:

(a) Parsley purchased 100% of the $1 ordinary shares in Sage on 1 January 20X8. At that date Sage's
retained earnings were $2,000,000.
(b) Parsley's annual impairment review of goodwill on acquisition of Sage valued it at $2,250,000 at 31
December 20X9.
(c) During the year ended 31 December 20X9 Parsley sold goods which originally cost $8,000,000 to Sage
for $12,000,000. Sage still had 25% of these goods in inventory at 31 December 20X9.
90 Questions
(d) Sage owed Parsley $1,800,000 at 31 December 20X9 for some of the goods Parsley supplied during the
year.
(e) Parsley owns $50,000 of Sage's loan notes. The interest is paid annually in arrears at 31 December.
Interest for the year ended 31 December 20X9 is included in Sage's payables. Parsley has also included
the interest in its receivables.
(f) All dividends were declared but not paid prior to the year end.
Required
(a) Calculate the goodwill arising on the acquisition of Sage. (2 marks)
(b) Prepare the following financial statements for Parsley:
(i) The consolidated statement of profit or loss and other comprehensive income for the year ended
31 December 20X9. (6 marks)
(ii) The consolidated statement of financial position as at 31 December 20X9.
Note. A working should be included for the retained earnings. Disclosure notes are not required.
(14 marks)
(c) Explain the accounting treatment of intra-group trading in consolidated accounts. (3 marks)
(Total = 25 marks)
47 Tom, Dick and Harry 45 mins

The following statements of financial position have been prepared as at 31 October 20X9.
Tom Dick Harry
$000 $000 $000 $000 $000 $000
Non-current assets
Property, plant and equipment 205 120 220
Investments
100,000 shares in Dick Ltd at cost 200
60,000 shares in Harry Ltd at cost 115
Current assets
Inventory 100 70 90
Receivables 170 40 70
Bank 190 30 50
460 140 210
980 260 430
Equity
$1 ordinary shares 500 100 200
870 230 350
Current liabilities
980 260 430
(a) Tom purchased all the share capital of Dick on 1 November 20X8 for $200,000. The previous owners of
Dick needed to sell quickly as they were in financial difficulty. The book value of Dick's net assets on the
date of acquisition was $190,000. A valuation exercise performed by a reputable firm showed that the
fair value of Dick's property, plant and equipment at that date was $50,000 greater than book value. The
increase in fair value was not accounted for in the books of Dick. If Dick had re-valued its non-current
assets at 31 October 20X8, an addition of $2,000 would have been made to the depreciation charged for
20X8/20X9.
(b) Tom sold goods for $25,000 to Dick during the year. The price included a 25% mark up. 40% of them
are still held in inventory by Dick.
Questions 91
(c) Tom's investment in Harry was acquired on 31 October 20X5 when the retained earnings of Harry were
$130,000. The fair value of Harry's assets were the same as their net book value at the date of
acquisition. At 31 October 20X9, the investment in Harry is impaired by $4,000.
Required
(a) (i) Calculate the goodwill on acquisition of Dick.
(ii) Explain the treatment required by IFRS 3 for a bargain purchase that creates negative goodwill.
(6 marks)
(b) Prepare the consolidated statement of financial position for the Tom Group as at 31 October 20X9.
(19 marks)
(Total = 25 marks)
48 ZA 45 mins
ZA is the parent company of ZB and owns 30% of ZC. The following are the financial statements for all three
companies as at 31 October 20X7.
ZA ZB ZC
$000 $000 $000
Sales revenue 870 285 148
Cost of sales (540) (119) (60)
Gross profit 330 166 88
Distribution costs (54) (36) (12)
Administrative expenses (78) (22) (15)
Interest payable (10) (16)
Profit before tax 198 98 45
Income tax expense (40) (25) (5)
STATEMENTS OF FINANCIAL POSITION AS AT 31 OCTOBER 20X7

ZA ZB ZC
$000 $000 $000
Assets
Non-current assets
Investments: shares in ZB at cost 4,545
shares in ZC at cost 800
Current assets
Inventory 1,500 800 400
Receivables 1,800 750 300
Bank 600 350 150
3,900 1,900 850
Total assets 12,245 5,200 2,850

Equity
$1 ordinary shares 9,000 4,000 2,260
Retained earnings 1,325 200 340
10,325 4,200 2,600
Current liabilities
Payables 1,220 200 150
Tax 700 800 100
Total equity and liabilities 12,245 5,200 2,800
92 Questions
The following information is also available.

(a) ZA purchased all of the shares in ZB some years ago when ZB had retained earnings of $60,000. All
goodwill on acquisition has been fully written off as impaired in prior years. ZA purchased its shares in ZC
on 1 November 20X6 when ZC had retained earnings of $300,000.
(b) During the year ZA sold goods with an invoice value of $240,000 to ZB. These goods were invoiced at
cost plus 20%. Half of the goods are still in ZB's inventory at the year end.
(c) ZB owes ZA $30,000 at 31 October 20X7 for goods it purchased during the year.
(d) ZA wants to recognise an impairment of $100,000 in respect of its investment in ZC.
Required
(a) Calculate the goodwill on acquisition of ZB. (2 marks)
(b) Prepare a consolidated statement of profit or loss and other comprehensive income for the ZA group of
entities for the year ended 31 October 20X7 and a consolidated statement of financial position as at that
date.
Note. A working should be included for group retained earnings. Disclosure notes are not required.
(20 marks)
(c) A company that owns less than 50% of the shares of another company will regard it as an 'associate' if it
is able to exert 'significant influence'. Identify three circumstances that might demonstrate 'significant
influence'. (3 marks)
(Total = 25 marks)
Questions 93
Part D: Principles of Business Taxation

Questions 49 to 55 cover Principles of Business Taxation, the subject of Part D of the BPP Study Text for F1.
Unless otherwise specified, the following data is applicable to questions 49 - 55.
Relevant tax rules

Corporate Profits
can be ignored:
recorded
Value Added Tax
Zero rated 0%
Standard rated 15%
49 Objective test questions: General principles of taxation 65 mins

1 Which of the following powers is not available to tax authorities.
A Power to review and query filed returns
B Power to detain company officials
C Power to request special returns
D Power to enter and search premises (2 marks)
2 Complete the blanks:

Direct taxation is charged directly on the ........................................ or ........................................ that
is intended to pay the tax. (2 marks)
3 The economist, Adam Smith, proposed that an acceptable tax should meet four characteristics. Three of
these characteristics were certainty, convenience and efficiency.
Identify the FOURTH characteristic.
A Neutrality
B Transparency
C Equity
D Simplicity (2 marks)
94 Questions
4 In no more than 20 words, define tax evasion. (2 marks)
5 List (using no more than five words per item) the four main sources of tax rules in a country. (4 marks)
6 The effective incidence of a tax is on:

A the date the tax is actually paid.
B the person or entity that finally bears the cost of the tax.
C the date the tax assessment is issued.
D the person or entity receiving the tax assessment. (2 marks)
7 In no more than 15 words, define the meaning of competent jurisdiction. (2 marks)
8 Which one of the following powers is a tax authority least likely to have granted to them?
A Power of arrest.
B Power to examine records.
C Power of entry and search.
D Power to give information to other country's tax authorities. (2 marks)
9 An entity sells furniture and adds a sales tax to the selling price of all products sold. A customer
purchasing furniture from the entity has to pay the cost of the furniture plus the sales tax. The customer
therefore bears the cost of the sales tax.
This is referred to as:
A Formal incidence
B Indirect incidence
C Effective incidence
D Direct incidence (2 marks)
10 List three possible reasons why governments set deadlines for filing returns and/or paying taxes. (3 marks)
11 What is 'hypothecation'?
A Process of earmarking tax revenues for specific types of expenditure
B Estimation of tax revenue made by the tax authorities for budget purposes
C Refund made by tax authorities for tax paid in other countries
D Payment of taxes due to tax authorities, net of tax refunds due from tax authorities (2 marks)
12 Explain briefly three major principles of modern taxation. (3 marks)
13 Which one of the following is not an advantage for the tax authority of deduction of tax at source?
A The total amount of tax due for the period is easier to calculate
B Tax is collected earlier
C Administration costs are borne by the entity deducting tax
D Tax is deducted before income is paid to the taxpayer (2 marks)
14 HD sells office stationery and adds a sales tax to the selling price of all products sold. A customer
purchasing goods from HD has to pay the cost of the goods plus the sales tax.
HD pays the sales tax collected to the tax authorities.
From the perspective of HD the sales tax would be said to have
A Formal incidence
B Effective incidence
C Informal incidence
D Ineffective incidence (2 marks)
Questions 95
15 The 'tax gap' is the difference between:

A When a tax payment is due and the date it is actually paid
B The tax due calculated by the entity and the tax demanded by the tax authority
C The amount of tax due to be paid and the amount actually collected
D The date when the entity was notified by the tax authority of the tax due and the date the tax
should be paid (2 marks)
16 Which of the following is a source of tax rules?

A International accounting standards
B Local company legislation
C International tax treaties
D Domestic accounting practice (2 marks)
(Total = 36 marks)
50 Objective test questions: Types of taxation I 85 mins

1 Country X uses a Pay-As-You-Earn (PAYE) system for collecting taxes from employees. Each employer is
provided with information about each employee's tax position and tables showing the amount of tax to
deduct each period. Employers are required to deduct tax from employees and pay it to the revenue
authorities on a monthly basis
From the perspective of the government, list three advantages of the PAYE system. (3 marks)
2 Where is employee tax recorded in a set of financial accounts?

A Charged to employee costs in the statement of profit or loss and other comprehensive income
B Charged to cost of sales in the statement of profit of loss and other comprehensive income
C Included as a payable in the statement of financial position
D Included as a receivable in the statement of financial position (2 marks)
3 Complete the following equation.

Accounting profit + ? non-taxable income tax allowable expenditure = ? (2 marks)
4 A withholding tax is:

A Tax withheld from payment to the tax authorities.
B Tax paid less an amount withheld from payment.
C Tax deducted at source before payment of interest or dividends.
D Tax paid on increases in value of investment holdings. (2 marks)
5 BM has a taxable profit of $30,000 and receives a tax assessment of $3,000.

BV has a taxable profit of $60,000 and receives a tax assessment of $7,500.
BM and BV are resident in the same tax jurisdiction.
This tax could be said to be
A A progressive tax
B A regressive tax
C A direct tax
D A proportional tax (2 marks)
6 State two reasons why a group of entities might want to claim group loss relief rather than use the loss in
the entity to which it relates. (2 marks)
96 Questions
7 DR makes a taxable profit of $400,000 and pays an equity dividend of $250,000. DR is resident in
Country X. In Country X, equity shareholders pay tax on their dividend income at a rate of 30%.
If DR and its equity shareholders pay a total of $175,000 tax between them, what method of corporate
income tax is being used in that country?
A The classical system
B The imputation system
C The partial imputation system
D The split rate system (2 marks)
8 A full imputation system of corporate income tax is one where an entity is taxable on:
A All of its income and gains whether they are distributed or not. The shareholder is liable for
taxation on all dividends received.
B All of its income and gains whether they are distributed or not, but all the underlying corporation
tax on the distribution is passed to the shareholder as a tax credit.
C All of its income and gains whether they are distributed or not, but only part of the underlying
corporation tax is passed to the shareholder as a tax credit.
D Its retained profits at one rate and on its distributed profits at another (usually lower) rate of tax.
(2 marks)
9 Company Z has a factory in Malaysia with retail outlets in Hong Kong. The company's registered office is
in London but the head office is located in the Cayman Islands. All board meetings take place in the
Cayman Islands. Where is Company Z's country of residence?
A Malaysia
B Hong Kong
C England
D Cayman Islands (2 marks)
10 The European Union (EU) is an example of a supranational body. In not more than 20 words, describe
the effect the EU has on its member states' tax rules. (2 marks)
11 List four payments that are usually affected by withholding tax. (2 marks)
12 List three methods of giving double taxation relief. (2 marks)
13 Double tax relief is used to:

A Ensure that you do not pay tax twice on any of your income.
B Mitigate taxing overseas income twice.
C Avoid taxing dividends received from subsidiaries in the same country twice.
D Provide relief where a company pays tax at double the normal rate. (2 marks)
14 Corporate residence for tax purposes can be determined in a number of ways, depending on the country
concerned.
Which one of the following is not normally used to determine corporate residence for tax purposes?
A The country from which control of the entity is exercised.
B The country of incorporation of the entity.
C The country where management of the entity hold their meetings.
D The country where most of the entity's products are sold. (2 marks)
Questions 97
15 An entity, DP, in Country A receives a dividend from an entity in Country B. The gross dividend of
$50,000 is subject to a withholding tax of $5,000 and $45,000 is paid to DP.
Country A levies a tax of 12% on overseas dividends.
Country A and Country B have both signed a double taxation treaty based on the OECD model convention
and both apply the credit method when relieving double taxation.
How much tax would DP be expected to pay in Country A on the dividend received from the entity in
Country B?
A $400
B $1,000
C $5,400
D $6,000 (2 marks)
16 Where a resident entity runs an overseas operation as a branch of the entity, certain tax implications
arise.
Which one of the following does not usually apply in relation to an overseas branch?
A Assets can be transferred to the branch without triggering a capital gain
B Corporate income tax is paid on profits remitted by the branch
C Tax depreciation can be claimed on any qualifying assets used in the trade of the branch
D Losses sustained by the branch are immediately deductible against the resident entity's income.
(2 marks)
17 The following details relate to EA:

Incorporated in Country A.
Carries out its main business activities in Country B.
Its senior management operate from Country C and effective control is exercised from Country C.
Assume countries A, B and C have all signed double tax treaties with each other, based on the OECD
model tax convention.
Which country will EA be deemed to be resident in for tax purposes?
A Country A
B Country B
C Country C
D Both Countries B and C (2 marks)
18 The OECD Model tax convention defines a permanent establishment.

Which one of the following is not specifically listed as a "permanent establishment" by the OECD Model
tax convention?
A An office
B A factory
C An oil well
D A site of an 11 month construction project (2 marks)
19 Developed countries generally use three tax bases. One tax base widely used is income.
List the other two widely used bases. (2 marks)
98 Questions
20 The following details are relevant:

HC carries out its main business activities in Country A
HC is incorporated in Country B
HC's senior management exercise control from Country C, but there are no sales or purchases
made in Country C
HC raises its finance and is quoted on the stock exchange in Country D.
Assume Countries A, B, C and D have all signed double taxation treaties with each other, based on the
OECD model tax convention.
Which country will HC be deemed to be resident in for tax purposes?
A Country A
B Country B
C Country C
D Country D (2 marks)
21 EB has an investment of 25% of the equity shares in XY, an entity resident in a foreign country.
EB receives a dividend of $90,000 from XY, the amount being after the deduction of withholding tax of
10%.
XY had profits before tax for the year of $1,200,000 and paid corporate income tax of $200,000.
Calculate how much underlying tax can EB claim for double taxation relief. (3 marks)
22 A company resident in Country X purchased land and buildings in January 20X5 for $155,000, of which
$55,000 was attributed to the land. The company incurred in the same month $50,000 for
refurbishment of the building, which was classified as capital expenditure according to local tax
regulations.
The land and buildings were sold for $425,000 in January 20X9, $100,000 of this price was
attributable to the land. The company paid $8,000 in disposal costs which were allowable for tax
purposes.
Local tax regulations allow for indexation of the purchase and refurbishment costs of the building. The
index has increased by 35% between January 20X5 and January 20X9. Capital gains are taxed at the
corporate income tax rate applicable in Country X.
Required
Calculate the capital gain arising on the sale of the land and buildings and the tax payable. Work to the
nearest $1. (3 marks)
(Total = 47 marks)
51 Objective test questions: Types of taxation II 99 mins

1 Excise duties are deemed to be most suitable for commodities that have certain specific characteristics.
List three characteristics of a commodity that, from a revenue authority's point of view, would make that
commodity suitable for an excise duty to be imposed. (3 marks)
2 Which of the following is an indirect tax?

A Withholding tax
B Employee tax
C Sales tax
D Company income tax (2 marks)
Questions 99
3 The cost of a sales tax is borne by which person?

A The supplier of raw materials
B The end consumer
C The retailer
D The wholesaler (2 marks)
4 DA and DB are entities resident in Country X. DA is a manufacturer and sells products to DB, a retailer,
for $500 excluding VAT. DB sells the products to customers for a total of $1,000 excluding VAT.
DA paid $200 plus VAT for the manufacturing cost of its products. All VAT is charged at the standard
rate.
Calculate the net VAT due to be paid by DA and DB for the products. (2 marks)
5 Country E uses a multi-stage sales tax system, where a cumulative sales tax is levied every time a sale is
made. The tax rate is 15% and tax paid on purchases is not recoverable. ZA and ZB are entities resident
in Country E.
ZA is a manufacturer and sells products to ZB, a retailer, for $500 excluding sales tax. ZB sells the
products to customers for a total of $1,000 excluding sales tax.
ZA paid $200 plus sales tax for the manufacturing cost of its products.
Calculate the total sales tax due to be paid on all of the sales of the products. (2 marks)
6 Which of the following types of taxes is regarded as an indirect tax?

A Taxes on income.
B Taxes on capital gains.
C Taxes on inherited wealth.
D Sales tax (Value added tax). (2 marks)
7 AE purchases products from a foreign entity and imports them into Country X. On import, the products are
subject to an excise duty of $5 per item and Value Added Tax (VAT).
AE purchased 200 items for $35 each and after importing them sold all of the items for $50 each plus
VAT. AE is resident in Country X. All VAT is charged at the standard rate.
How much is due to be paid to the tax authorities in Country X for these transactions?
A $450
B $1,450
C $2,050
D $2,500 (3 marks)
8 BZ is resident in Country X.
During the last VAT period, BZ, purchased materials and services costing $100,000, excluding VAT. All
materials and services were subject to VAT a the standard rate.
BZ converted the materials into two products Z and L. Product Z is zero rated and product L is standard
rated for VAT purposes.
During the VAT period, BZ made the following sales, excluding VAT:
$
Z 60,000
L 120,000
At the end of the period, BZ paid the net VAT due to the tax authorities.
Assuming BZ had no other VAT-related transactions, calculate how much VAT BZ paid. (2 marks)
100 Questions
9 CU and CZ are entities resident in Country X.

CU is a manufacturer and pays $115 including VAT for the raw materials to manufacture a batch of
clothing. CU sells the batch of clothing to a retailer CZ for $250 plus VAT. CZ unpacks the clothing and
sells the items separately to various customers for a total of $690 including VAT. VAT on clothing and
raw materials is charged at the standard rate.
Calculate how much VAT CU and CZ each have to pay to the tax authorities in respect of this one batch
of clothing. (2 marks)
10 GW is resident in Country X.
During the last VAT period GW purchased materials and services costing $138,000 including VAT. All
materials and services were at standard rate VAT.
GW converted the materials into two products A and B; product A is zero rated and product B is standard
During the VAT period, GW made the following sales, including VAT:
$
A 70,000
B 253,000
At the end of the period, GW paid the net VAT due to the tax authorities.
Assume no opening or closing inventory balances.
Assuming GW had no other VAT-related transactions, calculate GW's gross profit and the amount of VAT
that GW paid. (4 marks)
11 HN purchases products from a foreign country. The products cost $14 each and are subject to excise duty
of $3 per item and VAT at the standard rate. HN is resident in Country X.
If HN imports 1,000 items, how much does it pay to the tax authorities for this transaction?
A $2,100
B $5,100
C $5,550
D $19,550 (2 marks)
12 FE owns and runs a small retail store and is resident in Country X. The store's sales include items that are
zero rated, standard rated and exempt. FE's electronic cash register provides an analysis of sales. The
figures for the three months to 30 April 20X8 were:
Sales value, including
VAT where appropriate
$
Zero rated 13,000
Standard rated 18,400
Exempt 11,000
Total 42,400
FE's analysis of expenditure for the same period provided the following:
Expenditure, excluding
VAT
$
Zero rated purchases 6,000
Standard rated purchases relating to standard rate outputs 10,000
Standard rated purchases relating to zero rate outputs 4,000
Standard rated purchases relating to exempt outputs 5,000
25,000
Calculate the VAT due to/from FE for the three months ended 30 April 20X8. (3 marks)
Questions 101
13 Company G makes an accounting profit of $350,000 during the year. This includes non-taxable income
of $25,000 and depreciation of $30,000. In addition, $15,000 of the expenses are disallowable for tax
purposes. If the tax allowable depreciation totals $32,000, what is the taxable profit?
A $323,000
B $338,000
C $352,000
D $362,000 (2 marks)
14 Company G makes a taxable profit of $350,000 during the year. This includes adjustments for non-
taxable income of $25,000, depreciation of $30,000 and $15,000 disallowed expenses. If the tax
allowable depreciation totals $32,000, what is the accounting profit?
A $323,000
B $338,000
C $352,000
D $362,000 (2 marks)
15 Company G makes an accounting loss of $350,000 during the year. This includes non-taxable income of
$25,000 and depreciation of $30,000. In addition, $400,000 of the expenses are disallowable for tax
purposes. If the tax allowable depreciation totals $32,000, what is the taxable amount?
A $23,000 profit
B $23,000 loss
C $123,000 profit
D $123,000 profit (2 marks)
16 Company W makes a taxable profit of $50m during the year. This is after adjustments for non-taxable
income of $3m, depreciation of $15m and $1m disallowed expenses. If the tax allowable depreciation
totals $4m, what is the accounting profit?
A $38m
B $41m
C $58m
D $59m (2 marks)
17 Company M is resident in Country X and makes an accounting profit of $250,000 during the year. This
includes depreciation of $45,000 and disallowable expenses of $20,000. If the tax allowable
depreciation totals $30,000, what is the tax payable?
A $66,250
B $53,750
C $60,000
D $71,250 (2 marks)
18 Company B is resident in Country X and makes an accounting profit of $360,000 during the year. This
includes non-taxable income of $35,000 and depreciation of $40,000. In addition, $10,000 of the
expenses are disallowable for tax purposes. If the tax allowable depreciation totals $30,000, what is the
tax payable?
A $90,000
B $93,750
C $86,250
D $92,500 (2 marks)
102 Questions
19 Company RE is resident in Country X and makes an accounting profit of $500,000 during the year. This
includes non-taxable income of $25,000 and depreciation of $50,000.
The finance director finds that $5,000 of the expenses are disallowable for tax purposes. If the tax
allowable depreciation totals $60,000, what is the tax payable?
A $116,250
B $117,500
C $123,750
D $132,500 (2 marks)
20 Company G is resident in Country X and makes an accounting profit of $250,000 during the year. This is
after charging depreciation of $40,000 and tax disallowable expenses of $2,000. If the tax allowable
depreciation totals $30,000, what is the tax payable?
A $65,000
B $59,500
C $62,500
D $65,500 (2 marks)
21 E has an accounting profit before tax of $95,000. E is resident in Country X. The accounting profit
included non-taxable income from government grants of $15,000 and non-tax allowable expenditure of
$10,000 on entertaining expenses.
Calculate how much tax is E due to pay for the year. (2 marks)
22 AC made the following payments during the year ended 30 April 20X5:
$000
Operating costs (excluding depreciation) 23
Finance costs 4
Capital repayment of loans 10
Payments for the purchase of new computer equipment for use in AC's business 20
AC's revenue for the period was $45,000. AC is resident in Country X.
Calculate AC's tax payable for the year ended 30 April 20X5. (3 marks)
23 Country B has a corporate income tax system that treats capital gains/losses separately from trading
profits/losses. Capital gains/losses cannot be offset against trading profits/losses. All losses can be carried
forward indefinitely, but cannot be carried back to previous years. Trading profits and capital gains are
both taxed at 25%.
BD is resident in Country B and had no brought forward losses on 1 October 20X2. BD's results for 20X3
to 20X5 were as follows:
Trading profit/(loss) Capital gains/(loss)
$000 $000
Year to September 20X3 200 (100)
Year to September 20X4 (120) 0
Year to September 20X5 150 130
Calculate BD's corporate income tax due for each of the years ended 30 September 20X3 to 20X5.
(3 marks)
Questions 103
24 DZ recognised a tax liability of $290,000 in its financial statements for the year ended 30 September
20X5. This was subsequently agreed with and paid to the tax authorities as $280,000 on 1 March
20X6. The directors of DZ estimate that the tax due on the profits for the year to 30 September 20X6 will
be $320,000. DZ has no deferred tax liability.
What is DZ's tax charge in its statement of profit or loss and other comprehensive income for the year
ended 30 September 20X6?
A $310,000
B $320,000
C $330,000
D $600,000 (2 marks)
(Total = 55 marks)
52 Objective test questions: Deferred tax 77 mins

1 A company had a credit balance brought forward on current tax of $20,000. During the year it paid tax of
$18,000 and it has a provision for the current year of $50,000. It has increased the deferred tax
provision by $5,000. What is the total charge to tax for the year in the statement of profit or loss and
other comprehensive income?
A $53,000
B $55,000
C $57,000
D $68,000 (2 marks)
2 A company had a debit balance brought forward on current tax of $2,000. During the year it has paid no
tax and received a tax refund of $1,800. It has a provision for the current year of $30,000. It has
decreased the deferred tax provision by $5,000. What is the total charge to tax for the year in the
statement of profit or loss and other comprehensive income?
A $23,200
B $24,800
C $25,200
D $35,200 (2 marks)
3 In accounting for deferred tax, which of the following items can give rise to temporary differences?
1 Differences between accounting depreciation and tax allowances for capital expenditure
2 Expenses charged in the statement of profit or loss and other comprehensive income but
disallowed for tax
3 Revaluation of a non-current asset
4 Unrelieved tax losses
A 1, 3 and 4 only
B 1 and 2 only
C 3 and 4 only
104 Questions
4 Which of the following are examples of assets or liabilities whose carrying amount is always equal to their
tax base?
1 Accrued expenses that will never be deductible for tax purposes
2 Accrued expenses that have already been deducted in determining the current tax liability for
current or earlier periods
3 Accrued income that will never be taxable
4 A loan payable in the statement of financial position at the amount originally received, which is
also the amount eventually repayable
A 1 and 3 only
B 1 and 2 only
C 2 and 4 only
5 Which of the following statements about IAS 12 Income taxes are correct?
1 Companies may discount deferred tax assets and liabilities if the effect would be material.
2 The financial statements must disclose an explanation of the relationship between tax expense and
accounting profit.
3 Deferred tax may not be recognised in respect of goodwill unless any impairment of that goodwill is
deductible for tax purposes.
4 The tax base of an asset or liability is the amount attributed to that asset or liability for tax
purposes.
A All the statements are correct
B 2, 3 and 4 only are correct
C 1 and 4 only are correct
D None of the statements is correct. (2 marks)
6 The following information relates to an entity.

At 1 January 20X8, the net book value of non-current assets exceeded their tax written down value
by $850,000.
For the year ended 31 December 20X8, the entity claimed depreciation for tax purposes of $500,000
and charged depreciation of $450,000 in the financial statements.
During the year ended 31 December 20X8, the entity revalued a freehold property. The revaluation
surplus was $250,000. The entity has no plans to sell the property and realise the gain in the
foreseeable future.
The entity is resident in Country X.
Calculate the provision for deferred tax required by IAS 12 Income taxes at 31 December 20X8.
(2 marks)
7 A company had a credit balance brought forward on current tax of $25,000. During the year it has paid
no tax and received a tax refund of $2,500. It has a provision for the current year of $30,000. It has
decreased the deferred tax provision by $10,000. What is the total charge to tax for the year in the
statement of profit or loss and other comprehensive income?
A $5,000 debit
B $5,000 credit
C $7,500 debit
D $7,500 credit (2 marks)
Questions 105
8 A company had a credit balance brought forward on current tax of $25,000. During the year it paid tax of
$27,800. It has a provision for the current year of $28,000. It has increased the deferred tax provision
by $5,000. What is the total charge to tax for the year in the statement of profit or loss and other
comprehensive income?
A $31,200
B $33,000
C $33,800
D $35,800 (2 marks)
9 BC, a small entity, purchased its only non-current tangible asset on 1 October 20X3. The asset cost
$900,000, all of which qualified for tax depreciation.
BC's accounting depreciation policy is to depreciate the asset over its useful economic life of five years,
assuming a residual value of $50,000.
BC is resident in Country X.
Calculate BC's deferred tax balance required in the statement of financial position as at 30 September
20X5 according to IAS 12 Income taxes. (4 marks)
10 On 31 March 20X6, CH had a credit balance brought forward on its deferred tax account of $642,000.
There was also a credit balance on its corporate income tax account of $31,000, representing an over-
estimate of the tax charge for the year ended 31 March 20X5.
CH's taxable profit for the year ended 31 March 20X6 was $946,000. CH's directors estimated the
deferred tax provision required at 31 March 20X6 to be $759,000. CH is resident in Country X.
Calculate the income tax expense that CH will charge in its statement of profit of loss and other
comprehensive income for the year ended 31 March 20X6, as required by IAS 12 Income taxes.
(3 marks)
11 FD purchased an item of plant and machinery costing $600,000 on 1 April 20X5.

FD's policy in respect of plant and machinery is to charge depreciation on a straight line basis over five
years, with no residual value.
On 1 April 20X7, FD carried out an impairment review of all its non-current assets. This item of plant and
machinery was found to have a value in use of $240,000. FD adjusted its financial records and wrote the
plant and machinery down to its value in use on 1 April 20X7.
FD is resident in Country X and there are no other temporary differences in the period.
Calculate the amount of any deferred tax balances outstanding at 31 March 20X7 and 31 March 20X8.
(Work to the nearest $1,000.) (4 marks)
12 EE reported accounting profits of $822,000 for the period ended 30 November 20X7. This was after
deducting entertaining expenses of $32,000 and a donation to a political party of $50,000, both of
which are disallowable for tax purposes.
EE's reported profit also included $103,000 government grant income that was exempt from taxation. EE
paid dividends of $240,000 in the period.
Assume EE had no temporary differences between accounting profits and taxable profits.
EE is resident in Country X where a classical tax system applies.
Calculate EE's tax payable on its profits for the year to 30 November 20X7. (2 marks)
13 ED purchased new machinery for $400,000 on 1 October 20X5. For accounting purposes ED
depreciated the machinery on the reducing balance basis at 25% per year.
ED is resident in Country X.
Assume ED had no other temporary differences.
Calculate the amount of deferred tax that ED would show in its statement of financial position at 30
September 20X7. (3 marks)
106 Questions
14 HF purchased an asset on 1 April 20X7 for $220,000. HF depreciates the asset over eight years using
straight line depreciation, assuming no residual value. On 1 April 20X8, HF revalued the asset and
increased the net book value by $50,000. The asset's useful life was not affected. HF is resident in
Country X and there are no other temporary differences in the period.
Calculate the amount of deferred tax movement in the year ended 31 March 20X9 and the deferred tax
balance at 31 March 20X9, in accordance with IAS 12 Income taxes. (4 marks)
15 CY had the following amounts for 20X3 to 20X5:

Year ended 31 December: 20X3 20X4 20X5
$ $ $
Accounting depreciation for the year 1,630 1,590 1,530
Tax depreciation allowance for the year 2,120 1,860 1,320
At 31 December 20X2, CY had the following balances brought forward:
$
Cost of property, plant and equipment qualifying for tax depreciation 20,000
Accounting depreciation 5,000
Tax depreciation 12,500
CY had no non-current asset acquisitions or disposals during the period 20X3 to 20X5.
CY is resident in Country X.
Calculate the deferred tax provision required by IAS 12 Income taxes at 31 December 20X5. (3 marks)
16 DD purchased an item of plant and machinery costing $500,000 on 1 April 20X4.

DD's policy in respect of plant and machinery is to charge depreciation on a straight line basis over five
years, with no residual value. On 1 April 20X6, DD revalued the item of plant and machinery to
$420,000.
DD is resident in Country X and there are no other capital transactions in the three year period.
Calculate the amount of deferred tax to be included in DD's tax charge for the year ended 31 March
20X7, and the deferred tax provision to be included in its statement of financial position at 31 March
20X7. (4 marks)
(Total = 43 marks)
53 Section B questions: Taxation I 45 mins

(a) Briefly explain the following taxation terminology:
(i) Competent jurisdiction
(ii) Hypothecation
(iii) Taxable person
(iv) Regressive tax structure
(v) Tax gap. (5 marks)
(b) (i) Give a definition of an indirect tax and explain how it works. (3 marks)
(ii) There are two types of indirect taxes. State what these are and give two examples of each.
(2 marks)
(Total = 5 marks)
Questions 107
(c) On 1 January 20X3, SPJ had an opening credit balance of $5,000 on its tax account, which represented
the balance on the account after settling its tax liability for the previous year. SPJ had a credit balance on
its deferred tax account of $16 million at the same date.
SPJ has been advised that it should expect to pay $1 million tax on its trading profits for the year ended
31 December 20X3 and increase its deferred tax account balance by $150,000.
Required
Prepare extracts from the statement of profit or loss and other comprehensive income for the year ended
31 December 20X3, statement of financial position at that date and notes to the accounts showing the
tax entries required.
(5 marks)
P7 Pilot paper
(d) CW owns 40% of the equity shares in Z, an entity resident in a foreign country. CW receives a dividend of
$45,000 from Z; the amount received is after deduction of withholding tax of 10%. Z had before tax
profits for the year of $500,000 and paid corporate income tax of $100,000.
Required
(i) Explain the meaning of 'withholding tax' and 'underlying tax.' (2 marks)
(ii) Calculate the amount of withholding tax paid by CW. (1 mark)
(iii) Calculate the amount of underlying tax that relates to CW's dividend. (2 marks)
(Total = 5 marks)
P7 5/06
(e) EF is resident in Country X and imports perfumes and similar products in bulk. EF repackages the
products and sells them to retailers. EF is registered for Value Added Tax (VAT).
EF imports a consignment of perfume priced at $10,000 (excluding excise duty and VAT) and pays excise
duty of 20% and VAT on the total (including duty) at standard rate.
EF pays $6,900 repackaging costs, including VAT at the standard rate and then sells all the perfume for
$40,250 including VAT at the standard rate.
EF has not paid or received any VAT payments to/from the VAT authorities for this consignment.
Required
(i) Calculate EF's net profit on the perfume consignment.
(ii) Calculate the net VAT due to be paid by EF on the perfume consignment. (Total = 5 marks)
P7 11/07
(Total = 25 marks)
54 Section B questions: Taxation II 45 mins

(a) Governments use a range of specific excise duties as well as general sales taxes on goods.
Required
(i) Explain the reasons why a government might apply a specific excise duty to a category of goods.
(3 marks)
(ii) Explain the difference between a single stage and a multi-stage sales tax. (2 marks)
(Total = 5 marks)
P7 5/09
(b) Tax authorities have various powers to enforce compliance with the tax rules.
State what these powers are and give examples of each. (5 marks)
108 Questions
(c) What is withholding tax and why do tax authorities use it? Give two examples of payments affected by
withholding tax. (5 marks)
(d) Why do countries need to enter into double taxation agreements? What are the three main methods of
giving double taxation relief? (5 marks)
(e) (i) Explain the difference between tax avoidance and tax evasion. (2 marks)
(ii) Briefly explain the methods that governments can use to reduce tax avoidance and tax evasion.
(3 marks)
(Total = 5 marks)
(Total = 25 marks)
55 Section B questions: Taxation III 45 mins

(a) H is a major manufacturing entity. According to the entity's records, temporary differences of $2.00
million had arisen at 30 April 20X4 because of differences between the carrying amount of non-current
assets and their tax base, due to H claiming accelerated tax relief in the earlier years of the asset lives.
At 30 April 20X3, the temporary differences attributable to non-current assets were $2.30 million.
H is resident in Country X.
Required
Prepare the note in respect of deferred tax as it would appear in the financial statements of H for the year
ended 30 April 20X4. (Your answer should be expressed in $ million and you should work to two decimal
places.) (5 marks)
(b) B is a retail entity resident in Country X. It has a current tax liability brought forward from the year ended
30 April 20X3 of $750,000 and a deferred tax liability of $250,000.
On 30 April 20X4, the estimated tax charge for the year ended 30 April 20X4 was $1,400,000. The
actual tax charge for the year ended 30 April 20X3 was agreed with the tax authority and settled with a
payment of $720,000. The deferred tax liability needs to be increased to $300,000 as at 30 April 20X4.
Required
Prepare the notes in respect of current and deferred tax as they would appear in the financial statements
of B for the year ended 30 April 20X4. (Your answer should be expressed in $ million and you should
work to two decimal places.) (5 marks)
(c) DG purchased its only non-current tangible asset on 1 October 20X2. The asset cost $200,000, all of
which qualified for tax depreciation. DG's accounting depreciation policy is to depreciate the asset over its
useful economic life of five years on a straight-line basis, assuming no residual value, charging a full year's
DG sold the asset on 30 September 20X6 for $60,000.
DG's accounting period is 1 October to 30 September. DG is resident in Country X. No tax depreciation is
given in the year of disposal in Country X.
Required
(i) Calculate DG's deferred tax balance at 30 September 20X5.
(ii) Calculate DG's accounting profit/loss that will be recognised in its statement of profit or loss and
other comprehensive income on the disposal of the asset, in accordance with IAS 16 Property,
plant and equipment.
(iii) Calculate DG's tax balancing allowance/charge arising on the disposal of the asset. (5 marks)
P7 11/06
Questions 109
(d) AB acquired non-current assets on 1 April 20X3 costing $250,000. AB depreciates all non-current assets
at 20% a year on the straight line basis.
AB is resident in Country X.
Required
Apply IAS 12 Income taxes and calculate:
(i) the deferred tax balance required at 31 March 20X4
(ii) the deferred tax balance required at 31 March 20X5
(iii) the charge or credit to the statement of profit or loss and other comprehensive income for the year
ended 31 March 20X5 (5 marks)
P7 5/05
(e) FB commenced trading on 1 May 20X5 when it purchased all its non-current assets.
FB's non-current asset balances were:
Tax written down
Cost Net book value value
1 May 20X5 1 May 20X7 1 May 20X7
$ $ $
Land 20,000 20,000
Buildings 80,000 73,600 30,000
Plant and equipment 21,000 1,000 7,875
Furniture and fittings 15,000 5,000 5,625
FB did not purchase any non-current assets between 1 May 20X5 and 30 April 20X7. On 2 May 20X7,
FB disposed of all its plant and equipment for $5,000 and purchased new plant and equipment for
$30,000. FB is resident in Country X.
FB STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 APRIL 20X8

$
Gross profit 210,000
Gain on disposal of plant and equipment 4,000
Depreciation furniture and fittings (5,000)
Depreciation buildings (3,200)
Depreciation plant and equipment (6,000)
36,800
Finance cost (7,000)
Required
Calculate FB's corporate income tax due for the year ended 30 April 20X8. (5 marks)
(Total = 25 marks)
110 Questions
Mixed question banks

The following tax regime data is applicable to the mixed question banks.
Relevant tax rules

Corporate Profits
can be ignored:
recorded
Value Added Tax
Zero rated 0%
Standard rated 15%
56 Mixed objective test questions bank 1 (Specimen Paper) 36 mins

1 Which of the following statements is correct?
A Tax evasion is legally arranging affairs so as to minimise the tax liability. Tax avoidance is the
illegal manipulation of the tax system to avoid paying taxes due.
B Tax evasion is legally arranging affairs so as to evade paying tax. Tax avoidance is tax planning,
legally arranging affairs so as to minimise the tax liability.
C Tax evasion is using loop holes in legislation to evade paying tax. Tax avoidance is the illegal
manipulation of the tax system to avoid paying taxes due.
D Tax evasion is the illegal manipulation of the tax system to avoid paying taxes due. Tax avoidance
is tax planning, legally arranging affairs so as to minimise the tax liability. (2 marks)
Questions 111
2 A has been trading for a number of years and is resident for tax purposes in Country X. The tax written
down value of A's property, plant and equipment was $40,000 at 31 March 20X8. A did not purchase
any property, plant and equipment between 1 April 20X8 and 31 March 20X9.
A's statement of profit or loss and other comprehensive income for the year ended 31 March 20X9 is as
follows:
$
Depreciation - property, plant and equipment (12,000)
83,000
Administration expenses include entertaining of $15,000.

What is A's income tax due for the year ended 31 March 20X9?
A 8,750
B 13,750
C 15,500
D 22,250 (2 marks)
3 B buys goods from a wholesaler, paying the price of the goods plus VAT. B sells goods in its shop to
customers. The customers pay the price of the goods plus VAT.
From the perspective of B, the VAT would have
A Effective incidence
B Formal incidence
C Ineffective incidence
D Informal incidence (2 marks)
4 CT has taxable profits of $100,000 and pays 50% as dividends.

The total tax due is calculated as:
CT's corporate income tax ($100,000 25%) $25,000
CT's shareholder's personal income tax on dividends received ($50,000 20%) $10,000
Total tax due $35,000
The tax system in use here would be classified as a:
A Imputation tax system
B Partial imputation tax system
C Classical tax system
D Split rate tax system (2 marks)
5 The International Accounting Standards Board's Conceptual Framework for Financial Reporting (2010)
sets out four enhancing qualitative characteristics.
Timeliness and verifiability are two; state the other two. (2 marks)
6 The CIMA Code of Ethics for Professional Accountants sets out five principles that a professional
accountant is required to comply with. Two principles are objectivity and professional competence/due
care, list the other two. (2 marks)
112 Questions
7 The purpose of an external audit is to:

A Check the accounts are correct and to approve them.
B Enable the auditor to express an opinion as to whether the financial statements give a true and fair
view of the entity's affairs.
C Search for any fraud taking place in the entity.
D Check that all regulations have been followed in preparing the financial statements and to
authorise the financial statements. (2 marks)
8 Goodwill arising on acquisition is accounted for according to IFRS 3 Business combinations. Goodwill
arising on acquisition is:
A Carried at cost, with an annual impairment review
B Written off against reserves on acquisition
C Amortised over its useful life
D Revalued to fair value at each year end (2 marks)
9 IT has 300 items of product ABC2 in inventory at 31 March 20X9. The items were found to be damaged
by a water leak. The items can be repaired and repackaged for a cost of $1.50 per item. Once
repackaged, the items can be sold at the normal price of $3.50 each.
The original cost of the items was $2.20 each. The replacement cost at 31 March 20X9 is $2.75 each.
What value should IT put on the inventory of ABC2 in its statement of financial position at 31 March
20X9?
A $600
B $660
C $810
D $825 (2 marks)
10 (i) CD is Z's main customer.

(ii) FE is a supplier of Z.
(iii) ST is Z's chairman of the board and a major shareholder of Z.
(iv) K is Z's banker and has provided an overdraft facility and a $1,000,000 loan.
(v) JT is the owner of a building entity that has just been awarded a large building contract by Z. JT is
also the son of ST.
Which two of the above can be regarded as a related party of Z?
A (i) and (iii)
B (ii) and (iv)
C (iii) and (v)
D (iv) and (v) (2 marks)
(Total = 20 marks)
57 Mixed objective test questions bank 2 (5/10) 36 mins

1 An ideal tax system should conform to certain principles. Which one of the following statements is not
generally regarded as a principle of an ideal tax?
A It should be fair to different individuals and should reflect a person's ability to pay.
B It should not be arbitrary, it should be certain.
C It should raise as much money as possible for the government.
D It should be convenient in terms of timing and payment. (2 marks)
Questions 113
2 Which one of the following could be said to be a progressive tax?

A Property sales tax at 1% of the selling price of all properties sold.
B Value added tax at a rate of 0%, 10% or 15% depending on the type of goods or services
provided.
C Corporate wealth tax at 2% of total net assets up to $10 million then at 0.5% on total net assets
greater than $10 million.
D Personal income tax at 10% on earnings up to $10,000, then at 15% from $10,001 up to
$100,000 and 25% over $100,000. (2 marks)
3 An item of equipment cost $60,000 on 1 April 20X6. The equipment is depreciated at 20% per annum
on a reducing balance basis.
The amount of deferred tax relating to this asset that should be recognised in the statement of financial
position as at 31 March 20X9 is:
A $1,781
B $3,461
C $3,975
D $13,845 (2 marks)
4 The International Accounting Standards Board's (IASB)s Conceptual Framework for Financial Reporting
(2010) provides the framework for preparing financial information. Which one of the following does the
Conceptual Framework not cover?
A The format of financial statements
B The objective of financial statements
C Concepts of capital maintenance
D The elements of financial statements (2 marks)
5 The IASB's Conceptual Framework identifies faithful representation as one of the fundamental qualitative
characteristics of useful financial information. Which one of the following is not an element of faithful
representation?
A Information should be timely
B Information should be free from material error
C Information should be free from bias
D Information must be complete (2 marks)
6 OC signed a contract to provide office cleaning services for an entity for a period of one year from 1
October 20X8 for a fee of $500 per month.
The contract required the entity to make one payment to OC covering all twelve months' service in
advance. The contract cost to OC was estimated at $300 per month for wages, materials and
administration costs.
OC received $6,000 on 1 October 20X8.
How much profit/loss should OC recognise in its statement of profit or loss and other comprehensive
income for the year ended 31 March 20X9?
A $600 loss
B $1,200 profit
C $2,400 profit
D $4,200 profit (2 marks)
114 Questions
7 Which one of the following could be classified as deferred development expenditure in M's statement of
financial position as at 31 March 20X9 according to IAS 38 Intangible assets?
A $120,000 spent on developing a prototype and testing a new type of propulsion system for trains.
The project needs further work on it as the propulsion system is currently not viable.
B A payment of $50,000 to a local university's engineering faculty to research new environmentally
friendly building techniques.
C $35,000 spent on consumer testing a new type of electric bicycle. The project is near completion
and the product will probably be launched in the next twelve months. As this project is the first of
its kind for M it is expected to make a loss.
D $65,000 spent on developing a special type of new packaging for a new energy efficient light bulb.
The packaging is expected to be used by M for many years and is expected to reduce M's
distribution costs by $35,000 a year. (2 marks)
8 A finance lease for 6 years has an annual payment in arrears of $24,000. The fair value of the lease at
inception was $106,000. Using the sum of digits method, the liability for the lease at the end of year 2
is:
$000
A 58.0
B 77.9
C 86.1
D 115.9 (2 marks)
9 PQ has ceased operations overseas in the current accounting period. This resulted in the closure of a
number of small retail outlets.
Which one of the following costs would be excluded from the loss on discontinued operations?
A Loss on the disposal of the retail outlets
B Redundancy costs for overseas staff
C Cost of restructuring head office as a result of closing the overseas operations
D Trading losses of the overseas retail outlets up to the date of closure (2 marks)
10 The following balances were extracted from N's financial statements:

STATEMENT OF FINANCIAL POSITION (EXTRACT)
As at 31 December 20X8 As at 31 December 20X7
$000 $000
Non Current liabilities
Deferred tax 38 27
Current Liabilities
Current tax payable 119 106
FOR THE YEAR ENDED 31 DECEMBER 20X8 (EXTRACT)
$000
Income tax expense 122
The amount of tax paid that should be included in N's statement of cash flows for the year ended 31
December 20X8 is:
$000
A 98
B 109
C 122
D 241 (2 marks)
(Total = 20 marks)
Questions 115

1 CR is resident in Country X. CR makes a taxable profit of $750,000 and pays an equity dividend of
$350,000.
Equity shareholders pay tax on their dividend income at a rate of 30%.
If CR and its equity shareholders pay a total of $205,000 tax between them, what method of corporate
income tax is being used in Country X?
A The classical system
B The imputation system
C The partial imputation system
D The split rate system (2 marks)
2 Which one of the following is not a benefit of pay-as-you-earn (PAYE) method of tax collection?
A It makes payment of tax easier for the tax payer as it is in instalments.
B It makes it easier for governments to forecast tax revenues.
C It benefits the tax payer as it reduces the tax payable.
D It improves governments cash flow as cash is received earlier. (2 marks)
3 In relation to a Value Added Tax (VAT) system, which one of the following would be classified as the
formal incidence of VAT?
A The entity submitting a VAT return and making payment to the tax authorities.
B The date the tax is actually paid.
C The person that pays a retail entity for the goods plus VAT.
D A retail entity paying a wholesale entity for goods plus VAT. (2 marks)
4 Which one of the following is not a reason for governments to set deadlines for filing tax returns and
payment of taxes?
A To enable governments to enforce penalties for late payments.
B To ensure tax deducted at source by employers is paid over promptly.
C To ensure tax payers know when they have to make payment.
D To ensure that the correct amount of tax revenue is paid. (2 marks)
5 UF manufactures clothing and operates in Country X. UF and ZF are both registered for VAT.
UF manufactures a batch of clothing and pays expenses (taxable inputs at standard rate) of $1,000 plus
VAT. UF sells the batch of clothing to a retailer ZF for $2,875 including VAT at standard rate. ZF sells the
clothing items separately to various customers for a total of $6,900 including VAT at standard rate.
Calculate how much VAT UF and ZF each has to pay in respect of the above transactions. (2 marks)
6 An external auditor has completed an audit and is satisfied that proper records have been maintained and
that the financial statements reflect those transactions. However the auditor has one disagreement with the
management of the entity. The disagreement involves the treatment of one large item of expenditure that has
been classified by management as an increase in non-current assets. The auditor is of the opinion that the
item should have been classified as maintenance and charged as an expense to the statement of profit or
loss and other comprehensive income. The amount is material in the context of the reported profit for the
year.
Assuming that the management refuse to change their approach, which one of the following modified
audit reports should the auditor use?
A Emphasis of matter
B Except for qualification
C Adverse opinion
D Disclaimer of opinion (2 marks)
116 Questions
7 TS purchased 100,000 of its own equity shares in the market and classified them as treasury shares. At
the end of the accounting period TS still held the treasury shares.
Which one of the following is the correct presentation of the treasury shares in TSs closing statement of
financial position in accordance with IAS 32 Financial instruments: presentation?
A As a current asset investment
B As a non-current liability
C As a non-current asset
D As a deduction from equity (2 marks)
8 Which one of the following is not a topic included in the International Accounting Standards Board
(IASB)s Conceptual Framework for Financial Reporting (2010)?
A The objective of financial statements
B Concepts of capital maintenance
C Regulatory bodies governing financial statements
D Measurement of the elements of financial statements (2 marks)
9 Which one of the following would be regarded as a related party of Z in accordance with IAS 24 Related
party disclosures?
A FG is Zs banker and has provided an extensive overdraft facility on favourable terms.
B JK is Zs principal customer, accounting for 60% of its revenue.
C MN is Zs marketing director who holds 20% of Zs equity shares.
D QR is Zs main supplier, supplying nearly 50% of Zs purchases by value. (2 marks)
10 Which one of the following is not included in the definition of an operating segment in accordance with
IFRS 8 Operating Segments?
A A component of an entity that earns the majority of its revenue from sales to external customers.
B A component of an entity that engages in business activities from which it may earn revenues and
incur expenses.
C A component of an entity whose operating results are regularly reviewed by the entitys chief
operating decision maker, to make decisions about resource allocations and assess performance.
D A component of an entity for which discrete financial information is available. (2 marks)
(Total = 20 marks)

1 In Country Y, A earns $75,000 profit for the year and receives a tax bill for $17,000.
B earns $44,000 profit for the year and receives a tax bill for $4,800.
Country Ys income tax could be said to be a:
A Regressive tax
B Proportional tax
C Progressive tax
D Fixed rate tax (2 marks)
Questions 117
2 Tax deducted at source by employers from employees earnings and paid to government, often called pay-
as-you-earn (PAYE) has a number of advantages.
(i) Most of the administration costs are borne by the employer.
(ii) Employers may delay payment or fail to pay over PAYE deducted from employees.
(iii) Employers may be inefficient and not deduct any tax or deduct the wrong amount from employees.
(iv) Government receives a higher proportion of the tax due as defaults and late payments are fewer.
Which two of the above are not likely to be seen as an advantage of PAYE by the Government?
A (i) and (ii)
B (ii) and (iii)
C (ii) and (iv)
D (iii) and (iv) (2 marks)
3 The Organisation for Economic Co-operation and Developments (OECD) model tax convention defines
corporate residence.
In no more than 15 words complete the following sentence:
Under the OECD model an entity will have residence. (2 marks)
4 P is a trader resident in Country X. P imports products from a foreign country. Each unit costs $15.00 to
purchase and on import is subject to an excise duty of $3.00 per unit. P also has to pay VAT at standard
rate on all imports. If P imports 2,000 units how much would the tax authorities be due on import?
A $4,500
B $6,000
C $10,500
D $11,400 (2 marks)
5 Which two of the following are most likely to encourage an increase in the incidence of tax avoidance or
tax evasion?
(i) High penalties for any tax evasion
(ii) Imprecise and vague tax laws
(iii) A tax system that is seen as fair to everyone
(iv) Very high tax rates
A (i) and (ii)
B (ii) and (iii)
C (ii) and (iv)
6 According to IAS 8 Accounting policies, changes in accounting estimates and errors, which one of the
following is a change in accounting policy requiring a retrospective adjustment in financial statements for
the year ended 31 December 20X0?
A The depreciation of the production facility has been reclassified from administration expenses to
cost of sales in the current and future years.
B The depreciation method of vehicles was changed from straight line depreciation to reducing
balance.
C The provision for warranty claims was changed from 10% of sales revenue to 5%.
D Based on information that became available in the current period a provision was made for an
injury compensation claim relating to an incident in a previous year. (2 marks)
118 Questions
7 According to IFRS 8 Operating Segments which two of the following apply to reportable segments?
(i) The results of the segment must be prepared using the same accounting policies as are used for
the financial statements.
(ii) A reportable segment is a component of the entity whose operating results are regularly reviewed
by the entitys chief operating decision maker in order to make decisions about resource
allocations.
(iii) Information for reportable segments is required to be prepared based on products and geographical
areas.
(iv) A reportable segment is every segment that accounts for 10% or more of the sales revenue.
A (i) and (ii)
B (i) and (iii)
C (ii) and (iii)
D (ii) and (iv) (2 marks)
8 HA acquired 100% of SBs equity shares on 1 April 20X0 for $185,000. The values of SBs assets at
that date were:
Book value Fair value
$000 $000
Property 100 115
Plant and equipment 75 70
On 1 April 20X0 all other assets and liabilities had a fair value approximately equal to their book value.
SBs equity at 1 April 20X0 was:
$000
$1 equity shares 150
Share premium 15
Retained earnings (22)
Calculate the goodwill arising on the acquisition of SB. (2 marks)
9 The HC group acquired 30% of the equity share capital of AF on 1 April 20X0 paying $25,000.
At 1 April 20X0 the equity of AF comprised:
$
$1 equity shares 50,000
Share premium 12,500
Retained earnings 10,000
AF made a profit for the year to 31 March 20X1 (prior to dividend distribution) of $6,500 and paid a
dividend of $3,500 to its equity shareholders.
Calculate the value of HCs investment in AF for inclusion in HCs statement of financial position at 31
March 20X1. (2 marks)
10 HB sold goods to S2, its 100% owned subsidiary, on 1 November 20X0. The goods were sold to S2 for
$33,000. HB made a profit of 25% on the original cost of the goods.
At the year end, 31 March 20X1, 50% of the goods had been sold by S2. The remaining goods were
included in inventory.
Calculate the amount of the adjustment required to inventory in the consolidated statement of financial
position at 31 March 20X1. (2 marks)
(Total = 20 marks)
Questions 119
1 The following are common taxes used in many countries:

(i) Value added tax/sales tax
(ii) Corporate income tax
(iii) Import duty payable on petroleum and other products
(iv) Individual income tax deducted at source (such as PAYE)
Which of the above would normally be defined as a direct tax?
A (i) and (ii)
B (i) and (iv)
C (ii) and (iii)
2 Which one of the following defines a taxable capital gain?

A The growth in value of an investment in shares in another entity.
B Gains made on disposal of various types of investments or other assets.
C Gain made by an increase in an entitys own shares.
D Income from capital investments, for example dividends. (2 marks)
3 A country has a duty that is levied on all imported petroleum products. This levy is $5 per litre. This duty
could be said to be:
A General consumption tax
B Value added tax
C Specific unit tax
D Ad valorem tax (2 marks)
4 Define the meaning of tax evasion. (2 marks)
5 Corporate residence for tax purposes can be determined in different ways by different countries.
Which one of the following is not normally used to determine corporate residence for tax purposes?
A The country where management of the entity hold their meetings.
B The country of incorporation of the entity.
C The country where most of the entitys products are sold.
D The country from which control of the entity is exercised. (2 marks)
6 Which one of the following is not automatically regarded as a related party of an entity by IAS 24 Related
party disclosures?
A Directors of the entity.
B The entitys main customer, which accounts for 40% of the entitys sales volume.
C The entitys employee pension fund.
D A close relative of a director of the entity. (2 marks)
7 QR announced a rights issue of 1 for every 6 shares currently held, at a price of $2 each.
QR currently has 2,400,000 $1 ordinary shares with a quoted market price of $3.00 each. Directly
attributable issue costs will amount to $45,000.
Calculate the amount that will be credited to the share premium account in respect of the rights issue
assuming all rights are taken up and all monies are paid in full.
(2 marks)
120 Questions
8 HX acquired 100% of SAs equity shares on 1 July 2010 for $342,000. On 1 July 2010 the property
plant and equipment of SA had a fair value of $350,000 and a book value of $325,000. All other assets
and liabilities had a fair value approximately equal to their book value.
SA has $200,000 $1 equity shares in issue and at 1 July 2010 its reserves comprised share premium of
$40,000 and retained earnings of $62,000.
Calculate any goodwill arising on the acquisition of SA. (2 marks)
9 The HY group acquired 35% of the equity share capital of SX on 1 July 2010 paying $70,000. This
shareholding enabled HY group to exercise significant influence over SX.
At 1 July 2010 the equity of SX comprised:
$
$1 equity shares 100,000
SX made a profit for the year ended 30 June 2011 (prior to dividend distribution) of $130,000 and paid
a dividend of $80,000 to its equity shareholders.
Calculate the value of HYs investment in SX for inclusion in its consolidated statement of financial
position at 30 June 2011. (2 marks)
10 HW sold goods to SD, its 100% owned subsidiary on 1 February 2011. The goods were sold to SD for
$48,000. HW made a profit of 33.33% on the original cost of the goods.
At the year end, 30 June 2011, 40% of the goods had been sold by SD, the balance were still in SDs
inventory and SD had not paid for any of the goods.
Which ONE of the following states the correct adjustments required in the HW groups consolidated
statement of financial position at 30 June 2011?
A Reduce inventory and retained earnings by $7,200 and Reduce payables and receivables by $7,200
B Reduce inventory and retained earnings by $9,600 and Reduce payables and receivables by $9,600
C Reduce inventory and retained earnings by $7,200 and Reduce payables and receivables by $48,000
D Reduce inventory and retained earnings by $9,600 and Reduce payables and receivables by $48,000
(2 marks)
(Total = 20 marks)

1 Which one of the following would not normally be considered a principle of a modern tax system?
A Efficiency
B Equity
C Economic impact
D Raise revenues (2 marks)
2 Which one of the following is an example of formal incidence, but not effective incidence?
A An entity being assessed for corporate income tax by the tax authority.
B An individual purchasing goods in a shop, the price including VAT.
C An employee having tax deducted from salary through the PAYE system.
D An entity charging VAT on its sales and paying its net VAT to the tax authority. (2 marks)
3 Which one of the following does not give rise to a deferred tax adjustment?
A Entertaining expenses paid.
B Revaluation of a property.
C Depreciation of an asset that qualifies for tax writing down allowances.
D Tax losses that are carried forward for relief in future periods. (2 marks)
Questions 121
4 BCF purchased an asset for $600,000 on 1 September 2004. BCF incurred additional purchase costs of
$5,000.
lndexation of the cost of BCFs asset is allowed in Country X. The relevant index increased by 60% in the
period from 1 September 2004 to 31 August 2011.
BCF sold the asset on 1 September 2011 for $1,200,000. BCF incurred selling costs of $9,000
Assume all purchase and selling costs are tax allowable.
How much tax was due from BCF on disposal of its asset?
A $55,750
B $56,500
C $64,250
D $146,500 (2 marks)
5 Which one of the following defines the meaning of tax gap?

A The difference between the tax an entity expects to pay and the amount notified by the tax
authority.
B The difference between the total amount of tax due to be paid and the amount actually collected
by the tax authority.
C The difference between the due date for tax payment and the date it is actually paid.
D The difference between the amount of tax provided in the financial statements and the amount
actually paid. (2 marks)
6 Which one of the following would not be regarded as a related party of RST?
A RSTs chief executive officer.
B RSTs largest single shareholder holding 35% of RSTs equity shares.
C RSTs biggest customer, providing 55% of RSTs revenue.
D The wife of the chief executive officer of RST. (2 marks)
7 Which one of the following cannot be recognised as an intangible non-current asset in GHKs statement of
financial position at 30 September 2011?
A GHK spent $12,000 researching a new type of product. The research is expected to lead to a new
product line in 3 years time.
B GHK purchased another entity, BN on 1 October 2010. Goodwill arising on the acquisition was
$15,000.
C GHK purchased a brand name from a competitor on 1 November 2010, for $65,000.
D GHK spent $21,000 during the year on the development of a new product. The product is being
launched on the market on 1 December 2011 and is expected to be profitable. (2 marks)
8 Which one of the following would be classified by WDC as a non-adjusting event according to IAS 10
Events after the reporting period? WDCs year end is 30 September 2011.
A WDC was notified on 5 November 2011 that one of its customers was insolvent and was unlikely
to repay any of its debts. The balance outstanding at 30 September 2011 was $42,000.
B On 30 September WDC had an outstanding court action against it. WDC had made a provision in
its financial statements for the year ended 30 September 2011 for damages awarded against it of
$22,000. On 29 October 2011 the court awarded damages of $18,000.
C On 5 October 2011 a serious fire occurred in WDCs main production centre and severely
damaged the production facility.
D The year end inventory balance included $50,000 of goods from a discontinued product line. On 1
November 2011 these goods were sold for a net total of $20,000. (2 marks)
122 Questions
9 IFRS 8 Operating Segments requires information about operating segments to be disclosed in the
financial statements. According to IFRS 8 Operating Segments which one of the following defines an
operating segment.
An operating segment is a component of an entity:
A that is considered to be one of the entitys main products or services.
B whose operating results are regularly reviewed by the entitys chief operating decision maker.
C whose results contribute more than 10% of the entitys total sales revenue.
D whose assets are more than 10% of the entitys total assets. (2 marks)
10 On 28 September 2011, GY received an order from a new customer, ZZ, for products with a sales value
of $750,000. ZZ enclosed a deposit with the order of $75,000.
On 30 September 2011, GY had not completed the credit referencing of ZZ and had not despatched any
goods.
Which one of the following will correctly record this transaction in GYs financial statements for the year
ended 30 September 2011 according to IAS 18 Revenue:
A Debit Cash $75,000; Credit Revenue $75,000
B Debit Cash $75,000; Debit Trade Receivables $675,000; Credit Revenue $750,000
C Debit Cash $75,000; Credit Deferred Revenue $75,000
D Debit Trade Receivables $750,000; Credit Revenue $750,000 (2 marks)
(Total = 20 marks)

1 Which one of the following would be considered to be an example of an indirect tax?
A An entity assessed for corporate income tax on its profit.
B An individual purchases goods in a shop, the price includes VAT.
C An employee has tax deducted from salary through the PAYE system.
D An individual pays capital gains tax on a gain arising on the disposal of an investment. (2 marks)
2 Define the meaning of a tax base. (2 marks)
3 Which one of the following would cause a deferred tax balance to be included in the statement of
financial position for an entity, as required by IAS 12 Income taxes?
A An expense that is included in the statement of profit or loss and other comprehensive income but
is not allowed for tax.
B A non-current asset that does not qualify for tax depreciation.
C Tax depreciation being allowed on a non-current asset at a different annual rate to that used for
depreciation in the financial statements.
D Impairment of goodwill that arose on the acquisition of a subsidiary entity. (2 marks)
4 CFP, an entity resident in Country X, had an accounting profit for the year ended 31 December 2011 of
$860,000. The accounting profit was after charging depreciation of $42,000 and amortisation of
development costs of $15,000.
CFP was entitled to a tax depreciation allowance of $51,000 for the year to 31 December 2011.
CFPs tax payable for the year ended 31 December 2011 is:
A $202,250
B $206,500
C $212,750
D $216,500 (2 marks)
Questions 123
5 Which one of the following defines the meaning of hypothecation?

A A new tax law has to be passed each year to allow taxes to be legally collected.
B The difference between the total amount of tax due to be paid and the amount actually collected
by the tax authority.
C Tax is deducted from amounts due before they are paid to the recipient.
D The products of certain taxes are devoted to specific types of public expenditure. (2 marks)
6 Which one of the following would be regarded as a related party of CXZ?

A The wife of CXZs finance director.
B CXZs main supplier, supplying approximately 35% of CXZs purchases.
C CXZs biggest customer, providing 60% of CXZs annual revenue.
D CXZs banker providing CXZ with an overdraft facility and a short-term loan at market rates.
(2 marks)
7 Which one of the following events would result in an asset being recognised in KJHs statement of
financial position at 31 January 2012?
A KJH spent $50,000 on an advertising campaign in January 2012. KJH expects the advertising to
generate additional sales of $100,000 over the period February to April 2012.
B KJH is taking legal action against a contractor for faulty work. Advice from its legal team is that it
is likely that KJH will receive $250,000 in settlement of its claim within the next 12 months.
C KJH purchased the copyright and film rights to the next book to be written by a famous author for
$75,000 on 1 March 2011.
D KJH has developed a new brand name internally. The directors value the brand name at
$150,000. (2 marks)
8 Briefly explain how operating segments disclosed in the financial statements are determined according to
IFRS 8 Operating Segments. (2 marks)
9 IAS 18 Revenue specifies conditions that are required to be met before revenue from the sale of goods
can be recognised.
List four of the conditions specified in IAS 18. (4 marks)
(Total = 20 marks)

1 Complete the following sentence.
Under the OECD model tax convention an entity will generally have residence for tax purposes in
(2 marks)
2 XZ sells two types of product, A and B. A is standard rated for VAT purposes and B is zero rated. All
purchases have incurred VAT at standard rate.
XZs sales (inclusive of VAT where applicable) for the three months to 31 March 2012 were:
$
A 63,250
B 24,150
87,400
XZs purchases for the three months to 31 March 2012 were $32,333 exclusive of VAT.
Calculate the amount of VAT that XZ is due to pay for the three months to 31 March 2012.
(2 marks)
124 Questions
3 An entity earns a profit of $60,000 for the year to 31 March 2012. The entity is assessed as owing
$15,000 tax for the year. Which ONE of the following types of tax would best describe the tax due?
A Capital tax.
B Income tax.
C Wealth tax.
D Consumption tax. (2 marks)
4 List two possible powers that a tax authority may be granted to enable it to enforce tax regulations.
(2 marks)
5 A customer purchases goods for $115, inclusive of VAT. From the customers point of view the VAT could
be said to be:
A a direct tax with formal incidence.
B an indirect tax with formal incidence.
C a direct tax with effective incidence.
D an indirect tax with effective incidence. (2 marks)
6 Which one of the following is not a fundamental ethical principle indentified in CIMAs code of ethics?
A Professional competence.
B Professional behaviour.
C Integrity.
D Independence. (2 marks)
7 Which one of the following would not be regarded as a responsibility of the IASB?
A Responsibility for all IFRS technical matters.
B Publish IFRSs.
C Overall supervisory body of the IFRS organisations.
D Final approval of interpretations by the IFRS Interpretations Committee. (2 marks)
8 TY is the main contractor employing sub-contractors to assist it when required.

TY has recently completed a contract replacing a roof on the local school. Despite this, the roof has been
leaking and some sections are now unsafe. The school is suing TY for $20,000 to repair the roof.
TY used a sub-contractor to install the roof and regards the sub-contractors work as faulty. TY has raised
a court action against the sub-contractor claiming the cost of the schools action plus legal fees, a total of
$22,000.
TY has been informed by legal advisers that it will probably lose the case brought against it by the school
and will probably win the case against the sub-contractor.
How should these items be treated in TYs financial statements?
A A provision should be made for the $20,000 liability and the case against the sub- contractor ignored.
B A provision should be made for the $20,000 liability and the probable receipt of cash from the
case against the sub-contractor disclosed as a note.
C No provisions should be made but the $20,000 liability should be disclosed as a note.
D A provision should be made for the $20,000 liability and the probable receipt of cash from the
case against the sub-contractor recognised as a current asset. (2 marks)
Questions 125
9 BN has an asset that was classified as held for sale at 31 March 2012. The asset had a carrying value of
$900 and a fair value of $800. The cost of disposal was estimated to be $50.
According to IFRS 5 Non-current Assets Held for Sale and Discontinued Operations, which one of the
following values should be used for the asset in BNs statement of financial position as at 31 March
2012?
A $750
B $800
C $850
D $900 (2 marks)
10 MN obtained a government licence to operate a mine from 1 April 2011. The licence requires that at the
end of the mines useful life, all buildings must be removed from the site and the site landscaped. MN
estimates that the cost of this decommissioning work will be $1,000,000 in ten years time (present
value at 1 April 2011 $463,000) using a discount factor of 8%.
According to IAS 37 Provisions, contingent liabilities and contingent assets how much, to the nearest
$1,000, should MN include in provisions in its statement of financial position as at 31 March 2012?
A $100,000
B $463,000
C $500,000
D $1,000,000 (2 marks)
(Total = 20 marks)

1 Which one of the following is not generally considered a source of tax rules?
A Precedents based on previous legislation
B Directives from international bodies, such as the EU
C Tax assessments issued by the local tax authority
D Double tax treaties with other countries (2 marks)
2 GX sold an asset on 31 March 2012 for $10,000. The asset cost $90,000 and at 31 March 2012 had
accumulated depreciation of $85,000.
The asset was eligible for tax depreciation and at 31 March 2012 its accumulated tax depreciation was
$75,760.
What was the balancing allowance on the disposal of the asset?
A $4,240
B $5,000
C $9,240
D $14,240 (2 marks)
3 HY is registered for VAT in Country X.

HY purchased a consignment of goods for $70,000 plus VAT at the standard rate and then sold the
goods for $138,000 inclusive of VAT at the standard rate.
How much profit should HY record in its statement of profit or loss and other comprehensive income for
this consignment?
A $50,000
B $57,500
C $68,000
D $77,130 (2 marks)
126 Questions
4 Complete the following sentence.

A schedular system of tax is .................................................................................... (2 marks)
5 Assume that Countries M; N; O and P each has a double tax treaty with each other based on the OECD
model tax convention.
JZ is incorporated in Country M
JZ earns the majority of its revenue from Country N
JZ holds its management board meetings in Country O
JZ raises most of its finance and operating capital in Country P
In which country will JZ be deemed to be resident for tax purposes?
A Country M
B Country N
C Country O
D Country P (2 marks)
6 Which one of the following is not a common threat identified in CIMAs code of ethics?
A Self interest
B Bias
C Self review
D Familiarity (2 marks)
7 List two of the responsibilities of the IFRS Interpretations Committee? (2 marks)
8 EH is resident in Country X. EH purchased an asset on 1 April 2005 for $420,000, incurring additional
import duties of $30,000. The relevant index increased by 40% in the period from 1 April 2005 to 31
March 2012.
EH sold the asset on 31 March 2012 for $700,000, incurring selling costs of $10,000.
Assume all purchase and selling costs are allowable for tax purposes.
How much tax was due from EH on disposal of its asset? (2 marks)
9 CF, a contract cleaning entity, signed a contract to provide 12 months cleaning of an office block. The
contract for $12,000 commenced on 1 June 2012. The terms of the contract provided for payment six
monthly in advance on 1 June and 1 December 2012. CF received $6,000 and started work on 1 June
2012.
How should CF account for the contract in its financial statements for the year ended 30 June 2012?
A Debit cash $6,000 and credit revenue $6,000
B Debit cash $6,000, credit revenue $1,000 and credit deferred income $5,000
C Debit cash $6,000, debit receivables $6,000 and credit revenue $12,000
D Debit cash $6,000 and credit deferred income $6,000 (2 marks)
10 According to IFRS 8 Operating segments which one of the following defines an operating segment?
An operating segment is a component of an entity:
A whose results contribute more than 10% of the entitys total sales revenue.
B that is considered to be one of the entitys main geographical areas of operation
C whose operating results are regularly reviewed by the entitys chief operating decision maker.
D whose results contribute more than 10% of the entitys total profit. (2 marks)
(Total = 20 marks)
Questions 127

1 Taxes commonly used by many countries include:
(i) import duty payable on specific types of imported goods;
(ii) individual income tax, usually deducted at source;
(iii) corporate income tax;
(iv) value added tax.
Which of the above would normally be defined as direct taxation?
A (i) and (ii)
B (i) and (iv)
C (ii) and (iii)
2 Which one of the following is not part of the process of developing a new International Financial
Reporting Standard (IFRS)?
A Issuing a discussion paper that sets out the possible options for a new standard.
B Publishing clarification of an IFRS where conflicting interpretations have developed.
C Drafting an IFRS for public comment.
D Analysing the feedback received on a discussion paper. (2 marks)
3 At 1 October 2011 DX had the following balances in respect of property, plant and equipment:
Cost $220,000
Tax written down value $82,500
Statement of financial position:
Carrying value $132,000
DX depreciates all property, plant and equipment over 5 years using the straight line method and no
residual value. All assets were less than 5 years old at 1 October 2011.
No assets were purchased or sold during the year ended 30 September 2012.
DXs deferred tax balance (to the nearest $) in its statement of financial position at 30 September 2012
will be:
A $5,843
B $6,531
C $12,375
D $23,375 (2 marks)
4 The IASBs Conceptual Framework for Financial Reporting (2010) lists two fundamental qualitative
characteristics of useful financial information, one of which is faithful representation.
Which one of the following lists describes the three characteristics of faithful representation?
A Neutrality, free from error and comparability.
B Free from error, materiality and relevance.
C Comparability, understandability and completeness.
D Neutrality, completeness and free from error. (2 marks)
5 An external auditor gives a modified audit report that is a disclaimer of opinion.

This means that the auditor has:
A Been unable to access sufficient appropriate audit evidence.
B Been unable to agree with the directors over an accounting treatment of a material item.
C Found a few immaterial errors that have no impact on the auditors opinion.
D Found many errors causing material misstatements and has concluded that the financial
statements do not present fairly the financial position and financial performance. (2 marks)
128 Questions
6 E, a trainee management accountant, prepares an annual analysis of the performance of all staff,
including her own. The analysis is used by the financial director to calculate staff bonuses each year.
According to the CIMA code of ethics for professional accountants which one of the threats listed below
would apply to E?
A Advocacy threat
B Intimidation threat
C Familiarity threat
D Self-interest threat (2 marks)
7 Which one of the following would be shown in a statement of cash flow using the direct method but not
in a statement of cash flow using the indirect method of calculating cash generated from operations?
A Cash payments to employees
B Increase/(decrease) in receivables
C Depreciation
D Finance costs (2 marks)
8 Accounting and information disclosure practices are influenced by a variety of factors around the world.
Identify one of these factors and briefly explain how it influences accounting and information disclosure.
(2 marks)
9 IAS 10 Events after the reporting period distinguishes between adjusting and non-adjusting events.
Which one of the following is an adjusting event in XSs financial statements?
A A dispute with workers caused all production to cease six weeks after the year end.
B A month after the year end XSs directors decided to cease production of one of its three product
lines and to close the production facility.
C One month after the year end a court determined a case against XS and awarded damages of
$50,000 to one of XSs customers. XS had expected to lose the case and had set up a provision of
$30,000 at the year end.
D Three weeks after the year end a fire destroyed XSs main warehouse facility and most of its
inventory. (2 marks)
10 LP received an order to supply 10,000 units of product A every month for 2 years. The customer had
negotiated a low price of $200 per 1,000 units and agreed to pay $12,000 in advance every 6 months.
The customer made the first payment on 1 July 2012 and LP supplied the goods each month from 1 July
2012.
LPs year end is 30 September.
In addition to recording the cash received, how should LP record this order, in its financial statements for
the year ended 30 September 2012, in accordance with IAS 18 Revenue?
A Include $6,000 in revenue for the year and create a trade receivable for $36,000
B Include $6,000 in revenue for the year and create a current liability for $6,000
C Include $12,000 in revenue for the year and create a trade receivable for $36,000
D Include $12,000 in revenue for the year but do not create a trade receivable or current liability
(2 marks)
(Total = 20 marks)
Questions 129

1 AB made a profit of $320,000 for the year ended 31 December 2012 and paid $80,000 tax on its
profits. AB pays a gross dividend of $150,000 to its holding company, which operates in a foreign
country. When AB pays the dividend it deducts a 10% tax. This 10% tax is called:
A underlying tax.
B corporate income tax.
C foreign tax.
D withholding tax. (2 marks)
2 Which one of the following is a function of the IFRS Foundation?

A Complete responsibility for the preparation and publication of International Financial Reporting
Standards (IFRSs).
B Approving annually the budget and determining the funding of the International Accounting
Standards Board (IASB).
C To inform the IASB of the views of organisations and individuals on major standard setting
projects.
D To review new financial reporting issues not yet covered by an IFRS. (2 marks)
3 Accounting depreciation is usually disallowed when calculating tax due by an entity and a deduction for
tax depreciation is given instead.
Explain one reason why accounting depreciation is replaced with tax depreciation in a tax computation?
(2 marks)
4 Which one of the following is stated as an underlying assumption according to the IASBs Framework for
the Preparation and Presentation of Financial Statements (Framework)?
A Neutrality
B Accruals
C Relevance
D Prudence (2 marks)
5 An external auditor gives a modified audit report that is an adverse opinion.

This means that the auditor:
A Has been unable to agree with the directors over an accounting treatment of a material but not
pervasive item.
B Has been unable to access important accounting records.
C Was unable to attend the inventory count and is unable to agree the inventory value, which is
material.
D Has found many errors causing material misstatements in the financial statements. (2 marks)
6 R, a trainee management accountant is employed by JH. R has prepared the draft annual financial
statements for JH and presented them to JHs Chief Executive prior to the executive board meeting. The
Chief Executive has told R that the profit reported in the financial statements is too low and must be
increased by $500,000 before the financial statements can be approved by the executive board.
Which one of the threats listed below would apply to R in this situation, according to the CIMA code of
ethics for professional accountants?
A Advocacy threat
B Self-review threat
C Intimidation threat
D Self-interest threat (2 marks)
130 Questions
7 IAS 7 Statement of cash flows sets out the three main headings to be used in a statement of cash flows.
Items that may appear on a statement of cash flows include:
(i) Tax paid
(ii) Purchase of investments
(iii) Loss on disposal of machinery
(iv) Purchase of equipment
Which of the above items would be included under the heading Cash flows from operating activities
according to IAS 7?
A (i) and (ii)
B (i) and (iii)
C (ii) and (iv)
8 The IASB Framework identifies several different user groups of financial statements.
List four user groups identified by the Framework. (2 marks)
9 Which one of the following would be regarded as a related party transaction of the entity NV?
A A close family member of the Chief Executive of NV purchased an asset from NV.
B XYZ Bank lends NV $100,000 on commercial loan terms.
C The government of Country X awarded NV a grant of $25,000 to help fund a new production
facility.
D YU supplies 60% of NVs raw materials. (2 marks)
10 IAS 18 Revenue sets out criteria for the recognition of revenue from the sale of goods.
Which one of the following is not a criterion specified by IAS 18 for recognising revenue from the sale of
goods?
A The seller no longer retains any influence or control over the goods.
B The cost to the seller can be measured reliably.
C The buyer has paid for the goods.
D The significant risks and rewards of ownership have been transferred to the buyer. (2 marks)
(Total = 20 marks)

1 An entity makes a taxable profit of $500,000 and pays corporate income tax at 25%. The entity pays a
dividend to its shareholders. A shareholder receiving $5,000 dividend then pays the standard personal
income tax rate of 15% on the dividend, paying a further $750 tax.
The tax system could be said to be:
A A classical system
B An Imputation system
C A partial imputation system
D A split rate system (2 marks)
Questions 131
2 Tax authorities use various methods to reduce tax avoidance and tax evasion.
(i) Increase tax rates to compensate for losses due to evasion.
(ii) Make the tax structure as complicated as possible.
(iii) Increase the perceived risk by auditing tax returns.
(iv) Simplify the tax structure, minimising allowances and exemptions.
Which of the above methods could be used to help reduce tax evasion and avoidance?
A (i) and (ii)
B (i) and (iv)
C (ii) and (iii)
3 List two of the main methods of giving double taxation relief. (2 marks)
4 CG purchased an asset on 1 April 2006 for $650,000, exclusive of import duties of $25,000. CG is
resident in Country X where the indexation factor increased by 50% in the period from 1 April 2006 to 31
March 2013.
CG sold the asset on 31 March 2013 for $1,200,000 incurring transaction charges of $17,000.
Calculate the capital gains tax due from CG on disposal of the asset. (2 marks)
5 Which one of the following gives the meaning of rollover relief?

A Trading losses can be carried forward to future years.
B Inventory can be valued using current values instead of original cost.
C Capital losses made in a period can be carried forward to future years.
D Payment of tax on a capital gain can be delayed if the full proceeds from the sale of an asset are
reinvested in a replacement asset. (2 marks)
6 Countries are subject to a variety of economic, social and political factors. In some countries accounting
rules are largely driven by taxation laws. The legal system in these countries is known as:
A Case law
B Common law
C Code law
D Tax law (2 marks)
7 List two potential benefits of global harmonisation of accounting standards to multinational entities.
(2 marks)
8 List two functions of the IFRS Advisory Council. (2 marks)
9 The IASBs Conceptual Framework for Financial Reporting (2010) splits qualitative characteristics of
useful information into two categories, fundamental and enhancing.
List the two fundamental qualitative characteristics. (2 marks)
10 An external audit report usually has the following 5 sections:

(i) Title and addressee
(ii) Introduction
(iii) Scope
(iv) ***
(v) Signature and name of audit firm
State the section marked (iv). (2 marks)
(Total = 20 marks)
132 Questions
68 Mixed section B questions bank 1 (Specimen Paper) 54 mins

(a) ATOZ operates in several countries as follows:
ATOZ was incorporated in country BCD many years ago. It has curtailed operations in BCD but still
has its registered office in country BCD and carries out a small proportion (less than 10%) of its
trade there.
ATOZ buys most of its products and raw materials from country FGH.
ATOZ generates most of its revenue in country NOP and all its senior management live there and
hold all the management board meetings there.
Required
(i) Explain why determining corporate residence is important for corporate income tax. (2 marks)
(ii) Explain which country ATOZ will be deemed to be resident in for tax purposes (3 marks)
(Total = 5 marks)
(b) WX operates a retail business in country X and is registered for VAT purposes.
During the last VAT period WX had the following transactions:
Purchases of materials and services, all at standard VAT rate, $130,000 excluding VAT.
Purchase of new machinery, $345,000, inclusive of VAT.
Sales of goods in the period, all inclusive of VAT where applicable, were:
Sales of goods subject to VAT at standard rate $230,000
Sales of goods subject to VAT at zero rate $115,000
Assume you are WX's trainee management accountant and you have been asked to prepare the VAT
return and calculate the net VAT due to/from the tax authorities at the end of the period.
Assume WX has no other transactions subject to VAT and that all VAT paid can be recovered.
Required
(i) Explain the difference between a single stage sales tax and VAT. (2 marks)
(ii) Calculate the net VAT due to/from WX at the end of the period. (3 marks)
(Total = 5 marks)
(c) Country K uses prescriptive accounting standards. Country K's standard on intangible assets has a list of
intangible assets covered by the standard and an extensive list of items that are not allowed to be
recognised as assets. RS has incurred expenditure on a new product that does not appear to be
specifically listed as "not allowed" by the standard. RS's management want to classify the expenditure as
an intangible non-current asset in RS's statement of financial position. They argue that the type of
expenditure incurred is not listed in the accounting standard as being "not allowed" therefore it is allowed
to be capitalised.
RS's auditors have pointed out that the expenditure is not listed as being "allowed" and therefore should
not be capitalised.
Required
Explain the possible advantages of having accounting standards based on principles rather than being
prescriptive. Use the scenario above to illustrate your answer. (Total = 5 marks)
(d) BD is a well established double glazing business, manufacturing building extensions, doors and windows
in its own manufacturing facility and installing them at customer properties.
BD's financial statements for the year ended 31 March 20X7 showed the manufacturing facility and
installation division as separate reportable segments.
On 1 March 20X8, BD's management decided to sell its manufacturing facility and concentrate on the
more profitable selling and installation side of the business.
Questions 133
At BD's accounting year end, 31 March 20X8, BD had not found a buyer for its manufacturing facility and
was continuing to run it as a going concern. The facility was available for immediate sale; the
management were committed to the sale and were actively seeking a buyer. They were quite sure that the
facility would be sold before 31 March 20X9.
The manufacturing facility's fair value at 31st March 20X8 was $2.8 million, comprising total assets with
a fair value of $3.6 million and liabilities with a fair value of $0.8 million. BD's management accountant
calculated that the manufacturing facility had incurred a loss for the year of $0.5 million before tax and
the estimated cost of selling the manufacturing facility was $0.2 million.
Required
Explain, with reasons, how BD should treat the manufacturing facility in its financial statements for the
year ended 31 March 20X8. (Total = 5 marks)
(e) L leases office space and a range of office furniture and equipment to businesses. On 1 April 20X8 C
acquired a lease for a fully furnished office space (office space plus office furniture and equipment) and a
separate lease for a computer system from L.
The office space was a lease of part of a large building and the building had an expected life of 50 years.
The lease was for 5 years with rental payable monthly. The first year was rent free. The $1,000 per
month rental commenced on 1 April 20X9.
The computer system lease was for 3 years, the expected useful life of the system was 3 years. The
$15,000 per year lease rental was due annually in arrears commencing with 31 March 20X9. The
interest rate implicit in the lease is 12.5% and the cost of the leased asset at 1 April 20X8 was $35,720.
C depreciates all equipment on the straight line basis.
Under the terms of the computer system lease agreement C is responsible for insuring, servicing and
repairing the computers. However, L is responsible for insurance, maintenance and repair of the office.
C allocates the finance charge for finance leases using the actuarial method.
Required
Explain the accounting treatment, required by international financial reporting standards, in the financial
statements of C in respect of the two leases for the year ended 31 March 20X9. (Total = 5 marks)
(f) PS issued 1,000,000 $1 cumulative, redeemable preferred shares on 1 April 20X8. The shares were
issued at a premium of 25% and pay a dividend of 4% per year.
The issue costs incurred were $60,000. The shares are redeemable for cash of $1.50 on 31 March
20Y8. The effective interest rate is 5.18%. Ignore all tax implications.
The management accountant of PS has extracted the following amounts from the preferred shares ledger
account, for the year ended 31 March 20X9:
Account Non-current liability Preferred shares
$
Net amount received on issue 1,190,000
Finance cost @5.18% 61,642
Less dividend paid (40,000)
Balance at 31 March 20X9 1,211,642
Required
(i) Explain the IAS 32 Financial instruments: presentation and IAS 39 Financial instruments:
recognition and measurement requirements for the presentation and measurement of an issue of
preferred shares. (3 marks)
(ii) Using the information provided above, explain the amounts that PS should include for the
preferred shares in its statement of profit or loss and other comprehensive income and statement
of financial position for the year ended 31 March 20X9. (2 marks)
(Total = 5 marks)
(Total = 30 marks)
134 Questions
69 Mixed section B questions bank 2 (5/10) 54 mins

(a) Cee has reduced her tax bill by taking advice from a tax expert and investing her surplus cash in
government securities. The income from government securities is free of tax.
Gee works as a night security guard for a local entity and also has a job working in a supermarket during
the day. Gee has reduced his tax bill by declaring only his day job income on his annual tax return.
Required
Explain the difference between tax evasion and tax avoidance, using Cee and Gee to illustrate your
answer. (5 marks)
(b) W is a business in Country X, that uses locally grown fruit and vegetables to make country wines. During
20X8 W paid $30,000 plus VAT for the ingredients and other running costs.
When the wine is bottled W pays $1 tax per bottle to the tax authority. During 20X8 W produced 10,000
bottles.
W sold all the wine to retailers for an average price of $8.05 per bottle, including VAT at standard rate.
Required
(i) Explain the difference between unit taxes and ad valorem taxes, using the scenario above to
illustrate your answer. (3 marks)
(ii) Calculate the amounts of indirect tax payable by W for the year ended 31 December 20X8.
(2 marks)
(Total = 5 marks)
(c) H, an entity, carries out business in Country X, buying and selling goods.
The senior management of H meet regularly in the entity's offices in Country X.
H owns 100% of S, an entity that buys and sells goods in Country Y. The senior management of S meet
regularly in the entity's offices in Country Y. S reported a profit of $500,000 for 20X8 and received an
income tax bill from Country Y's tax authority for $100,000.
S has declared a dividend of $200,000 and is required to deduct tax at 10% before remitting cash to
overseas investors, such as H.
Assume Country X and Country Y have a double tax agreement based on the Organisation for Economic
Co-Operation and Development (OECD) Model Tax Convention.
Required
Explain the terms "competent jurisdiction" and "withholding tax". Illustrate how each relates to the H
group. (5 marks)
(d) B's profits have suffered due to a slow-down in the economy of the country in which it operates. AB's draft
financial statements show revenue of $35 million and profit before tax of $4 million for the year ended 31
December 20X8.
AB's external auditors have identified a significant quantity of inventory that is either obsolete or seriously
impaired in value. The audit senior has calculated the inventory write-down of $1 million. AB's directors
have been asked by the audit senior to record this in the financial statements for the year ended 31
December 20X8.
AB's directors are refusing to write-down the inventory at 31 December 20X8, claiming that they were not
aware of any problems at that date and furthermore do not agree with the auditor that there is a problem
now. The directors are proposing to carry out a stock-take at 31 May 20X9 and to calculate their own
inventory adjustment, if required. If necessary the newly calculated figure will be used to adjust inventory
values in the year to 31 December 20X9.
Questions 135
Required
(i) Explain the objective of an external audit. (2 marks)
(ii) Assuming that AB's directors continue to refuse to amend the financial statements, explain the
type of audit report that would be appropriate for the auditors to issue. (3 marks)
(Total = 5 marks)
(e) On 1 April 20X7 CC started work on a three year construction contract. The fixed value of the contract is
$63 million.
During the year ended 31 March 20X8 CC's contract costs escalated.
The value of work done and the cash received for the two years to 31 March 20X9 are summarised
below:
Year to 31 March 20X9 Year to 31 March 20X8
Percentage of work completed in year 40% 35%
Cost incurred in year $26 million $18 million
Estimated further costs after the year end
to complete project $20 million $36 million
Progress payments received in the year $22 million $15 million
Amounts recognised by CC in its statement of profit or loss and other comprehensive income for the year
ended 31 March 20X8:
Revenue $22 million

Cost of sales $18 million
Required
Calculate the amounts to be recorded for the above contract in CC's statement of profit or loss and other
comprehensive income for the year ended 31 March 20X9 and in the statement of financial position at
that date.
Show all calculated figures to the nearest $ million. (5 marks)
(f) AD operates five factories in different locations in a country. Each factory produces a different product line
and each product line is treated as a separate segment under IFRS 8 Operating Segments.
One factory, producing a range of shoes, had an increased annual loss of an estimated $2,000,000 for
the year to 31 March 20X9. On 1 March 20X9 AD's management decided to close the factory and cease
the sale of it's range of shoes. Closure costs, net of any gains on disposal of the assets, are estimated as
$150,000.
On 31 March 20X9 AD's management is still negotiating payment terms with the shoe factory workforce
and has not agreed an actual closure date. AD has not yet attempted to find a buyer for the factory or its
assets.
AD's management wants to completely exclude the shoe factory results from AD's financial statements for
the year ended 31 March 20X9. They argue that as the shoe factory is about to be closed or sold, it
would mislead investors to include the results of the shoe factory in the results for the year.
Required
Assume that you are a trainee accountant with AD.
AD's finance director has asked you to draft a briefing note that she can use to prepare a response to AD's
management.
Your briefing note should explain how AD should treat the shoe factory in its financial statements for the
year ended 31 March 20X9.
You should make reference to any relevant International Financial Reporting Standards and to CIMA's
Code of Ethics for Professional Accountants. (5 marks)
(Total = 30 marks)
136 Questions

(a) ZK is part of a group of entities and has traded profitably for a number of years. During the year to 31
August 20X9, ZK made a tax adjusted trading loss of $30,000 and a capital gain of $5,000. In the
following year to 31 August 20Y0, ZK made a taxable trading profit of $10,000. ZK expects to increase
taxable trading profits to $50,000 for the year to 31 August 20Y1. ZK does not expect any capital gains
or losses in the year to 31 August 20Y1.
Required
Explain four methods that a Country can allow to relieve trading losses of an entity and illustrate the
effect of each method on ZK for the years ended 31 August 20X9 to 20Y1. (5 marks)
(b) HW, an entity resident in Country X, owns 40% of the equity shares in SV, an entity resident in a foreign
country, Country Y. For the year to 31 March 20Y0 SV had taxable profits of $12,500,000 and paid
corporate income tax of $1,875,000. On 31 October 20Y0 HW received a dividend of $3,375,000 from
SV, the amount received is net of tax of 10%.
Country X has a double taxation treaty with Country Y. The treaty provides for a group of entities to only
be taxed once on each entitys profits. Credit is given for withholding tax and underlying tax paid in other
countries, but no refunds are available if a higher rate of tax has been paid.
Required
(i) Explain the meaning of withholding tax and provide an explanation as to why countries levy
withholding taxes. (2 marks)
(ii) Calculate the amount due to be paid by HW on receipt of this dividend in Country X. Show all
workings. (3 marks)
(Total = 5 marks)
(c) Required
Explain the two fundamental qualitative characteristics and any two of the enhancing qualitative
characteristics of financial information specified in the IASBs Conceptual Framework. (5 marks)
(d) HB paid $2.50 per share to acquire 100% of PNs equity shares on 1 September 20X9. At that date
PNs statement of financial position showed the following balances with equity:
$000
Equity shares of $1 each 180
Share premium 60
Retained earnings 40
PNs net asset values were the same as their book values, except for land which was valued at $70,000
more than its book value.
HB directors estimate that any goodwill arising on the acquisition will have a useful life of 10 years.
Required
(i) Calculate goodwill arising on the acquisition of PN. (2 marks)
(ii) Explain how HB should record the goodwill in its group financial statements for the year ended 31
August 20Y0, in accordance with IFRS 3 Business combinations. (3 marks)
(Total = 5 marks)
Questions 137
(e) HI, a parent entity, is planning to acquire a shareholding in ABC. The following alternative investment
strategies are being considered:
(i) HI can purchase 80,000 preferred shares in ABC
(ii) HI can purchase 40,000 equity shares and 50,000 preferred shares in ABC
(iii) HI can purchase 70,000 equity shares in ABC and no preferred shares
ABC has the following issued share capital:
$
$1 Equity shares 100,000
$1 10% Preferred Shares 100,000
Holders of preferred shares do not have any votes at annual general meetings.
Required
Identify with reasons how HI would classify its investment in ABC in its consolidated financial
statements for each of the alternative investment strategies. (5 marks)
(f) MN obtained a licence free of charge from the government to dig and operate a gold mine.
MN spent $6 million digging and preparing the mine for operation and erecting buildings on site. The
mine commenced operations on 1 September 20X9.
The licence requires that at the end of the mines useful life of 20 years, the site must be reinstated, all
buildings and equipment must be removed and the site landscaped. At 31 August 20Y0 MN estimated
that the cost in 19 years time of the removal and landscaping will be $5 million and its present value is
$3 million.
On the 31 October 20Y0 there was a massive earthquake in the area and MNs mine shaft was badly
damaged. It is estimated that the mine will be closed for at least six months and will cost $1 million to
repair.
Required
(i) Explain how MN should record the cost of the site reinstatement as at 31 August 20Y0 in
accordance with IAS 37 Provisions, contingent liabilities and contingent assets. (2 marks)
(ii) Explain how MN should treat the effects of the earthquake in its financial statements for the year
ended 31 August 20Y0 in accordance with IAS 10 Events after the reporting period. (3 marks)
(Total = 5 marks)
(Total = 30 marks)

(a) FG, an entity operating in Country X, purchased a machine costing $500,000 on 1 April 20X6, which
qualified for tax depreciation allowances. All other non-current assets are leased.
FGs policy in respect of machines is to charge depreciation on a straight line basis over 5 years, with no
residual value.
FG had profits of $192,000 for the year ended 31 March 20X8. These profits are after charging
depreciation and before adjusting for tax allowances.
Required
Use the above information to:
(i) Calculate FGs corporate income tax due for the year ended 31 March 20X8. (2 marks)
(ii) Calculate the deferred tax charge to FGs statement of profit or loss and other comprehensive
income for the year ended 31 March 20X8 in accordance with IAS 12 Income taxes. (3 marks)
(Total = 5 marks)
138 Questions
(b) JK, an entity operating in Country X, purchased land on 1 March 20X5 for $850,000. JK incurred
purchase costs of surveyors fees $5,000 and legal fees $8,000. JK spent $15,000 clearing the land and
making it suitable for development. Local tax regulations classified all of JKs expenditure as capital
expenditure.
JK sold the land for $1,000,000 on 1 February 20X8, incurring tax allowable costs of $6,000.
Assume JK had no temporary differences between taxable and accounting profits.
Required
(i) Explain the meaning of a capital gain and capital gains tax. (2 marks)
(ii) Use the above information to calculate the capital gains tax due on the disposal of JKs land.
(3 marks)
(Total = 5 marks)
(c) HC acquired a 75% holding in SU on 1 April 20X0.
HC received a dividend from SU of $156,000, the amount received is after deduction of withholding tax
of 20%. SU profit before tax was $650,000 and it paid corporate income tax of $130,000 in respect of
these profits.
Required
(i) Explain the meaning of underlying tax. (2 marks)
(ii) Calculate the amount of underlying tax that HC can claim for double tax relief. (3 marks)
(Total = 5 marks)
(d) Generally accepted accounting practice (GAAP) in a country can be based on legislation and accounting
standards that are either
very prescriptive in nature; or
principle-based
Required
Explain the possible advantages of having principle-based accounting standards as opposed to
prescriptive standards. (5 marks)
(e) Required
(i) Explain the objective of financial reporting according to the IASBs Conceptual Framework for
Financial Reporting (2010). (3 marks)
(ii) Explain the underlying assumption outlined in the Conceptual Framework. (2 marks)
(Total = 5 marks)
(f) CX, a professional accountant, is facing a dilemma. She is working on the preparation of a long term profit
forecast required by the local stock market listing regulations prior to a new issue of equity shares.
At a previous management board meeting, her projections had been criticised by board members as being
too pessimistic. She was asked to review her assumptions and increase the profit projections.
She revised her assumptions, but this had only marginally increased the forecast profits.
At yesterdays management board meeting the board members had discussed her assumptions and
specified new values to be used to prepare a revised forecast. In her view the new values grossly
overestimate the forecast profits.
The management board intends to publish the final revised forecasts.
Required
Explain the ethical problems that CX faces and identify her possible options. You should refer to CIMAs
Code of ethics for professional accountants. (5 marks)
(Total = 30 marks)
Questions 139
(a) SV is registered for value added tax (VAT) in country X. During the last VAT period, SV purchased materials and
services costing $200,000, excluding VAT. All materials and services were at the standard rate of VAT.
SV converted the materials into two products Y and Z; product Y is zero rated and product Z is standard
During the same VAT period, SV made the following sales, inclusive of VAT
$
Y 90,000
Z 207,000
At the end of the period, SV pays the net VAT due to the tax authorities or claims a refund of the VAT
paid.
Assume SV had no other VAT-related transactions in the period.
Required
(i) Explain the difference between a single-stage sales tax and VAT. (2 marks)
(ii) Calculate the net amount of VAT due to be paid by SV or any refund to be claimed by SV at the
end of the period. (3 marks)
(Total = 5 marks)
(b) Required
(i) Explain the meaning of deferred tax as defined in IAS 12 Income taxes (2 marks)
(ii) Explain how a deferred tax debit balance can arise in an entity and the criteria for its recognition
as an asset. (3 marks)
(Total = 5 marks)
(c) Required
(i) Explain the worldwide approach to taxing entities in a country. (2 marks)
(ii) Explain the problems caused by the worldwide approach and how they can be overcome.
(3 marks)
(Total = 5 marks)
(d) Accounting and disclosure practices are subject to a number of influences that vary from country to
country. This leads to a variety of different accounting regulations around the world.
Required
Explain the factors that may influence accounting regulations in a country.
(5 marks)
(e) The International Accounting Standards Board (IASB)s Conceptual Framework for Financial Reporting
(2010) identifies assets and liabilities as two key elements.
Required
(i) Define assets and liabilities in accordance with the Conceptual Framework
(ii) Explain the criteria that must be met for assets and liabilities to be recognised in an entitys
(5 marks)
140 Questions
(f) WZ is an assistant accountant with ABC. On 31 March 2011 ABC decided to sell a property. This
property was correctly classified as held for sale in accordance with IFRS 5 Non-Current Assets Held For
Sale and Discontinued Operations.
In its draft financial statements ABC has written down the property by $3.4 million. The write down was
charged to the statement of profit or loss and other comprehensive income for the year ended 31 August
2011. The draft financial statements showed a loss of $1.3 million for the year to 31 August 2011.
When the management board of ABC reviewed the draft financial statements the board members were
unhappy that the draft statements showed a loss and decided that the property should continue to be
shown under non-current assets at its previous carrying value.
Required
Explain the ethical problems that WZ faces AND identify his possible options. Your answer should refer to
CIMAs Code of ethics for professional accountants
(5 marks)
(Total = 30 marks)
(a) The following is an extract from KMs statement of profit or loss and other comprehensive income for the
year ended 31 March 2011:
$
Revenue 966,000
232,000
Cost of sales includes depreciation charges of $42,000 for property, plant and equipment. Distribution
costs include a depreciation charge for a new vehicle (see below). Included in administrative expenses are
entertainment costs of $9,800.
KM had been selling through retail outlets, but from1 April 2010 began selling on the internet and
delivering to customers as well. KM purchased its first delivery vehicle on 1 April 2010 for $18,000. The
vehicle qualifies for a first year tax allowance and is depreciated on a straight line basis over six years.
The property, plant and equipment (excluding the delivery vehicle) qualified for tax depreciation allowance
of $65,000 in the year ended 31 March 2011.
Required
(i) Calculate the estimated amount of corporate income tax that KM is due to pay for the year ended
31 March 2011.
(ii) Calculate the income tax expense charged to the statement of profit or loss and other
comprehensive income for the year ended 31 March 2011. (5 marks)
Questions 141
(b) LM imports luxury goods in bulk. LM repackages the products and sells them to retailers. LM is registered
for Value Added Tax (VAT) in Country X.
LM imported a consignment of perfume costing $50,000, paying excise duty of 20% of cost. The
consignment was subject to VAT on the total (including duty). LM paid $9,775 repackaging costs,
including VAT and sold the perfume for $105,800 including VAT.
LM had not paid or received any VAT payments to or from the VAT authorities for this consignment.
Required
(i) Calculate the net VAT due to be paid by LM on the perfume consignment.
(ii) Calculate LMs net profit on the perfume consignment. (5 marks)
(c) Required
Explain the meaning of tax base and give three examples of the different tax E; bases regularly used by
governments. I (5 marks)
(d) Required
Explain the concepts of capital and capital maintenance as defined in the International Accounting
Standards Board (IASB)s Conceptual Framework for Financial Reporting (2010)). (5 marks)
(e) You are the partner in charge of the audit of LMN. The following matter has been brought to your attention in
the audit working papers. During the year LMN spent $500,000 on applied research, trying to find an
application for a new process it had developed. LMN's management has capitalised this expenditure. LMN
management is refusing to change its accounting treatment as it does not want to reduce the year's profit. The
draft financial statements show revenue of $40 million and net profit of $4.5 million.
Required
(i) Explain what is meant by materiality AND whether the matter highlighted above is material.
(3 marks)
(ii) Identify the type of audit report that would be appropriate to the above statements, assuming that
LMN's management continue to refuse to change the financial statements. (2 marks)
(Total = 5 marks)
(f) RS an employee, prepares monthly management accounting information for XYZ which includes detailed
performance data that is used to calculate staff bonuses. Based on information prepared by RS this year's
bonuses will be lower than expected. RS has had approaches from other staff offering various incentives
to make accruals for additional revenue and other reversible adjustments, to enable all staff (including RS)
to receive increased or higher bonuses.
Required
Explain the requirements of the CIMA Code of Ethics for Professional Accountants in relation to the
preparation and reporting of information AND the ethical problems that RS faces.
(5 marks)
(Total = 30 marks)
142 Questions

(a) TY, an entity operating in Country X, purchased plant and equipment on 1 January 2010 for $440,000.
TY claimed a first year tax allowance and thereafter annual writing down allowances.
TY is depreciating the plant and equipment over eight years using straight line depreciation, assuming no
residual value.
On 1 January 2011, TY revalued the plant and equipment and increased the net book value by $70,000.
The assets useful life was not affected.
Assume there are no other temporary differences in the period.
Required
Calculate the amount of deferred tax movement in the year ended 31 December 2011 AND the deferred
tax balance at 31 December 2011, in accordance with IAS 12 Income taxes. (5 marks)
(b) UYT is an entity supplying goods and services to other businesses. UYT is registered for Value Added Tax
(VAT) in Country X.
UYT is partially exempt for VAT purposes.
During the last VAT period UYT purchased materials and services costing $400,000 excluding VAT. UYT
used these goods and services to produce both standard and exempt supplies. VAT was payable at
standard rate on all purchases.
UYT supplied goods and services to its customers, some of these were at standard rate VAT and some
were exempt VAT.
Excluding VAT: $
Standard rate goods and services 450,000
Exempt supplies 150,000
At the end of the period UYT prepared a VAT return. Assume UYT had no other VAT related transactions.
Required
(i) Explain the difference between the treatment of items that are zero rated and items that are
exempted from VAT. (2 marks)
(ii) Calculate the net VAT balance shown on UYTs VAT return. (3 marks)
(Total = 5 marks)
(c) LKJ, an entity resident in Country X, reported a taxable profit for the year to 31 December 2011 and
declared a dividend for the year.
YT, a director and shareholder of LKJ, received a dividend payment from LKJ and is certain that the
dividend he received will have been taxed twice.
Country X applies a full imputation system to corporate income taxes.
Required
Explain to YT how the imputation system of corporate income tax works AND whether his dividend will
have been taxed twice. (5 marks)
(d) Required
Identify the four main entities that are involved in developing and implementing International Accounting
Standards. Briefly describe the role of each entity. (5 marks)
Questions 143
(e) Countries differ quite widely in their audit requirements, but most agree that large corporate entities
should have an annual external audit.
Required
(i) Explain the objective of an external audit of the financial statements of an entity. (2 marks)
(ii) Briefly explain three key areas of content of the audit report as required by ISA 700 The Auditors
Report on Financial Statements. (3 marks)
(Total = 5 marks)
(f) XQ, an employee of ABC, prepares monthly management accounting information for ABC. This
information includes detailed performance data that is used to evaluate managers performance. The
directors are considering the closure of some facilities and XQs management information will be included
in the review.
XQ has had approaches from a number of concerned managers offering various incentives to make
adjustments to the management accounting information to improve their performance statistics.
Required
Briefly explain the ethical problem that XQ faces AND what XQ should do in this situation. Your answer
should refer to the appropriate fundamental principles of the CIMA Code of Ethics. (5 marks)
(Total = 30 marks)

(a) Required
Explain the main benefits, to users of the accounts, of including a statement of cash flows in published
financial statements. (5 marks)
(b) The draft financial statements for the year ended 31 March 2012 for TX include the following:
$000
Statement of profit or loss and other comprehensive income
(extract)
Notes to the accounts:

Over provision for the year to 31 March 2011 (50)
Estimate of tax due for the year to 31 March 2012 700
Increase in deferred tax provision for the year to 31 March 2012 200
850
Statement of cash flows (extract)

Tax paid in the year to 31 March 2012 600
Required
(i) Explain how deferred tax arises.
Use the information given above to:
(ii) Identify the most likely reason for the increase of $200,000 in the deferred tax provision for the
year to 31 March 2012.
(iii) Explain what the over provision of $50,000 in the statement of profit or loss and other
comprehensive income represents.
(5 marks)
144 Questions
(c) PQ is resident in Country X. PQs summary statement of profit or loss and other comprehensive income for
the year ended 31 March 2012 was as follows:
$000
Revenue 567
Cost of sales and other expenses (253)
314
Finance income 85
Finance cost (12)
Other expenses include depreciation of $92,000 and amortisation of intangible assets of $14,000.
PQs property, plant and equipment qualified for tax depreciation of $98,000 for the year.
PQ holds a number of bonds and bank deposits in Country Z. PQ received interest of $85,000 (net of
withholding tax at 15%) during the year to 31 March 2012.
Country X has a double taxation treaty with Country Z that provides for double taxation relief using the tax
credit method.
Required
Calculate the estimated amount of corporate income tax that PQ is due to pay for the year ended 31
March 2012. (5 marks)
(d) Required
(i) Explain the difference between an excise duty and a single stage sales tax. (3 marks)
(ii) Describe the characteristics of commodities that make them most suitable, from the revenue
authoritys point of view, for the application of excise duty. (2 marks)
(Total 5 marks)
(e) The International Accounting Standards Board (IASB)s Conceptual Framework for Financial Reporting
(2010) identifies five key elements of financial statements.
Required
(i) Define income and equity in accordance with the IASB Conceptual Framework. (3 marks)
(ii) Explain the criteria that must be met for income to be recognised in an entitys financial
statements. (2 marks)
(Total = 5 marks)
(f) You are a trainee accountant working for ABC, which is listed on the local stock exchange. A new chief
executive has recently been appointed and has queried the benefits to ABC of having an external audit
carried out each year.
Required
Prepare a short briefing note that highlights the benefits of an external audit to ABC.
(5 marks)
(Total = 30 marks)
Questions 145

(a) PY is resident in Country X. PYs statement of financial position extracts as at 31 March 2011 and 2012
are as follows:
Statement of financial position (extracts) as at: 2011 2012
$000 $000
Non-current Liabilities
Deferred tax provision 540 560
Current Liabilities
Tax payable 1,820 1,980
Statement of cash flows (extract) for year ended 31 March 2012:

$000
Tax paid 1,795
Required
(i) Calculate the income tax charge to be included in PYs statement of profit or loss and other
comprehensive income for the year ended 31 March 2012. (3 marks)
(ii) Explain the impact of an increase in the corporate profits tax rate to 30% from 1 April 2012 on
PYs deferred tax provision at 31 March 2012. (2 marks)
(Total = 5 marks)
(b) Required
Explain the main methods of giving double taxation relief to entities with overseas earnings.
(Total = 5 marks)
(c) SM is a small local corporate entity that delivers products to local businesses. The following is a summary
of SMs statement of profit or loss and other comprehensive income for the year ended 31 March 2012:
$
Revenue 200,000
Expenses 157,000
Expenses include depreciation charges of $16,500 for property. These properties qualified for tax
depreciation allowances of $19,300 in the year ended 31 March 2012.
On 1 April 2011 SM had to replace its only delivery vehicle. The vehicle was sold for $2,000. At the date
of disposal the vehicle had a carrying value of $3,000 and a tax written down value of $2,000.
SMs replacement vehicle cost $32,000, has an expected useful life of 7 years with a residual value of
$4,000. The appropriate accounting entries for these vehicles have been included in the accounts.
SMs expenses include $6,300 for entertainment costs.
Required
Calculate the amount of tax that SM is due to pay for the year ended 31 March 2012.
(Total = 5 marks)
(d) TY has a construction contract in progress. The contract commenced on 1 April 2011 and is scheduled to
run for two years. The contract has a fixed price of $9,000,000. TY uses the value of work completed
method to recognise attributable profit for the year.
At 31 March 2012 the proportion of work certified as completed was 35%.
$000
Work in progress (cost incurred during year to 31 March 2012) 4,000
Estimated cost to complete contract 6,000
Cash received on account from contract client 3,250
146 Questions
Required
(i) Calculate the amount of revenue and cost that TY should include in its statement of profit or loss
and other comprehensive income for the year ended 31 March 2012 in respect of the construction
contract.
(3 marks)
(ii) Calculate the gross amount due from/to customers to be included in TYs statement of financial
position as at 31 March 2012. (2 marks)
(Total = 5 marks)
(e) Required
Explain the steps in the IASBs standard setting process that most IFRSs go through during development.
(Total = 5 marks)
(f) VBs sales revenue for the year was $2,000,000 and its profit was $300,000. VBs external audit has
just been completed and there are two outstanding matters.
(i) An inventory count did take place at the year-end but there are very few supporting records
available. The inventory value stated, $90,000, cannot be verified from the available records.
(ii) VB is facing a court case accusing it of breaching another international entitys copyright. If VB
loses the case it will be unable to continue as a going concern. VBs directors have assessed the
likelihood of losing the case and have disclosed the court case as a contingent liability in its
financial statements. The auditors have agreed with the directors treatment and disclosure.
Required
Explain for each of the two matters listed above:
(i) The impact that each would have (if any) on the audit report in respect of VB.
(ii) Whether the audit report in respect of VB requires modification and if so the type of modification
required.
(Total = 5 marks)
(Total = 30 marks)

(a) Required
Explain the powers that tax authorities may be given to enable them to enforce tax regulations.
(Total = 5 marks)
(b) For the year ended 30 September 2012 KQs statement of profit or loss and other comprehensive income
included a profit before tax of $147,000. KQs expenses included political donations of $9,000 and
entertaining expenses of $6,000.
KQs statement of financial position at 30 September 2012 included plant and machinery with a carrying
value of $168,500. This is comprised of plant purchased on 1 October 2010 at a cost of $180,000 and
machinery purchased on 1 October 2011 at a cost of $50,000.
KQ depreciates all plant and machinery on the straight line basis at 15% per year.
Required
Calculate the tax payable by KQ for the year to 30 September 2012. (Total = 5 marks)
(c) Required
Define an operating segment according to IFRS 8 Operating segments and explain when a segment is
classified as a reportable segment. (Total = 5 marks)
Questions 147
(d) A taxable person making a taxable supply of goods or services must register for VAT in most countries
once their taxable turnover reaches a certain limit.
HJ is registered for VAT in Country X. HJ is partially exempt for VAT purposes.
During the latest VAT period HJ purchased materials and services costing $690,000 including VAT at
standard rate. These goods and services were used to produce standard rated, zero rated and exempt
goods.
Goods supplied to customers (excluding VAT) were:
$
Goods at standard rate 720,000
Goods at zero rate 100,000
Exempt goods 205,000
Assume HJ had no other VAT related transactions.
Required
(i) Once registered for VAT an entity must abide by the VAT regulations.
Identify four typical requirements of VAT regulations. (2 marks)
(ii) Calculate the net VAT balance shown on HJs VAT return for the period. (3 marks)
(Total = 5 marks)
(e) HC, resident in Country X for tax purposes, owns 100% of shares in a foreign entity, OC. OC operates in a
country that has a double taxation treaty with Country X that provides for the use of the tax credit method
of double taxation relief.
OC reported profits before tax of $600,000 with corporate income tax of $126,000 for the year ended 31
March 2012.
OC paid HC a dividend for the year ended 31 March 2012 of $200,000 gross which was subject to
withholding tax of 12%.
Required
(i) Calculate the total foreign tax suffered on the dividend. (2 marks)
(ii) Calculate the amount of tax that HC will be liable to pay on receipt of the dividend in Country X,
applying the tax credit method of double taxation relief. (3 marks)
(Total = 5 marks)
(f) Required
Explain the roles of the following in relation to International Financial Reporting Standards.
The IFRS Interpretations Committee
The IFRS Advisory Council (Total = 5 marks)
(Total = 30 marks)

(a) Most governments require detailed records to be kept for each type of tax to which an entity is subject.
Required:
(i) List four taxes that are likely to require detailed records to be maintained by an entity. (2 marks)
(ii) Identify the records that an entity would be required to keep to support its VAT or sales tax
returns. (3 marks)
(Total = 5 marks)
148 Questions
(b) HG is resident in Country X.

HG had a tax loss of $49,000 for the year ended 31 December 2011.
HG made an accounting profit of $167,000 for the year ended 31 December 2012. The profit was after
charging $4,000 for entertaining and $5,000 for donations to a political party. HGs revenue includes a
non-taxable government grant of $12,000 received during the year ended 31 December 2012.
HG has plant and equipment that cost $50,000 on 1 January 2011 and new equipment that cost
$8,000 on 1 January 2012. HG depreciates its plant and equipment on a straight line basis over 5 years
with no residual value.
Required
Calculate the tax payable by HG for the year ended 31 December 2012. (Total = 5 marks)
(c) LP is an entity that up until 30 June 2012 operated 3 divisions; division A, B and C. LP closed division C
on 30 June 2012.
Division C had the following results for the period 1 January 2012 to 30 June 2012:
$000
Revenue 95
Operating expenses (110)
Operating loss (15)
Tax refund 3
Loss (12)
(excluding disposal of assets and restructuring)
The disposal of the assets of division C incurred a loss of $30,000.
LP incurred an expense of $75,000 for restructuring the remaining divisions after the closure of division
C. LP regards $75,000 as material in the context of its financial statements.
Required
Explain how the closure of division C and restructuring of the other divisions will be reported in LPs
Statement of comprehensive income for the year ended 31 December 2012, according to IFRS 5 Non-
current assets held for sale and discontinued operations (Total = 5 marks)
(d) Excise duties are charged on certain types of specific goods by most governments. Excise duties are often
charged in addition to VAT/sales tax.
Required
Explain three reasons why an excise duty may be imposed on certain types of goods by a government. For
each reason give an example to illustrate your answer. (Total = 5 marks)
(e) OW is an international entity that has operations in two countries:
OW has a number of branch offices in Country Z, each office provides services to customers and
sells OWs products.
OWs head office is in Country X, where OWs production facility and head office are located. All
directors board meetings are held in Country X.
Assume countries X and Z have double tax treaties with each other based on the OECD model tax
convention.
Required
(i) Explain, with reasons, which country/countries OW will be regarded as resident in for tax
purposes. (2 marks)
(ii) Explain how the profits made by OW in Country Z will be taxed. (3 marks)
(Total = 5 marks)
Questions 149
(f) Required
The IASB has developed a conceptual framework called The Framework for the Preparation and
Presentation of Financial Statements (Framework).
Identify FIVE purposes of the Framework. (Total = 5 marks)
(Total = 30 marks)

(a) Extracts from CFQs Statement of financial position at 31 March 2013, with comparatives appear below:
31 March 2013 31 March 2012
$million $million
Non-current asset investments at fair value 93 107
Deferred development expenditure 29 24
During the year to 31 March 2013, CFQ sold property, plant and equipment for $45m. It had originally
cost $322m and had a carrying value of $60m at the date of disposal.
CFQs statement of profit or loss for the year ended 31 March 2013 included:
depreciation of property, plant and equipment of $120m;
amortisation of deferred development expenditure of $8m;
revaluation loss on investments of $21m.
Required
Prepare the cash flows from the investing activities section of CFQs statement of cash flows for the year
ended 31 March 2013. (Total = 5 marks)
(b) Ace is a management accountant working as part of a small team that has been set up by ZY, his
employer, to evaluate tenders submitted for contracts being awarded by ZY. He has just discovered that
one of the other team members accepted large payments in exchange for information, from an entity at
the time it was considering tendering. Ace suspects that this may have influenced the winning tender
submitted by the entity.
Required
Explain the steps that Ace could follow to ensure that he adheres to CIMAs code of ethics for professional
accountants. (Total = 5 marks)
(c) On 1 January 2012 PS issued at par, 500,000 $1 5% cumulative preferred shares, redeemable at par in
four years. The issue costs were $20,000.
PS has not issued preferred shares before and the managing director has asked you to explain how the
preferred shares should be treated in the financial statements of PS.
Required
Explain with reasons, how PS should:
(i) classify the preferred shares in its financial statements for the year ended 31 December 2012, in
accordance with IAS 32 Financial Instruments: Presentation;
(ii) account for the related costs in accordance with IAS 39 Financial Instruments: Recognition and
Measurement. (Total = 5 marks)
(d) GH, an entity operating in Country X, purchased plant and equipment on 1 April 2011 for $260,000. GH
claimed first year allowances and thereafter annual writing down allowances.
GH depreciates plant and equipment over 6 years, using the straight line method, assuming a 10%
residual value.
150 Questions
Required
(i) Define the meaning of the tax base of an asset and its significance for deferred tax. (2 marks)
(ii) Calculate the amount of the deferred tax provision that GH should include in its statement of
financial position as at 31 March 2013 in respect of this plant and equipment. (3 marks)
(Total = 5 marks)
(e) MTs summarised statement of profit or loss for the year ended 31 March 2013 is as follows:
$
39,000
Administrative expenses include donations to the local ruling political party of $5,000 and depreciation of
property, plant and equipment of $39,000 (inclusive of depreciation of new purchases).
MT an entity operating in Country X made a tax loss for the year ended 31 March 2012. The loss carried
forward at 31 March 2012 was $12,000.
At 31 March 2012 MTs tax written down value of its property, plant and equipment was $120,000. All
of these assets qualified for the annual tax depreciation allowances. MT purchased property, plant and
equipment during the year to 31 March 2013 for $30,000.
Required
Calculate the amount of tax that MT is due to pay for the year ended 31 March 2013.
(Total = 5 marks)
(f) During the last VAT period AV purchased materials and services costing $620,000 excluding VAT.
$400,000 were standard rated for VAT and $220,000 were zero rated.
AV sold the following goods to its customers during the period, including VAT:
At standard rate $828,000
At zero rate $150,000
Assume that AV had no other VAT related transactions during the period.
Required
(i) Explain the difference between a cascade sales tax and value added tax (VAT). (2 marks)
(ii) Calculate the net profit/loss that AV should recognise AND the VAT due for the period. (3marks)
(Total = 5 marks)
(Total = 30 marks)
151
ANSWERS
152
Answers 153
1 Objective test answers: The regulatory framework

1 C Guidance on application and interpretation of IFRSs is provided by the IFRS Interpretations
Committee.
2 A The priority given to different user groups in different countries (eg investor groups in the US and
employees in Europe) is actually a barrier to harmonisation.
3 D The IFRS Interpretations Committee develops its interpretations through a due process of
consultation and debate which includes making Draft Interpretations available for public comment.
4 Expenses and equity
5 C The statement that the business is expected to continue in operation for the foreseeable future
means that the business is a going concern. Going concern is an underlying assumption because
the Conceptual Framework states that users should assume that the financial statements are
prepared on the going concern basis unless there is disclosure to the contrary.
6 B The elements of financial statements are assets, liabilities and equity in the statement of financial
position and income and expenses in the statement of profit or loss and other comprehensive
income. Profits and losses are not elements.
7 B The statement of profit or loss and other comprehensive income measures financial performance.
The entitys economic resources and claims are shown in the statement of financial position and
financial adaptability is shown in the statement of cash flows
8 D Going concern.
9 An asset is a resource controlled by an entity as a result of past transactions or events and from
which future economic benefits are expected to flow to the entity.
10 D Generally accepted accounting practice
11 C The IFRS Foundation Trustees are responsible for governance and fundraising and publish an
annual report on the IASBs activities. The trustees also review annually the strategy of the IASB
and its effectiveness.
12 C The IFRS Interpretations Committee reports to the IASB. The IFRS Advisory Council advises the
IASB. The IFRS Foundation is the parent entity of the IASB.
13 Expenses are decreases in economic benefits during the accounting period in the form of outflows
or depletions of assets or incurrences of liabilities that result in decreases in equity, other than
those relating to distributions to equity participants.
14 The objective of financial reporting is to provide financial information about the reporting entity
that is useful to existing and potential investors, lenders and other creditors in making decisions
about providing resources to the entity.
15 C A is the definition of a liability, B is the definition of an asset and D is the definition of income
according to the Conceptual Framework.
16 D The IFRS Foundation Trustees are responsible for:
appointing members of the IASB, the IFRS Interpretations Committee and the IFRS Advisory
Council
establishing and amending the operating procedures, consultative arrangements and due
process for the IASB, the Interpretations Committee and the Advisory Council
reviewing annually the strategy of the IASB and assessing its effectiveness
ensure the financing and approve annually the budget of the IFRS Foundation and the IASB
17 Relevance and faithful representation.
18 D The IFRS Advisory Council is a forum for the IASB to consult with the outside world. The IASB
produces IFRSs and is overseen by the IFRS Foundation.
154 Answers
19 The four stages are:

1 Establishment of Advisory Committee
2 Discussion Paper issued
3 Exposure Draft issued
4 IFRS issued
20 D Providing information regarding the economic resources and claims of a business and its
performance are important factors for users in making decisions about providing resources to the
business.
21 C For financial information to faithfully represent a businesss underlying transactions it must be
complete and neutral (free from bias). Note also that the information must be free from error
(although this was not required for this question).
22 B Relevance is a fundamental qualitative characteristic and comparability and timeliness are
enhancing qualitative characteristics. Completeness is part of faithful representation.
23 D Verifiability, understandability, comparability, timeliness.
24 C The role of the IASB is to develop and publish International Financial Reporting Standards
25 A The IFRS Advisory Council
2 Objective test answers: External audit

1 D An external audit provides reasonable assurance that the financial statements are free from
material misstatements. An external audit does not guarantee that there are no material
misstatements in the financial statements. There are inherent limitations in an audit which affect
the auditor's ability to discover material misstatements that arise from the nature of financial
reporting, the nature of audit procedures, time and cost limitations and the requirement for the
auditor to exercise judgment.
2 B An opinion must be disclaimed when the auditor cannot obtain sufficient appropriate audit
evidence on which to base the opinion and concludes that the possible effects on the financial
statements of undetected misstatements, if any, could be both material and pervasive.
3 C No modification is needed as the directors have made full disclosure.
4 D The auditors report covers all of these matters.
5 B The auditor cannot obtain sufficient appropriate audit evidence on which to base the opinion but
concludes that the possible effects of undetected misstatements, if any, could be material but not
pervasive.
6 C The auditors will be unable to give an opinion in this case.
7 C Even though the finance department may prepare the accounts, management have overall
responsibility for the preparation of the financial statements. External auditors give an opinion on
whether the financial statements give a true and fair view.
8 A In order to state that the financial statements show a true and fair view the auditor must satisfy
himself that the other three matters are valid.
9 D The auditors will begin by trying to persuade the directors.
10 Power to require access to all books and records
Power to require information and explanations from officers of the company
Power to attend meetings and address shareholders
11 C If the auditor believes that the financial statements do not show a true and fair view this should
first be discussed with management. If management refuse to adjust the accounts, the auditor
would give an adverse opinion in the audit report.
Answers 155
12 A The external audit is carried out by external auditors who are independent of the company so that
they can provide an independent opinion as to the truth and fairness of the company's financial
statements.
13 A The auditor does not report on items that are not material.
14 To enable the auditor to express an opinion as to whether the financial statements give a true and
fair presentation of the entitys affairs.
15 D The external auditors will issue a qualified opinion on the basis that the misstatement is material,
but not pervasive to the financial statements.
3 Objective test answers: Ethics

1 B The audit of the financial statements will be carried out by an accountant in practice.
2 B Reliability, Morality and Efficiency are not fundamental principles.
3 A Self-interest. If such threats are significant (ie the interest is direct and of high value), safeguards
will have to be put in place.
4 B A principles-based approach sets out principles and guidelines, rather than detailed rules to cover
every specific situation. This leads to the listed advantages but not to consistent application,
since there is a high degree of discretion in applying guidelines to different cases.
5 A The principle of due care is that, having accepted an assignment, you have an obligation to carry it
out to the best of your ability, in the client's best interests, and within reasonable timescales, with
proper regard for the standards expected of you as a professional. In this scenario, any answer you
give on the spot would risk being incomplete, inaccurate or out-of-date, with potentially serious
consequences, if the client relies and acts on your reply. Integrity is honesty, fair dealing and
truthfulness; professional behaviour is upholding the reputation of your profession; and
confidentiality is not using or disclosing information given to you by employers or clients in the
course of your work. (None of these issues applies directly here.)
6 B This raises issues of professional competence and due care. You know that you do not have the
knowledge to answer these questions at this time and in this situation. For your own professional
safety, you should make the client clearly aware of this and not be prepared to give any opinion, as
this may be relied upon by the client despite the circumstances. The most appropriate form of action
would be to make an appointment with the client to discuss the matter properly after you have done
some research into these specific areas, or refer them to a colleague with experience in this area.
7 Confidentiality
Professional competence/due care.
8 C A, B and D all describe the features of a rules-based code.
9 A B describes integrity; C describes objectivity and D describes professional competence and due
care.
10 B Disclosure of information to advance the interests of a new client would not be permitted under the
Code.
11 D HMRC is not a source of ethical codes for accountants.
4 Section B answers: Regulation

(a) The IASBs Conceptual Framework lays out the elements of financial statements as follows.
(i) Asset
A resource controlled by an entity as a result of past events and from which future economic
benefits are expected to flow to the entity.
An example of an asset is an item of machinery used in the business.
156 Answers
(ii) Liability
A present obligation of the entity arising from past events, the settlement of which is expected to
result in an outflow of resources from the entity.
An example of a liability is an amount due to a supplier for goods received.
(iii) Equity
The residual interest in the assets of the entity after deducting all its liabilities.
Ordinary share capital is an example of equity.
(iv) Income
Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to contributions from equity participants.
An example of income is income recognised on the sale of goods.
(v) Expenses
Decreases in economic benefits during the accounting period in the form of outflows or depletions
of assets that result in decreases in equity, other than those relating to distributions to equity
participants.
Depreciation is an example of an expense.
(b)
Examiner's comments. Candidates failed to include enough detail in their answers. Many answers
identified a characteristic and then the explanation added nothing to it, for example, 'Relevance
information needs to be relevant'.
The four enhancing qualitative characteristics of financial information are as follows.

Comparability
Information is more useful if it can be compared with similar information about other entities and/or other
accounting periods. Consistency in the preparation of financial information helps achieve comparability.
For this to be possible users must be informed of the accounting policies employed in the preparation of
the financial statements and any changes to those policies and their effects. The financial statements
must also show corresponding amounts for the previous period.
Verifiability
Information must be verifiable in order to give assurance to the users of financial information that the
information has been prepared so that it faithfully represents the economic phenomena it purports to
represent. Verification can be direct or indirect.
Timeliness
Financial information is required by users in order to make decisions based on that information. It must
therefore be made available in a timely manner if it is to influence the decisions they make.
Understandability
The financial statement information should be readily understandable to users. For this purpose users are
assumed to have a reasonable knowledge of business and economic activities and accounting and a
willingness to study the information with reasonable diligence. The information provided should be
presented in a clear and concise manner.
(c)
Examiner's comments. Most candidates did well on this question, although some could not think of three
alternatives. A common error was using bullet points or short notes to answer the question and as a result
not providing sufficient detail for 5 marks.
Answers 157
C could pursue any of the following options:

(i) Develop its own standards without reference to the IASB. This would produce standards which
reflected trading conditions in the country but, when it developed to the point of needing to attract
foreign investment, investors may not be drawn to companies whose financial statements are not
prepared under generally recognised standards.
(ii) Adopt IFRS. This would mean that C had adopted high-quality, generally recognised standards
from the outset, and would have no future harmonisation process to undergo. However, it may find
that time and expense has gone into implementing standards which may not be that relevant to its
current economic situation.
(iii) Adopt those IFRSs which are currently applicable, such as IAS 41 Agriculture, and develop
additional standards of its own based on IFRS. This would produce a set of standards which were
theoretically high-quality and relevant to its own economy. However, the judgement and expertise
required to carry this out may not be available and C will be resolving issues between local
standards and IFRS on an ongoing basis.
(d)
Top tips. We have only given five answers here as this is all that is required for five marks.
Examiner's comments. The answers provided for this question were very weak. Many candidates did not
know what the purpose of the Conceptual Framework was and tried explaining the purpose of financial
statements.
The purposes of the Conceptual Framework are:

(i) To assist in the review of existing IASs and IFRSs and the development of new IFRSs
(ii) To promote harmonisation of accounting standards by reducing the number of allowed alternative
accounting treatments
(iii) To assist national standard-setting bodies in developing national standards
(iv) To assist preparers of financial statements in applying IFRSs and dealing with topics not yet
covered by an IFRS
(v) To assist auditors in determining whether financial statements comply with IFRS
Alternative answers
You would also have scored marks if you had identified any of the following purposes.
To assist users of financial statements prepared under IFRS in interpreting the information
contained in them
To provide general information on the approach used in formulating IFRSs
(e) IFRS Advisory Council

The IFRS Advisory Council provides a forum for groups and individuals to give advice to the International
Accounting Standards Board (IASB), the board responsible for setting IFRS. The committee members are
from diverse geographical and functional backgrounds to allow them to gather opinions from a wide range
of representatives.
The committee advises the IASB on its agenda and priorities for setting new IFRS. Consultation with the
IFRS Advisory Council continues throughout the development of an IFRS. In particular, the IFRS Advisory
Council advises the IASB on issues related to the practical application and implementation of new IFRS. It
also advises on the advantages and disadvantages of different proposals.
International Financial Reporting Interpretations Committee
The IFRS Interpretations Committee provides timely guidance on the application and interpretation of
IFRS. It normally deals with complex accounting issues that could give rise to a diversity of accounting
treatments. In this way it assists the IASB in setting and improving IFRS.
IFRS Interpretations Committee produces interpretations which, once finalised, are ratified and issued by
the IASB. The IASB may choose to add an item to its own agenda if an interpretation is not ratified.
158 Answers
5 Section B answers: External audit

(a)
Examiners comments. Common errors made by candidates in this question were:

incorrectly concluding that item 1 was material by incorrectly calculating the percentage of revenue
as 500/15,000 instead of 500/15,000,000 and the percentage of profit as 500/1,500 instead of
500/1,500,000.
suggesting that item 2 (development costs) should be written off against the previous years profit,
which is incorrect as the circumstances existing at that balance sheet date met the criteria required
by IAS 38.
not recognising that item 3 required immediate full provision as per IAS 37.
(i) Item 1 the obsolete inventory is not material as $500 is 0003% of revenue and is 003% of
profit, therefore managements decision is acceptable. The inventory can be written off in the
current year.
Item 2 the deferred development expenditure must be charged to profit or loss as soon as it
ceases to meet the IAS 38 criteria for deferral. As the project has now been abandoned, the
expenditure ceases to meet the IAS 38 criteria for deferral. Therefore the $600,000 should be
charged to profit or loss in the current year.
(ii) Item 3 decommissioning costs
IAS 37 Provisions, contingent liabilities and contingent assets requires decommissioning costs to
be recognised as soon as the liability arises, which is usually when the facility starts to operate. HF
should create a provision for the full $5,000,000 decommissioning costs, discounted to present
value, and add it to the cost of the asset (debit asset, credit provision). This will be a material
increase in the net asset value and will increase the depreciation charged to profit or loss.
Audit opinion
If the directors do not agree to change the treatment of the decommissioning costs to recognise the
full provision in the financial statements, an except for qualified audit report will need to be
issued as all matters are correct except for the treatment of the decommissioning costs.
(b) (i) Qualified opinion A qualified opinion must be expressed in the auditors report in the following
two situations:
(1) The auditor concludes that misstatements are material, but not pervasive, to the financial
statements.
Material misstatements could arise in respect of the appropriateness of selected accounting
policies, the application of accounting policies or the adequacy of disclosures.
(2) The auditor cannot obtain sufficient appropriate audit evidence on which to base the
opinion but concludes that the possible effects of undetected misstatements, if any, could
be material but not pervasive.
This is often referred to as a limitation on scope and could arise from situations including
the accounting records being destroyed or management preventing the auditor reviewing
certain records.
The opinion will be expressed as being 'except for the effects of the matter to which the
qualification relates.
(ii) Disclaimer of opinion An opinion must be disclaimed when the auditor cannot obtain sufficient
appropriate audit evidence on which to base the opinion and concludes that the possible effects on
the financial statements of undetected misstatements, if any, could be both material and
pervasive. This limitation on scope may have arisen through circumstances, or may have been
imposed by the client or may have arisen due to the inadequate nature of the company's
accounting records. The auditor's report should give an explanation of the nature of the limitation
of scope and quantify the effects on the financial statements where possible.
Answers 159
(iii) Adverse opinion An adverse opinion is expressed when the auditor, having obtained sufficient
appropriate audit evidence, concludes that misstatements are both material and pervasive to the
financial statements. The audit report must fully describe the circumstances leading to the adverse
opinion. The opinion will state that, because of the effect of these circumstances, the financial
statements do not present fairly the financial position of the company and its results.
(c) Right of access to records
The auditor has a right of access at all times to the books, accounts and vouchers of the company.
Right to require information
The auditor has a right to require from the company's officers such information and explanations as he
thinks necessary for the performance of his duties as auditor. It is an offence for a company's officer to
make a statement to the auditor which is materially misleading, false or deceptive.
These rights make it possible for the auditor to carry out an audit. If these rights are violated, the auditor will
qualify his report. If the situation is serious, for instance if the auditor believes the directors to be involved in
a fraud, he has the following rights which enable him to communicate directly to the shareholders:
Right to attend/receive notice of general meetings
The directors cannot keep the auditor away from the AGMs by not informing him of when they are taking
place.
Right to speak at general meetings
The auditor has a right to be heard at general meetings which he attends, on any part of the business that
concerns him as auditor.
Right in relation to written resolutions
The auditor has the right to receive a copy of any written resolution proposed. This means that he must
receive a copy of any resolution which is proposed to terminate his engagement.
In practice, an auditor would not expect to have to invoke these rights very often, but the fact that they
exist establishes his status in relation to the directors and makes it possible for him to get the co-
operation that he needs in order to carry out his engagement.
(d)
Examiner's comments. Many answers to this question were of low quality. Many candidates clearly did
not understand the objective of an audit and a large proportion of answers were unable to correctly
identify the type of report or the information required.
(i) The objective of an external audit is to enable the auditor to express an opinion on whether the
financial statements give a true and fair view (or present fairly) the financial position of the
company and the results of its operations and its cash flows, in accordance with applicable
Accounting Standards.
(ii) The misstatement is $2.4m which is 15% of profits for the year and is therefore material, but not
pervasive (because only this balance is affected, not the rest of the accounts). EA & Co should
issue a qualified opinion because the misstatement identified is material but not pervasive, to the
The auditors will include in their report:
'Profit on long-term contracts has not been accounted for in accordance with IAS 11. Per the standard, a
foreseeable loss on a long-term contract should be recognised immediately. In the financial statements for
the year to 30 September 2006, only that portion of the loss which has been incurred to date has been
included. $3.7m has been included in the statement of comprehensive income in respect of long-term
contracts. This should be amended to $1.3m in order to recognise in full the expected loss.
In our opinion, except for the effect on the financial statements of the matter referred to in the preceding
paragraph, the financial statements give a true and fair view'
160 Answers
6 Section B answers: Ethics

(a) The CIMA Code requires the professional accountant to comply with five fundamental principles:
Integrity
Objectivity
Professional Competence and Due Care
Confidentiality
Professional Behaviour
Compliance with these principles is required in order for the accountant to discharge his duty to act in the
public interest.
Specific threats to his compliance with these principles can arise during the course of his work. The
conceptual framework requires the accountant to identify, evaluate and address threats to compliance
with the fundamental principles.
The framework sets out five categories of threat:
Self-interest threats
Self-review threats
Advocacy threats
Familiarity threats
Intimidation threats
The accountant must recognise the threat when it arises, evaluate whether or not it is significant and put
in place safeguards to deal with it. The Code gives examples of how the categories of threat can arise
and examples of relevant safeguards.
There are major differences between this approach and a rules-based approach. The conceptual
framework approach puts the responsibility on the accountant to ensure compliance with the principles.
In this way, whatever threat arises, the accountant has to consider it. A list of rules could not encompass
every possible threat and could even lead to attempts to circumvent them. Any situation not explicitly
covered would be deemed to be not a threat and situations would then arise which would require the
rules to be continually updated. The application of a conceptual framework avoids this.
(b) The five fundamental principles are:
Integrity a professional accountant should be straightforward and honest in all professional and
business relationships.
Objectivity a professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgments.
Professional competence and due care - a professional accountant has a continuing duty to maintain
professional knowledge and skill at the level required to ensure that a client or employer receives
competent professional service based on current developments in practice, legislation and techniques. A
professional accountant should act diligently and in accordance with applicable technical and professional
standards when providing professional services.
Confidentiality a professional accountant should respect the confidentiality of information acquired as a
result of professional and business relationships and should not disclose any such information to third
parties without proper and specific authority unless there is a legal or professional right or duty to
disclose. Confidential information acquired as a result of professional and business relationships should
not be used for the personal advantage of the professional accountant or third parties.
Professional behaviour a professional accountant should comply with relevant laws and regulations and
should avoid any action that discredits the profession.
(c) Advantages of a code based on principles include:
Having principles rather than rules places the onus on the professional to consider actively
relevant issues in a given situation, rather than just agreeing action with a checklist of forbidden
items.
Answers 161
Principles rather than rules prevent professionals interpreting legalistic requirements narrowly to
get around the ethical requirements.
Principles rather than rules allow for variations that are found in every individual situation.
A principles-based code prescribes minimum standards of behaviour that are expected.
Disadvantages of a code based on principles include:
Principles-based codes can be difficult to enforce legally, unless the breach of the code is blatant.
International codes (such as the IFAC Code) cannot fully capture regional variations in beliefs and
practice.
Illustrative examples given in principles-based codes can be interpreted mistakenly as rules to
follow in all similar circumstances.
As ethical codes cannot include all circumstances and dilemmas, accountants need a very good
understanding of the underlying principles in order to effectively apply them.
7 Objective test answers: Presentation

1 A Members do not inspect the accounting records the auditors do this on their behalf.
2 A All of these items appear in the statement of changes in equity.
3 D Authorised share capital is disclosed in the notes to the balance sheet, the other disclosures are
made in the income statement or notes.
4 C 2 is a change of accounting estimate, 4 is specifically mentioned in IAS 8 as not constituting a
change of accounting policy.
5 D Material errors are treated in the same way as changes of accounting policy, by the application of
retrospective restatement.
6 B IAS 8 requires that a change in accounting policy is accounted for by retrospective application.
7 B A change in the method of valuing inventory is a change of accounting policy
8 A Changing the method of depreciation is a change of estimation technique not a change of
accounting policy and therefore retrospective application is not required. However the current year
figures must be changed to reflect the change in estimation technique and the change must be
disclosed.
9 C Provisions are covered by IAS 37.
10 D Revenue and finance cost
11 B This is the most commonly seen form of the statement of comprehensive income (income
statement), which includes cost of sales and distribution costs.
12 D A is a change in accounting policy, B is specifically mentioned in IAS 8 as a change in an accounting
policy to be dealt with as a revaluation in accordance with IAS 16, C is an error per IAS 8.
8 Section B answers: Presentation

(a) Companies might be expected to publish accounts using standard formats so as to ensure complete
disclosure of material and important items and to ensure consistency between accounting periods and
comparability between companies.
In addition, in certain European and other countries where standard formats have been in use for many
years their use provides governments with consistent information for the preparation of national
accounts and other economic statistics.
The detail shown in each of the standard statements of profit or loss would enable users of accounts to
calculate certain key ratios such as gross margins, net margins, ratio of administration costs to sales or
162 Answers
profit and to identify the proportion of the net income arising from operations separately to that arising
from financing transactions.
This information would be of use to shareholders and stockholders' analysts who will wish to assess the
profitability of a company and compare it with possible alternative investments.
(b)
Examiner's comments. Candidates scored high marks on this question. This question was the most
popular part of question 2 and was generally the best answer.
The most common error was to incorrectly adjust for the change in inventory value and some candidates
ignored the requirement to make a provision for compensation.
CE
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH 20X6
$000
Revenue 2,000
Cost of sales (W) (688)
Gross profit 1,312
Administrative expenses (260 + 500) (760)
Finance costs (190)
Working: Cost of sales
Per trial balance 480
Inventory adjustment 16
Depreciation ((1,500 540) 20%) 192
688
9 Objective test answers: Statements of cash flows

1 A It is important to know which way round the additions and subtractions go when preparing a
statement of cash flows.
2 D Profit on disposal will be included in profit, so should be deducted.
3 C These items do not affect cash flow.
4 D The final figure in the statement of cash flows is the increase or decrease in cash and cash
equivalents.
5 A
$m
Balance b/d 30
Additions 16
46
Depreciation (6)
Disposals (balancing figure) (4)
Balance c/d 36
Alternative working:
PROPERTY, PLANT & EQUIPMENT CARRYING AMOUNT
$m $m
Balance b/d 30 Depreciation 6
Disposals (balancing figure) 4
Cash paid for additions 16 Balance c/d 36
46 46
Balance b/d 36
Answers 163
As the carrying value of the asset disposed of is $4m and there was a loss on disposal of $1m, the
proceeds were $3m.
6 B Equity investments do not generally fulfil the description of cash equivalents
7 A All of these items involve movements of cash
8 C Depreciation and losses on disposal are added back.
9 A $000
Cash from sales
$3,600 + $600 $700 3,500
Cash paid for purchases
$2,400 + $300 $450 (2,250)
Payments for expenses (760)
490
10 Property, plant and equipment purchases = $105,000
Property, plant and equipment working

$000
Balance b/d 180
Revaluation 20
Additions (balancing figure) 105
305
Depreciation (40)
Disposals (5)
Balance c/d 260
PROPERTY, PLANT & EQUIPMENT CARRYING AMOUNT

$000 $000
Revaluation 20 Disposals 5
Cash paid for additions (bal figure) 105 Balance c/d 260
305 305
Balance b/d 260
11 A Interest paid = $38,000
Interest payable working

$
Balance b/d 12,000
Finance charge per SPLOCI 41,000
53,000
Cash paid (balancing figure) (38,000)
Balance c/d 15,000
INTEREST PAYABLE
$ $
Cash paid (bal figure) 38,000 Balance b/d 12,000
Balance c/d 15,000 SPLOCI 41,000
53,000 53,000
10 Section B answer: Statements of cash flows

(a)
Examiner's comments. A very large proportion of candidates prepared a statement of cash flows according to
IAS 7 indirect method rather than the direct method, thereby losing most of the marks.
164 Answers
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 20X8

Cash flows from operating activities $000 $000
Cash received from customers (W1) 440
Rents received 45
Cash paid to suppliers (W2) (225)
Cash paid to and on behalf of employees (70)
Other operating expenses (15)
Cash generated from operations 175
Workings
1 Cash received from customers
$000
Opening trade receivables 45
Revenue 445
Closing trade receivables (50)
Cash received from customers 440
2 Cash paid to suppliers

$000
Cost of sales 220
Opening inventory (25)
Closing inventory 40
Purchases 235
Opening payables 20
Closing payables (30)
Cash paid to suppliers 225
11 Dickson
Text references. Statements of cash flows are covered in Chapter 9.

Top tips. This is a really great question to practice preparing statements of cash flows. The calculation of interest
paid and income tax paid should have been fairly straightforward. It was easy to miss the amortisation on
development expenditure and instead just include the cash spent during the year be on the lookout for this in
your exam. The new finance lease was tricky make sure you understand how it affected the PPE and finance
liability workings. Remember that no cash changes hands in a bonus issue of shares!
DICKSON CO
$000 $000
Profit before taxation 342
Adjustments for:
Depreciation 57
Amortisation (W3) 60
Interest expense 15
Profit on disposal of assets (7)
467
Decrease in trade receivables (W1) 50
Increase in inventories (W1) (133)
Decrease in trade payables (W1) (78)
Interest paid (15 5) (10)
Income taxes paid (W4) (256)
Net cash from operating activities 40
Answers 165
Cash flows from investing activities

Development expenditure (190)
Purchase of property, plant & equipment (W2) (192)
Proceeds from sale of property, plant & equipment 110
Net cash used in investing activities (272)
Cash flows from financing activities
Issue of shares (850 500 (400 1/8)] 300
Issue of loan notes 50
Payment of finance lease liabilities (W5) (31)
Dividends paid (W6) (156)
Net cash from financing activities 163
Net decrease in cash and cash equivalents (69)
Cash and cash equivalents at beginning of period 109
Cash and cash equivalents at end of period 40
NOTES TO THE STATEMENT OF CASH FLOWS
1 Property, plant and equipment
During the period, the company acquired property, plant and equipment with an aggregate cost of
$248,000 of which $56,000 was purchased by means of finance leases. Cash payments of $192,000
were made to acquire property, plant and equipment.
2 Cash and cash equivalents
Cash and cash equivalents consist of cash on hand and balances with banks, and investments in
government bonds. Cash and cash equivalents included in the cash flow statement comprise the following
balance sheet amounts.
20X6 20X5
$000 $000
Cash on hand and balances with banks (103) 63
Short-term investments 143 46
Workings
1 Inventories, trade receivables and trade payables
Trade Trade
Inventories receivables payables
$000 $000 $000
Balance b/d 227 324 352
Increase/(decrease) (balancing figure) 133 (50) (78)
Balance c/d 360 274 274

$000
Balance b/d 637
Revaluations (160 60) 100
Finance leases 56
985
Depreciation (57)
Disposals (103)
Balance c/d 825
3 Development expenditure
$000
Balance b/d 160
Expenditure 190
350
Amortisation (balancing figure) (60)
Balance c/d 290
166 Answers
4 Income tax payable

$000
Balance b/d - current 45
Balance b/d - deferred 153
SPLOCI 162
360
Paid (balancing figure) (256)
Balance c/d current (56) & deferred (48) 104
5 Finance lease liability

$000
Balance b/d - > 1 year 80
Balance b/d - < 1 year 12
New finance lease 56
148
Bal c/d > 1 year (100) & < 1 year (17) 117
6 Dividends payable
$000
Balance b/d 103
234
Balance c/d 78
Alternative layout for workings 2 to 6 using T accounts

PROPERTY, PLANT AND EQUIPMENT
$ $
Revaluations (160 60) 100 Disposals 103
Finance leases 56 Balance c/d 825
Additions 192
985 985
DEVELOPMENT EXPENDITURE
$ $
Balance b/d 160
Expenditure 190 Amortisation 60
Balance c/d 290
350 350
INCOME TAX PAYABLE
$ $
Balance b/d current 45
deferred 153
Paid 256 SPLOCI 162
Balance c/d current 56
deferred 48
360 360
FINANCE LEASE LIABILITY
$ $
Balance b/d > 1 year 80
< 1 year 12
Paid 31
Balance c/d > 1 year 100 New finance lease 56
< 1 year 17
148 148
Answers 167
DIVDENDS PAYABLE
$ $
Balance b/d 103
Paid 156 Retained earnings 131
Balance c/d 78
234 234
12 UV (9/11)
Text references. Statements of cash flows are covered in Chapter 9. Tangible non-current assets are covered in
Chapter 6.
Top tips. A question like this requires you to manage your time well. Preparing a property, plant and equipment
note for 6 marks was a nice start to the question, although you may have struggled with the disclosure for the
revaluation because of the twist with deferred tax. Time management is important here if you dont know what
to do with one part of a question (eg the deferred tax/revaluation twist) then leave it and move on as there are
more easy marks to gain elsewhere. The deferred tax on revalued property only had an effect on the tax working,
not on the PPE note.
Following a logical approach to a statement of cash flow question is an absolute must if you are to get the easy
marks. Lay out your proforma and then work through the SPLOCI and SOFP, transferring the figures to your
proforma or to workings as you go.
This question was unusual in that it gave you cash balances for some things (eg development expenditure and
restructuring) and expected you to calculate the non-cash charges in the SPLOCI. Dont be put off with this, just
use the standard workings to calculate the required amounts.
Easy errors to make were:
Getting the signs mixed up on the working capital adjustments
Incorrect treatment of the legal provision/restructuring provision
Not including the dividend paid
Easy marks. Part (a) is should have been relatively straightforward to complete most of the numbers didnt
involve any calculations and could be inserted straight from the question. In part (b), as with most statement of
cash flow questions, there were some easy marks are those available for working through the SOFP and the
SPLOCI and transferring the numbers to your proforma eg SPLOCI: profit before tax, finance cost, loss on
disposal, and SOFP: year end cash balances, working capital changes (though watch the signs!), share issue and
the loan repayment. Even the additional notes gave you a couple of figures that could go straight into your
proforma the cash spent on restructuring and on development expenditure.
Examiners comments. There were some very good answers to this question, some candidates scoring full
marks on part (b), but it also produced some very poor answers scoring just a few marks. Candidates either new
how to do cash flows and scored fairly high marks or didnt really know what they were doing.
168 Answers
Marking scheme
Marks
(a) PPE note
B/f and c/f figures 1
Disposal 1
Revaluation 1
Additions
Depreciation charge 1
Carrying amount 1
6
(b) Statement of cash flows
Profit before tax
Finance cost
Depreciation
Loss on disposal 1
Amortisation of development expenditure 1
Restructuring provision/expenses 2
Legal provision 1
Working capital adjustments - 1 each 3
Interest paid 1
Income taxes paid 1
11
Purchase of PPE
Proceeds of sale of PPE 1
Development expenditure 1
2
Proceeds from issue of share capital 1
Repayment of borrowings 1
Dividends paid 1 3
Cash and cash equivalents

Presentation 1
Total 19
Total marks for question 25
(a) Property, plant and equipment

Property Plant Equipment Total
$000 $000 $000 $000
Carrying amount at 1 July 2010 3,700 1,000 85 4,785
Additions 215 275 490
Disposals (30) (30)
Revaluation 800 800
Charge for the year (50) (280) (40) (370)
Carrying amount at 30 June 4,450 905 329 5,675
2011
As at 30 June 2011
Cost/valuation 4,500 2,475 1,260 8,235
Accumulated depreciation (50) (1,570) (940) (2,560)
Carrying amount 4,450 905 320 5,675
As at 30 June 2010
Cost/valuation 4,150 2,350 985 7,485
Accumulated depreciation (450) (1,350) (900) (2,700)
Carrying amount 3,700 1,000 85 4,785
Answers 169
(b) UV
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 30 JUNE 2011
$000 $000
Finance cost (W4) 95
Depreciation (part (a)) 370
Loss on disposal 15
Amortisation of development expenditure (W1) 13
Increase in restructuring provision (W6) 60
Restructuring expenses (W6) (160)
Increase in legal provision (105 75) 30
Operating profit before working capital changes 1,963
Increase in inventories (W1) (15)
Increase in receivables (W1) (45)
Decrease in payables (W1) (25)
Cash generated from operations 1,878
Interest paid (W4) (122)
Purchase of property, plant and equipment (part (a)) (490)
Proceeds of sale of property, plant and equipment (30 15) 15
Development expenditure (W2) (114)
Dividend paid (W4) (168)
Proceeds from issue of equity shares (910 760) + (665 400) 415
Repayment of long term borrowings (1,500 250) (1,250)
Net cash used in financing activities (1,003)
Net decrease in cash and cash equivalents (65)

Cash and cash equivalents at 30 June 2010 160
Cash and cash equivalents at 30 June 2011 95
Workings
Trade Trade
$000 $000 $000
Balance b/d 80 145 85
Increase/(decrease) (balancing figure) 15 45 (25)
Balance c/d 95 190 60
$000
Balance b/d 69
Additions during year 114
183
Amortisation (balancing figure) (13)
Balance c/d 170
3 Income taxes
$000
Deferred tax on revalued property 200
Tax charge per SPLOCI 455
960
Income taxes paid (balancing figure) (229)
170 Answers
4 Interest paid
$000
Balance b/d 32
Finance cost per SPLOCI 95
127
Interest paid (balancing figure) (122)
Balance c/d 5
5 Dividend paid
$000
Balance b/d 1,982
Profit for the year 1,085
3,067
Dividend paid (balancing figure) (168)
Bal c/d 2,899
6 Restructuring provision
$000
Balance b/d 100
Charge per SPLOCI (balancing figure) 60
160
Restructuring cash spend (160)
Balance c/d 0

$000 $000
Balance b/f 69 Amortisation (bal fig) 13
Additions during year 114 Balance c/f 170
183 183
INCOME TAXES
$000 $000
Income taxes paid (bal fig) 229 Balance b/f current 305
Balance b/f deferred 0
Balance c/f current 321 Deferred tax on revalued property 200
Balance c/f deferred 410 Tax charge per SPLOCI 455
960 960
INTEREST PAYABLE
$000 $000
Interest paid (bal fig) 122 Balance b/f 32
Balance c/f 5 Finance cost per SPLOCI 95
127 127
RETAINED EARNINGS
$000 $000
Dividend paid (bal fig) 168 Balance b/f 1,982
Balance c/f 2,899 Profit for year 1,085
3,067 3,067
RESTRUCTURING PROVISION
$000 $000
Restructuring cash spend 160 Balance b/f 100
Balance c/f 0 Charge per SPLOCI (bal fig) 60
160 160
Answers 171
13 OP (5/11)
Text references. Statements of cash flows are covered in Chapter 9. Finance leases are covered in Chapter 8.
Top tips. As with many statement of cash flow questions, this is question is time pressured and you need to
make sure you leave adequate time to address part (b) which is worth 6 marks. You must be logical in your
approach to answering part (a) set up the proforma, and insert the numbers that dont require adjustment first.
Most of the adjustments (interest, tax development expenditure) were pretty straightforward if you had practiced
a few SOCF questions, though the PPE working was a bit more involved than it can be in other questions and
the downwards valuation may have put you off. Remember to work logically through the information you have.
This isnt the first time the examiner has included a provision in a statement of cash flows question, so it may
appear in the real exam. Make sure you know how to deal with it.
Incorrect treatment of the legal provision
Not including the downward valuation of PPE in the PPE working
Part (b) was a finance lease using the actuarial method. If you struggled with this part of the question, make
sure you go back and revise how to do the workings. Easy errors to make were accounting for the repayments as
if they were paid in advance instead of in arrears and missing out the depreciation and finance charge from the
financial statement extracts.
Easy marks. In part (a), the question gave you lots of figures that could be plugged straight into you proforma for
some easy marks: finance cost, amortisation, depreciation and loss on disposal of PPE. In part (b), if you
couldnt remember the workings for finance leases, you could still have picked up some marks by including the
figures from the extracts from the financial statements that didnt involve any (or very little) calculation eg the
cost of the non-current asset, the depreciation charge and the finance lease payments.
Marking scheme
Marks
(a) Statement of cash flows
Profit before tax
Finance cost
Depreciation
Loss on disposal 1
Amortisation of development expenditure
Impairment of brand name
Legal provision 1
Interest paid 1
Income taxes paid 1
9
Purchase of PPE 2
4
Dividends paid 1
4
Cash and cash equivalents
Presentation
Total 19
172 Answers
(b) Finance lease

Statement of financial position extracts 2
Statement of profit or loss and other comprehensive income extracts 2
Statement of cash flows extracts 2
6
Total marks for question
25
(a) OP
$000 $000
Finance cost 15
Depreciation (17 + 25) 42
Loss on disposal 6
Amortisation of development expenditure 15
Impairment of brand name 10
Legal provision 40
Operating profit before working capital changes 1,217
Decrease in inventories (W1) 4
Increase in payables (W1) 55
Purchase of property, plant and equipment (W2) (432)
Proceeds of sale of property, plant and equipment (11 6) 5
Proceeds from issue of equity shares (400 200) + (200 -100) 300
Repayment of long term borrowings (250 100) (150)
Net cash used in financing activities (430)
Net increase in cash and cash equivalents 34

Cash and cash equivalents at 1 April 20X0 35
Cash and cash equivalents at 31 March 20X1 69
Workings
Trade Trade
$000 $000 $000
Balance b/d 450 310 95
Increase/(decrease) (balancing figure) (4) 70 55
Balance c/d 446 380 150
Answers 173

Total PPE additions in year: 171 + 230 + 31 = $432,000
Land cost/valuation $000
Balance b/d 320
Additions in year (balancing figure) 171
491
Downwards valuation (65)
Bal c/d 426
Buildings - cost $000

Balance b/d 610
Bal c/d 840
Plant and equipment - cost $000

Balance b/d 180
211
Disposals (45)
Bal c/d 166
$000
Balance b/d 65
Additions during year 10
75
Amortisation (15)
Balance c/d 60
4 Brand name
$000
Balance b/d 40
40
Impairment (10)
Balance c/d 30
5 Income taxes paid

$000
660
6 Interest paid
$000
Balance b/d 20
Finance costs per SPLOCI 15
35
Interest paid (25)
Balance c/d 10
7 Dividend paid
$000
Balance b/d 423
1,232
Dividend paid (580)
Balance c/d 652
174 Answers
LAND COST/VALUATION
$000 $000
Balance b/d 320 Downwards valuation 65
Additions in year (balance) 171 Balance c/d 426
491 491
BUILDINGS - COST
$000 $000
Balance b/d 610
840 840
PLANT & EQUIPMENT - COST
$000 $000
Balance b/d 180 Disposals 45
211 211
$000 $000
Balance b/d 65 Amortisation 15
Additions during year 10 Balance c/d 60
75 75
BRAND NAME
$000 $000
Balance b/d 40 Impairment 10
Balance c/d 30
40 40
INCOME TAXES
$000 $000
Income taxes paid 280 Balance b/d current 260
Balance c/d current 250 Balance b/d deferred 120
Balance c/d deferred 130 Tax charge per SPLOCI 280
660 660
INTEREST PAYABLE
$000 $000
Interest paid 25 Balance b/d 20
Balance c/d 10 Finance cost per SPLOCI 15
35 35
RETAINED EARNINGS
$000 $000
Dividend paid 580 Balance b/d 423
Balance c/d 652 Profit for year 809
1,232 1,232
Answers 175
(b)
Financial statement extracts
Statement of financial position $
Non-current assets
Held under finance lease 248,610
Depreciation (1/10) (24,861)
223,749
Amounts due under finance leases 218,576
Current liabilities
Amounts due under finance leases (234,443 218,576) 15,867

Depreciation charge 24,861
Finance cost 29,833
Statement of cash flows

Add back: Depreciation 24,861
Add back: Finance cost 29,833
Interest paid (29,833)

Finance lease payments (44,000 29,833) (14,167)
Working
$
1.4.X1 Fair value of asset 248,610
Finance charge @ 12% 29,833
Repayment (44,000)
Balance 31.3.X2 234,443
Finance charge @ 12% 28,133
Repayment (44,000)
Balance 31.3.X3 218,576
14 YG (11/10)
Text references. Statements of cash flows are covered in Chapter 9. Ethics is covered in Chapter 3.
Top tips. This is question is very time pressured and you will probably have struggled to get all the figures into
the statement of cash flows in the time allowed. However remember that you need to leave some time to
address part (b) as you can pick up an easy 5 marks there. You must be logical in your approach to answering
part (a) set up the proforma, and insert the numbers that dont require adjustment first. Most of the
adjustments (PPE, interest, tax, development) were pretty straightforward if you had practiced a few SOCF
questions. The redundancy provision was a bit unusual, but if you keep in mind that you are showing cash
movements, it wasnt too tricky to work out the extra amount to include in cash from operating activities.
Incorrect treatment of the redundancy provision
Missing out the dividend paid
Not including the revaluation of PPE in the PPE working
Easy marks. The question gave you amortisation, depreciation and cash received on disposal of PPE, you should
have inserted these straight into your proforma to get some quick easy marks. Writing sensible comments in part
(b) would get you 5 easy marks.
176 Answers
Marking scheme
Marks
(a) Statement of cash flows
Profit before tax 1
Finance cost 1
Depreciation 1
Loss on disposal 1
Interest paid 1
Income taxes paid 1
9
Purchase of PPE 2
5
Dividends paid 1 4

Presentation 1
Total 20
(b) mark per valid point for each strategy, up to a maximum of 5
(a) YG STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 OCTOBER 20X9
$000 $000
Finance cost 16
Depreciation 250
Loss on disposal of PPE (66 - 70) 4
Amortisation of capitalised development expenditure 145
Decrease in redundancy provision (150)
Operating profit before working capital changes 531
Increase in inventory (W1) (97)
Purchase of property, plant and equipment (W4) (448)
Proceeds of sale of property, plant and equipment 66
Answers 177
$000 $000
Repayment of long term borrowings (715 360) (355)
Proceeds from issue of shares (1,600 + 800) 2,400
Net cash from financing activities 1,963
Net increase in cash and cash equivalents (1,989 205) 1,784
Cash and cash equivalents at 31 October 20X8 205
Cash and cash equivalents at 31 October 20X9 1,989
Workings
Trade Trade
$000 $000 $000
Balance b/d 509 372 310
Increase (balancing figure) 97 84 115
Balance c/d 606 456 425
2 Interest paid
$000
Balance b/d 3
Finance costs per SPLOCI 16
19
Interest paid (14)
Balance c/d 5

$000
460

$000
Balance b/d 4,248
Revaluation 300
4,996
Depreciation (250)
Disposal (70)
Balance c/d 4,676
$000
Balance b/d 494
Cash paid (balancing figure) 68
562
Amortisation (145)
Bal c/d 417
6 Dividend paid
$000
Balance b/d 1,250
1,396
Dividend paid (82)
Balance c/d 1,314
178 Answers

INTEREST PAYABLE
$000 $000
Interest paid 14 Balance b/d 3
Balance c/d 5 Finance cost per SPLOCI 16
19 19
INCOME TAXES
$000 $000
Income taxes paid (bal fig) 180 Balance b/d current tax 170
Balance b/d deferred tax 170
Balance c/d current tax 70
Balance c/d deferred tax 210 Tax charge per SPOCI 120
460 460
PROPERTY, PLANT AND EQUIPMENT

$000 $000
Balance b/d 4,248 Depreciation 250
Revaluation 300 Disposal 70
Additions (balancing figure) 448 Balance c/d 4,676
4,996 4,996
$000 $000
Balance b/d 494 Amortisation 145
Cash paid (balancing figure) 68 Balance c/d 417
562 562
RETAINED EARNINGS
$000 $000
Dividend paid 82 Balance b/d 1,250
Balance c/d 1,314 Profit for year 146
1,396 1,396
(b) Ethical issues

I should not accept the dinner invitation as this may cause me issues with objectivity as I will feel
pressure to reveal information that I should not disclose about the proposed takeover.
Revealing information about the proposed takeover before it is made public would be unethical. It would
give my friend insider information about the proposed takeover, which he could then use to his
advantage to make money on buying or selling shares in either entity, which is illegal.
Giving this information to my friend would breach the fundamental principle of confidentiality in the CIMA
Code of Ethics. The information I have obtained in my role as a professional accountant at YG should not
be shared with third parties unless there is a legal or professional right or duty to disclose, there is neither
in this case. The information I have obtained should also not be used for the personal advantage of myself
or third parties, there is a risk it might be in this case.
If my friend used this insider information to make a personal gain, which is illegal, this would breach the
fundamental principle of professional behaviour in the CIMA Code of Ethics which requires that a
professional accountant should comply with the law.
Answers 179
15 Objective test answers: Non-current assets, inventories and

construction contracts I
1 C 780 + 117 + 30 + 28 + 100 = 1,055
2 D They are all correct
3 D Neither internally generated goodwill nor internally developed brands can be capitalised.
4 A Goodwill on acquisition is retained in the statement of financial position and reviewed annually for
impairment.
5 A Carriage outwards is charged to distribution, abnormal costs are not included in inventory.
6 D 1 Production overheads should be included in cost on the basis of a company's normal level
of activity.
2 Trade discounts should be deducted but not settlement discounts.
3 IAS 2 does not allow the use of LIFO.
7 C $
Contract revenue recognised (900 60%) 540,000
Costs (840,000)
Expected loss (900 1,200) (300,000)
Costs incurred 720,000
Recognised loss (300,000)
Progress billings (400,000)
Due from customer 20,000
8 C Recoverable amount is the higher of value in use and net realisable value.
9 Revenue = $40m 45% = $18m
Profit = $6m 45% = $2.7m
$m
Contract price 40
Total costs (16 + 18) (34)
Anticipated profit 6
10
$
Carrying value (100,000 0.754) 31,640
Recoverable amount 28,000
Impairment loss 3,640
11 The contract is 70% complete. Revenue earned = $90m 70% = $63m.

12 CN should recognise a loss of $20m (90m 77m 33m).
13 D An allocation of EW's administration costs would not be included as these do not relate specifically
to the non-current asset.
180 Answers
16 Objective test answers: Non current-assets, inventories and

construction contracts II
1 C
$
Original purchase price 50,000
Depreciation 20X1: (50,000 5,000)/5 (9,000)
Depreciation 20X2 (9,000)
Upgrade 15,000
47,000
Depreciation 20X3: (47,000 5,000)/5 (8,400)
Carrying amount 1 January 20X4 38,600
Disposal proceeds (7,000)
Loss on disposal 31,600
2 B The impairment loss is applied first against the goodwill and then against the other non-current
assets on a pro-rata basis. It will be allocated as follows:
$m
Building 10
Goodwill 5
20
The carrying amount of the building will then become $10m (20 10)
3 A fall in the value of an asset, so that its recoverable amount is now less than its carrying amount in the
statement of financial position.
4 B Low production or idle plant does not lead to a higher fixed overhead allocation to each unit.
5 The amount for which an asset could be exchanged between knowledgeable, willing parties in an arm's
length transaction.
6 The publishing rights cannot be recognised as they have no reliable monetary value as they were a gift
and had no cost. The expected future value cannot be recognised as an asset as the event has not yet
occurred.
7 Value of goodwill = $130,000
$000 $000
Fair value of consideration shares (10,000 $20) 200,000
Cash 20,000
220,000
Fair value of net assets acquired:
Tangible non-current assets 25,000
Patents 15,000
Brand name 50,000
(90,000)
Goodwill 130,000
8 Year ended: Cost/valuation Depreciation Acc depreciation Carrying Amount

March 20X2 100,000 10,000 10,000 90,000
March 20X3 100,000 10,000 20,000 80,000
March 20X4 95,000 (20,000) 95,000
March 20X4 95,000 11,875 (95,000/8) 11,875 83,125
March 20X5 95,000 16,625 (83,125/5) 28,500 66,500
9 Depreciable amount is asset cost or valuation less residual value.
10 A This is replacement of a significant part of the asset. The carrying amount of the existing furnace
lining must be derecognised. B, C and D refer to repairs and maintenance.
11 Carrying amount of machine at 30 September 20X5 = 10,500
Remaining useful life = 2 years
Answers 181
Depreciation for year ended 30 September 20X6 (10,500/2) = 5,250

12 This question appears to refer to the criteria for recognising development expenditure, which are:
1 Technical feasibility of completing the intangible asset
2 Intention to complete and use or sell the asset
3 Ability to use or sell the asset
4 The asset will generate future economic benefits
5 Adequate resources exist to complete the project
6 Expenditure on the asset can be reliably measured
The answer only requires four of these.
13 $000
Total costs (1,500 + 250 + 400) (2,150)
Expected total profit 850
Percentage completed = 1,500/2,150 % = 70%

Statement of profit or loss and other comprehensive income amounts:
$000
Revenue (3,000 70%) 2,100
Costs (1,500)
Profit 600
17 Section B answers: Non-current assets, inventories and

construction contracts
(a) (i) Research costs
IAS 38 does not allow the capitalisation of research costs.
Development costs
IAS 38 lays down strict criteria to determine when carry forward of development costs is
permissible.
The expenditure attributable to the intangible asset during its development must be
measurable.
The technical feasibility of completing the product or process so that it will be available for
sale or use can be demonstrated.
The entity intends to complete the intangible asset and use or sell it.
It must be able to use or sell the intangible asset.
There must be a market for the output of the intangible asset or, if it is to be used internally
rather than sold, its usefulness to the entity, can be demonstrated.
Adequate technical, financial and other resources must exist, or their availability must be
demonstrated, to complete the development and use or sell the intangible asset.
(ii) IAS 1 has three basic accounting assumptions: going concern, accruals and consistency.
Each of these concepts is relevant in considering the criteria discussed above for carrying forward
development expenditure.
Going concern. The business must be in a position to continue its operations at least to the extent
of generating resources sufficient to complete the development project and therefore to market the
end product.
Accruals. The purpose of deferring development expenditure at all is to comply with the accruals
concept by matching such expenditure with the income expected to arise from it.
182 Answers
Consistency. IAS 38 states that the criteria for deferral of expenditure should be consistently
applied.
(b) The general principle underlying IAS 2 is that inventories should be shown in financial statements at the
lower of cost and net realisable value. This principle accords with both the matching concept, which
requires costs to be matched with the relevant revenues, and the prudence concept, which requires that
profits are not anticipated and any probable losses are provided for.
The cost of an item of manufactured inventory can include both external and internal costs and it is
important that only correctly attributable costs are included. These are direct acquisition costs, direct
inventory holding costs and production overheads based on a normal level of activity. General overheads
are excluded.
Production overheads are usually incurred on a time basis and not in relation to the quantities of
inventory produced. Most businesses, however, are assumed to continue to exist in the medium term and
production overheads are part of the inevitable cost of providing production facilities in the medium term.
Thus, so long as the scale of the overheads is not distorted by unusual levels of activity, it is reasonable to
include them in the 'cost' of inventory produced in the period to which they relate. Identifying a 'normal'
level of activity is more difficult where business is seasonal.
The establishment of NRV also poses a number of practical problems. For many intermediate products,
and even for finished items, there may be a limited market and the inventory volumes may represent a
significant proportion of the market especially if disposed of under distress conditions. Where a
well-developed and liquid market does not exist, it is usually appropriate to base NRV on an orderly
disposal after allowing for the reasonable additional costs of marketing and distribution.
(c) MEMO
To: Transport manager

From: Trainee management accountant
Subject: Useful life
IAS 16 Property, plant and equipment requires that the useful lives of non-current assets should be
regularly reviewed and changed if appropriate.
By 31 March 20X2 the delivery vehicle will have been depreciated for two years out of the original
estimate of its useful life of four years:
$
Cost 20,000
Depreciation ($20,000 2/4) (10,000)
Carrying amount at 31 March 20X2 10,000
The carrying amount at the start of the year ending 31 March 20X3 should now be written off over the
remaining, revised useful life of four years giving an annual depreciation charge of $2,500 ($10,000/4).
In the statement of profit or loss and other comprehensive income for the year ended 31 March 20X3
therefore the depreciation charge will be $2,500. In the statement of financial position the delivery
vehicle will appear at its carrying amount of $7,500 ($10,000 2,500).
(d)
Examiner's comments. Most candidates made a better attempt at the buildings part of the question then
the brand name. Some candidates did not depreciate the buildings for enough years before revaluating.
Despite the question saying that the brand name had been acquired for $500,000, many candidates
treated it as internally generated.
Building
The building has previously been revalued upwards and the gain on revaluation taken to the revaluation
surplus). Therefore IAS 36 Impairment of assets states that the impairment loss of $200,000 ($1.7m
1.5m) should be charged against the previous revaluation surplus of $900,000 leaving a revaluation surplus
of $700,000 and a carrying amount for the building of $1,500,000. The building is reported under
property, plant and equipment.
Answers 183
Revaluation surplus at 30 Sept 20X4 = $1.8m ($1.0 ($1.0 2/20))

= $900,000
Carrying amount of building at 30 Sept 20X5 = $1.8m ($1.8m/18)
= $1.7m
Market value at 30 Sept 20X5 = $1.5m
Brand name
IAS 36 requires the brand to be written down to its recoverable amount, which is the higher of its fair
value less costs to sell and value in use. Therefore the recoverable amount is the market value of
$200,000 as this is higher than its value in use of $150,000.
The impairment loss of $50,000 (250,000 200,000) is recognised immediately in the statement of
profit or loss and other comprehensive income. The brand is measured at $200,000 in the statement of
financial position and reported as an intangible asset.
Carrying amount = $500,000 ($500,000 5/10)
= $250,000
Recoverable amount = higher of fair value and value in use
= $200,000
Impairment = $50,000 ($250,000 200,000) charged to the statement of profit of loss and other
comprehensive income
Brand in statement of financial position = $200,000
(e)
Examiner's comments. The most common error made by those who understood the concept of revaluing
non-current assets was to miscount the number of years' depreciation, either using 4 or 6 years before the
first revaluation in 2007.
Building A
$
Cost 200,000
Depreciation to 31.8.01 (200,000/20 5) (50,000)
Revaluation 31.8.01 to revaluation surplus 30,000
Depreciation to 31.8.06 (180,000/15 5) (60,000)
120,000
Valuation 31.8.06 impairment loss (20,000)
Building A has suffered an impairment loss of $20,000 at 31 August 2006 which can be debited to
revaluation surplus reversing the previous revaluation gain.
Building B
$
Cost 120,000
Depreciation to 31.8.01 (120,000/15 5) (40,000)
Depreciation to 31.8.06 (75,000/10 5) (37,500)
37,500
Building B has suffered impairment losses totalling $7,500 at 31 August 2006, which will be charged to
the statement of profit or loss and other comprehensive income.
184 Answers
(f)
Examiners comments. This question caused problems for some candidates who ignored the details given
and calculated the percentage complete using costs instead of using the value of work completed as
specified in the question. Other common errors were not identifying clearly what each result represented
and not identifying the amount due on the contract as an asset or a liability.
HS Construction contract
$000
Total revenue 300
Total costs to complete (170 + 100) (270)
Total profit 30
State of completion of contract = 165/300 100% = 55%
Amounts recognised in the statement of profit or loss and other comprehensive income for the year ended
31 March 20X9
$000
Revenue (value of work completed) 165.0
Profit (30 55%) 16.5
Amounts recognised in the statement of financial position at 31 March 20X9
$000
Costs incurred 170.0
Profit recognised 16.5
186.5
Less progress billings (130.0)
Amount recognised as an asset/(liability) 56.5
Recognise an asset in statement of financial position under current assets:

Gross amount due from customer $56,500
(g)
Examiner's comments. This question was very badly answered. Those candidates that did identify the
correct IAS and the correct accounting treatment often omitted to explain why the items should be treated
that way, as a consequence only partial marks could be awarded.
In order to decide how to treat these items of expenditure in its financial statements, EK must decide
whether the expenditure gives rise to an asset or intangible asset which can be recognised in the
statement of financial position. Asset recognition criteria are dealt with in the IASBs Conceptual
Framework. Intangible assets are covered by IAS 38 Intangible assets.
The IASBs Conceptual Framework defines an asset as a resource controlled by an entity as a result of
past events and from which further economic benefits are expected to flow to the entity.
Both assets and intangible assets can only be recognised if both the following apply.
It is probable that future economic benefits will flow to the entity.
The cost of the asset can be measured reliably.
(i) Book publishing and film rights
These rights give access to future economic benefits and could even be resold, so the $1m
cost can be recognised as an intangible asset. No amortisation is necessary until the book is
actually published.
(ii) Trade fair
Since no new orders were taken as a direct result of the event and no estimate can be made
of additional revenue, the cost of the trade fair cannot be recognised as an asset. Future
economic benefits may not be probable. The cost of the trade fair does not meet the
Answers 185
recognition criteria for an asset and should therefore be treated as an expense in the year
incurred.
(iii) Consultant
Although the cost of the consultancy itself is known, it is virtually impossible to quantify any
change in the value of the image of EK. Since the cost of the corporate image cannot be
measured reliably, the consultancy fees should not be recognised as an asset and should be
expensed in the year incurred.
18 Geneva
Top tips. Begin by working out for each contract whether a profit or a loss is forecast. If it is a profit, calculate
how much can be recognised. If it is a loss, it is all recognised immediately.
Easy marks. Note that all of these contacts started in the current year so any attributable profit to date belongs
to the current year. This makes the calculations easier.
Treatment of construction contracts in the statement of financial position

$000
Contract Lausanne
Asset (1,000 + 240 1,080)
Gross amount due from customers for contract work 160
Contract Bern
Liability (1,100 200 950)
Gross amount due to customers for contract work 50
Contract Zurich
Liability (640 + 70 800)
Gross amount due to customers for contract work 90
Treatment of construction contracts in the statement of profit or loss and other comprehensive income
Lausanne Bern Zurich
$000 $000 $000
Revenue 1,200 1,000 700
Cost of sales 960 1,200 630
Gross profit/(loss) 240 (200) 70
19 Objective test answers: Capital transactions and financial

instruments
1 C The premium is transferred from share capital to share premium
2 C $500,000 + $11,000 (990,000 50c + 10,000 $1.60)
Note that the forfeited shares each brought in a total of $2.60
3 D Share capital $500,000 + $250,000 + $300,000 + $350,000 = $1,400,000
Share premium $800,000 $250,000 + $900,000 + $910,000 = $2,360,000
4 D If a shareholder fails to pay a call his shares are forfeited and the company is not obliged to return
his money.
5 C Cumulative and redeemable preference shares are classified as financial liabilities under IAS 32.
6 B As a deduction from equity.
186 Answers
7 $3.8m
$m
Receipt from issue ($10m - $0.5m) 9.5
Dividend payable over 4 years ($10m 7% 4) ((2.8)
Payable on redemption ($10m + 5%) ((10.5)
Total finance charge (3.8)
8 $10.025m
$m
Receipt from issue 9.5
Finance charge 10% 0.95
Dividend paid (0.7)
Balance at 31 December 20X8 9.75
Finance charge 10% 0.975
Dividend paid (0.7)
Balance at 31 December 20X9 10.025
9 B Treasury shares are an entitys own shares which it has repurchased and holds in treasury.
Treasury shares can be re-issued or issued as part of employee share schemes in the future.
10 B $
Ordinary shares at start of year 50,000
Add: bonus issue 50,000 50c 25,000
Add: new issue 60,000 50c 30,000
105,000
Share premium at start of year 180,000
Less: bonus issue 50,000 50c (25,000)
Add: new issue 60,000 30c 18,000
173,000
11 $248,800 $
Share premium
Opening balance 100,000
Rights issue 250,000 75c 187,500
Share issue costs (1,200)
Bonus issue 150,000 25c (37,500)
248,800
20 Objective test answers: Accounting standards I

1 A /10 $3,000
3
2 D /6
2
$3,000
3 A (1) describes an adjusting event which should be adjusted for in the financial statements.
4 C $1,800,000 $116,000 $20,000 = $1,664,000
5 B Discovery of fraud, error or impairment, which will have existed at the end of the reporting period.
6 D These have all occurred after the reporting period.
7 C 1 Contingent liability that is possible, therefore disclose.
2 Contingent liability but remote, therefore no disclosure.
3 Non-adjusting event after the reporting period, material therefore disclose.
8 B IAS 37 excludes retraining and relocation of continuing staff from restructuring provisions.
9 A All three criteria must be present.
10 D This does not affect the position as at the year end.
11 D The dividend will not be shown in the statement of profit or loss and other comprehensive income
or appear as a liability in the statement of financial position.
Answers 187
12 1 An entity has a present obligation as a result of a past event.

2 It is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation.
3 A reliable estimate can be made of the amount of the obligation.
13 C
14 An operating segment is a component of an entity:
(a) that engages in business activities from which it may earn revenues and incur expenses
(b) whose operating results are regularly reviewed by the entitys chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance, and
(c) for which discrete financial information is available
15 B Revenue must be 10% or more of the total revenue of all segments.
16 B This does not affect the position as at the year end.
17 D
21 Objective test answers: Accounting standards II

1 C Item 1 is not correct if it is probable and the amount can be estimated reliably, then it must be
provided for.
2 C Customers, suppliers and providers of finance are not related parties.
3 C In a finance lease, the risks and rewards of ownership are transferred.
4 A $
Deposit 30,000
Instalments (8 $20,000) 160,000
190,000
Fair value 154,000
Interest 36,000
89
Sum-of-the-digits = = 36
2
6 months to June X1 8
/36 $36,000
Dec X1 7
/36 $36,000
June X2 6
/36 $36,000
Dec X2 5
/36 $36,000
June X3 4
/36 $36,000 = $4,000
Dec X3 3
/36 $36,000 = $3,000
$7,000
5 D The fire is non-adjusting as it does not clarify the 31 December value of the building. It is therefore
only disclosed if it threatens the company's going concern status.
Again the customer is assumed to be insolvent at 31 December. We simply did not know this and
therefore it is an adjusting event and it should be adjusted for.
The answer would be B if the customer had become insolvent after the year end.
6 C 1 As the board decision had not been communicated to customers and employees there is
assumed to be no legal or constructive obligation therefore no provision should be made.
2 As refunds have been made in the past to all customers there is a valid expectation from
customers that the refunds will be made therefore the amount should be provided for.
3 There is no present obligation to carry out the refurbishment therefore no provision should
be made under IAS 37.
7 B Members of the close family of any key management of an entity are presumed to be related
parties.
188 Answers
8 An entity has a present obligation (legal or constructive) as a result of a past event.

It is probable that an outflow of resources embodying economic benefits will be required to settle the
obligation.
A reliable estimate can be made of the amount of the obligation.
9 C A provision should be made for the claim against AP.
10 B Customers, suppliers and bankers are not normally related parties.
11 Finance cost = $2,160
$
Total finance cost
Total payments 12,000 5 60,000
Fair value 51,900
Finance cost 8,100
Payments being made over five year period:

To 30 Sept 20X4 5/15 8,100
To 30 Sept 20X5 4/15 8,100 $2,160
12 C BW must provide for customer refunds.
13 Any four of the following:
the seller has transferred to the buyer the significant risks and rewards of ownership
the seller retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold
the amount of revenue can be measured reliably
it is probable that the economic benefits associated with the transaction will flow to the seller
the costs incurred or to be incurred in respect of the transaction can be measured reliably
14
$
Cost 1.1.X4 80,000
Interest 7.93% 6,344
Instalment (20,000)
Balance 31.12.X4 66,344
Instalment (20,000)
Balance 31.12.X5 51,605
Instalment (20,000)
Balance 31.12.X6 35,697
Current liability (51,605 35,697) = 15,908

Non-current liability 35,697
Total balance at 31.12.X5 51,605
15 $
Original cost 80,000
Depreciation 2004/2005 (80,000/12,000 (2,600 + 2,350)) (33,000)
16 D No sale has taken place, so DT must show that it is holding $90,000 which belongs to XX.
17 D Fair value less costs to sell ($740,000 - $10,000) is lower than carrying value ($750,000).
Note that non-current assets held for sale are not depreciated.
18 B Non-current assets held for sale are shown separately under the 'current assets' heading.
19 C Share transactions after the reporting period do not require adjustment.
20 A Large customers are not necessarily related parties of the entity.
Answers 189
21 Operating lease spread the rent-free period over the term of the lease
Total rent payable = 4 $12,000 = $48,000
Over five years = $48,000/5 = $9,600 per annum
$9,600 charged to profit or loss in each of 30 April 20X8 and 30 April 20X9.
22 Section B answers: Accounting standards I

(a) Asset
IAS 17 is an example of economic substance triumphing over legal form. In legal terms, with a finance
lease, the lessor may be the owner of the asset, but the lessee enjoys all the risks and rewards which
ownership of the asset would convey. This is the key element to IAS 17. The lessee is deemed to have an
asset as they must maintain and run the asset through its useful life.
Liability
The lessee enjoys the future economic benefits of the asset as a result of entering into the lease. There is
a corresponding liability which is the obligation to pay the instalments on the lease until it expires. Assets
and liabilities cannot be netted off. If finance leases were treated in a similar manner to the existing
treatment of operating leases then no asset would be recognised and lease payments would be expensed
through the statement of comprehensive income as they were incurred. This is 'off balance sheet finance'.
The company has assets in use and liabilities to lessors which are not recorded in the financial
statements. This would be misleading to the user of the accounts and make it appear as though the
assets which were recorded were more efficient in producing returns than was actually the case.
(b) MEMO
To: Production manager
From: Trainee management accountant
Subject: De-commissioning costs
Provision
The accounting question regarding the de-commissioning costs is whether or not a provision should now
be set up in the accounts for the eventual costs. According to IAS 37 any future obligations arising out of
past events should be recognised immediately. The de-commissioning costs are a future obligation and
the past event is the granting of the licence and the drilling of the site.
Therefore a provision should be recognised immediately in the financial statements for the year ended 31
March 20X3. This will be $20million discounted to present value.
Discounting
As this cost gives access to future economic benefits in terms of oil reserves for the next 20 years then the
discounted present value of the de-commissioning costs can be capitalised and treated as part of the cost
of the oil well in the statement of financial position. However this total cost, including the discounted de-
commissioning costs should be reviewed to ensure that the carrying amount does not exceed the
recoverable amount. If there is no impairment then the total cost of the oil well and discounted de-
commissioning costs should be depreciated for the next 20 years and a charge made to the statement of
profit or loss and other comprehensive income.
(c) Because the airline operation was sold before the year end and was a distinguishable component of the
entity it is a discontinued operation as defined by IFRS 5 Non-current assets held for sale and
discontinued operations. A separate line in the statement of profit or loss and other comprehensive
income for discontinued operations should be included after the profit after tax for continuing operations.
IFRS 5 states that this should be made up of the post-tax profit or loss of the discontinued operation and
the post-tax gain or loss on disposal of the airline assets. The loss on sale of the fleet of aircraft of $250m
and the provision for severance payments of $20m will both be reported in this line.
$m
Discontinued operations (270)
190 Answers
IFRS 5 also requires an analysis of the amount into:

(i) the revenue, expenses and pre-tax profit of discontinued operations (to include the loss made by
the airline for the year and the provision for the $20m severance payments); and
(ii) the gain or loss recognised on the disposal of the assets (the $250m loss on the sale of the fleet of
aircraft).
This can be presented either on the face of the statement of profit or loss and other comprehensive
income or in the notes.
The cash flows attributable to the operating, investing and financing activities of the airline should also be
disclosed, either in the notes to the financial statements or in the statement of cash flows itself.
As the restructuring has been agreed and active steps have been taken to implement it a provision is
required for $10m (because the entity has a constructive obligation to carry out the plan). This will be
reported as part of the continuing activities, probably as part of administrative expenses.
(d)
Examiner's comments. Most candidates correctly identified that the customer was not a related party. Most
candidates correctly identified that George was a related party but did not give sufficient explanation.
Some candidates correctly identified the provider of finance as not being a related party, but did not go on
to identify that Arnold was a related party.
XC
XC is not a related party of CB. The discount represents no more than a normal commercial arrangement
with a favoured customer.
Property
George is one of the key management personnel of the company and thus a related party, and the sale of
the property to him at a discount of $250,000 must be disclosed in the financial statements.
FC
As a provider of finance, FC is not itself a related party. However, Arnold is close family of George and
therefore a related party to CB, and the loan does not appear to have been advanced at normal
commercial terms. The loan and the involvement of Arnold will need to be disclosed.
(e)
Examiner's comments. Few candidates did well on this question. Most candidates failed to include all
three elements of the finance cost in the total cost. Some candidates used the straight line or sum of
digits method to allocate the finance cost instead of the actuarial method, despite the discount rate of
10% being given.
(i)
$
Receipt (2,000,000 192,800) 1,807,200
Costs:
Dividends (100,000 5) 500,000
Redemption 2,300,000
(2,800,000)
(ii)
Balance Interest 10% Dividend Balance
20X6 1,807,200 180,720 (100,000) 1,887,920
20X7 1,887,920 188,792 (100,000) 1,976,712
20X8 1,976,712 197,671 (100,000) 2,074,383
20X9 2,074,383 207,438 (100,000) 2,181,821
20Y0 2,181,821 218,179 (100,000) 2,300,000
The balance at 31 March 20Y0 is $2,300,000, which is the amount needed to redeem the shares.
Answers 191
(f)
Examiner's comments. A large proportion of candidates seemed to have problems with the dates in this
question. They said that the 20X5 financial statements should be changed, despite the fact that the fraud
was discovered more than 6 months after the year end and the accounts had been signed off by the
directors two months earlier.
Fraud
The discovery of the fraud in April 20X6 would be an adjusting event after the reporting period if it had
occurred before the financial statements were authorised for issue. If the accounts were approved on
1 March, they would probably have been issued by April. So it is unlikely that this can be accounted for
in the September 20X5 financial statements.
In the September 20X6 financial statements the overstatement of profit for the year ended 30 September
20X5 must be accounted for as a prior year adjustment. This will be shown in the Statement of Changes
in Equity. The profit for the year ended 30 September will be reduced to $555,000. This will affect the
retained earnings for the current year but not the current year profit.
Payment from new customer
The payment received in advance in September 20X6 cannot be treated as income because DF has not
yet done anything to earn that income. It should be posted to current liabilities as 'deferred income' and
released to the statement of profit or loss and other comprehensive income when the goods are
despatched.
(g)
Examiner's comments. Most candidates correctly identified the factory closure as a discontinued activity
but did not give sufficient explanation to gain more than a mark. Few candidates were able to explain how
to deal with assets 'held for sale'.
The factory will be treated as a discontinued operation under IFRS 5 at 31 March 20X7, as all operations
have ceased and sale of the land and buildings is 'highly probable'.
In the statement of profit or loss and other comprehensive income one figure will be shown under
discontinued operations, being the trading loss for the period from the discontinued operation (we are not
told what this is), plus the loss on disposal of the plant and equipment ($70,000), plus the closure costs
($620,000), less any tax allowances. This single figure should then be analysed in the notes.
In the statement of financial position, the carrying amount of the land and buildings ($750,000) should
be moved out of non-current assets and shown under current assets as 'non-current assets held for sale'.
The fair value less costs to sell would be higher, so the property is left at its carrying amount. It is not
depreciated.
(h) (i)
Examiner's comments. A large proportion of answers did not refer to the asset values and costs
given in the question. If a question asks for an explanation of the treatment in financial statements
and provides figures it should be fairly obvious that the answer must include reference to costs and
asset values given.
EK can treat the sale of its retailing division as a discontinued operation under IFRS 5 for the
following reasons:
It is classified as held for sale.
It represents a separate major line of business, with clearly distinguishable cash flows.
The retailing division can be classified as held for sale because it is available for immediate sale,
the company expects to dispose of it within one year and negotiations are already proceeding with
a buyer.
192 Answers
(ii) Statement of profit or loss and other comprehensive income

EK should disclose a single amount on the face of the statement of profit or loss and other
comprehensive income comprising:
(a) The post-tax profit or loss of the retailing division up to 31 October 20X7; and
(b) The post tax gain or loss on measurement to fair value less costs to sell. A disposal group
held for sale should be measured at the lower of its carrying amount and fair value less
costs to sell. For EK this is the lower of $443,000 and $398,000 ($423,000 $25,000).
The impairment loss of $45,000 should be recognised.
Statement of financial position
The assets of the retailing division should be removed from non-current assets and shown at their
fair value under current assets, classified as non-current assets held for sale. The impairment
should all be deducted from the goodwill balance.
23 Section B answers: Accounting standards II

(a) IAS 37 defines a provision as a liability of uncertain timing or amount. It goes on further to state that a
provision should only be recognised when:
(a) There is a present obligation, either legal or constructive, arising as a result of a past event.
(b) It is probable that an outflow of resources embodying economic benefits will be required in order to
settle the obligation.
(c) A reliable estimate of the amount of the obligation can be made.
This can be compared to the IASB's definition of a liability in its Conceptual Framework for Financial
Reporting:
A liability is a present obligation of the entity arising from past events, the settlement of which is expected
to result in an outflow of resources from the entity.
The key elements from the liability definition are all encompassed in the rules for recognising a provision.
(a) Obligation. A liability is a present obligation and a provision is only recognised if there is an
obligation. This obligation can either be a legal or a constructive obligation. A constructive
obligation arises out of past practice or as a result of actions which have previously taken place
which have created an expectation that the organisation will act in such a way.
(b) Past event. A provision must arise out of a past event so the event must already have happened at
the balance sheet date. If the event has not yet occurred then there is no provision as the entity
may be able to avoid it.
(c) Outflow of resources. A provision will only be recognised if it is probably that there will be an
outflow of resources to settle the obligation which ties in with the IASB's definition of a liability.
Answers 193
(b) STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (EXTRACTS)

Year 1 Year 2
$000 $000
Finance charge (W1) 5,567 4,453
Depreciation charge (W3) 17,660 17,660
STATEMENT OF FINANCIAL POSITION (EXTRACTS)
Year 1 Year 2
$000 $000
Non current assets
Property, plant and equipment (W3) 70,640 52,980
Amounts due under leases (W2) 56,320 38,660
Current liabilities
Amounts due under leases
(72,867 56,320) (W2) 16,547
(56,320 38,660) (W2) 17,660
Workings
1 Finance charge
$000
Total lease payments (5 $21,000) 105,000
Fair value of asset (88,300)
Total finance charge 16,700
Finance charge allocation

$
Year 1 5/15 16,700 5,567
Year 2 4/15 16,700 4,453
Year 3 3/15 16,700 3,340
Year 4 2/15 16,700 2,227
Year 5 1/15 16,700 1,113
16,700
2 Lease liabilities
$
Fair trade value 88,300
Finance charge 5,567
Repayment (21,000)
Balance end year one 72,867
Repayment (21,000)
Balance end year two 56,320
Repayment (21,000)
Balance end year three 38,660
3 Non-current assets
$88,300
Annual depreciation charge = = $17,660
5
$
Year 1
Cost 88,300
Year 2
194 Answers
(c)
Examiner's comments. Few candidate were able to produce a correct answer. Errors included:
Not calculating overall profitability of the contract
Ignoring the work in progress inventory

$000
Sales revenue (W) 30,000
Cost of sales (balancing figure) 21,500
Recognised profit (W) 8,500
STATEMENT OF FINANCIAL POSITION $,000

Total costs to date 24,000
Recognised profit 8,500
Progress billings (25,000)
Gross amount due from customer 7,500
Working
Revenue 60,000
Costs to date (24,000)
Costs to completion (19,000)
Total expected profit 17,000
Profit to date: 17,000 50% 8,500
Revenue to date: 60,000 50% 30,000
(d)
Examiner's comments. Most candidates were able to calculate the finance cost and the outstanding
balances at each year end, but many were unable to produce correct statement of profit or loss and other
comprehensive income and statement of financial position extracts.
Common errors included:
Basing the calculation on 4 years instead of 5
Applying the digit weightings in reverse order
Applying the sum of the digits to the annual repayment instead of the finance charge
(i) The amount of finance cost charged to the statement of profit of loss and other comprehensive
income for the year ended 31 March 20X5 is $9,067.
Working
$
Total lease payments 150,000
Fair value of asset 116,000
Using sum of the digits:

31.3.X4 34,000 5/15 = 11,333
31.3.X5 34,000 4/15 = 9,067
31.3.X6 34,000 3/15 = 6,800
31.3.X7 34,000 2/15 = 4,533
31.3.X8 34,000 1/15 = 2,267
34,000
Answers 195
(ii) Statement of financial position extracts

$
Held under finance lease 116,000
Depreciation (2/5) 46,400
69,600
Amounts due under finance leases 53,200
Current liabilities
Amounts due under finance leases (76,400 53,200) 23,200
Working
$
1.4.X3 Fair value of asset 116,000
Repayment (30,000)
Balance 31.3.X4 97,333
Repayment (30,000)
Balance 31.3.X5 76,400
Repayment (30,000)
Balance 31.3.X6 53,200
(e)
Examiner's comment. Most candidates were able to score good marks on this question. Many had learnt
a mnemonic to aid their recall of the six criteria. In Part (ii) some candidates failed to explain why the
development costs should be treated as recommended.
(i) Under IAS 38 development costs will normally be recognised as an expense in the accounting period in
which they are incurred. However, they may be capitalised if they meet all of the following criteria:
It is technically feasible to complete the asset so that it is available for use or sale.
The intention is to complete the asset so that it can be used or sold.
The business is able to use or sell the asset
It can be demonstrated that the asset will generate future economic benefits. For instance,
a market must exist for the product.
Adequate technical, financial and other resources exist to complete the development.
The development expenditure can be reliably measured.
(ii) CD's development costs meet all of the above criteria. The development is complete, testing has
confirmed the future economic benefits and the costs involved have been reliably measured. CD
should capitalise $180,000 development costs at 30 April 20X6. Amortisation should begin on 1
May 20X6 and continue over the expected life of the process.
(f)
Examiner's comments. Most candidates were able to correctly calculate the finance charges and balances
for each of the three years, but many candidates could not select the correct figures from their workings to
answer the question.
(i) Finance charge for the year ended 31 March 20X7: $72,000
(ii) Current liability: $228,000
Non-current liability: $378,000
196 Answers
Working
$000
Purchase price 900
Payment 1 April 20X5 (228)
672
Interest 13.44% 90
Payment 1 April 20X6 (228)
534
Interest 13.44% 72
Balance at 31 March 20X7 606
Payment due 1 April 20X7 (current liability) 228
Balance due (non-current liability) 378
606
Note. As payments are made in advance, the payment due on 1 April 20X7 includes no interest relating
to future periods.
(g) Related party under the terms of IAS 24 a party is related to an entity if:
(i) Directly or indirectly the party:
Controls, is controlled by, or is under common control with, the entity
Has an interest in the entity that gives it significant interest over the entity; or
Has joint control over the entity
(ii) The party is a member of the key management personnel of the entity or its parent, such as a director
(iii) The party is a close member of the family of any individual referred to in (i) or (ii) above
(iv) The party is an entity that is controlled, jointly controlled or significantly influenced by, or a
significant proportion of whose voting rights are held by, any individual referred to in (ii) or (iii)
Related party transaction a transfer of resources, services or obligations between related parties,
regardless of whether a price is charged.
(h)
Examiner's comments. Most candidates were able to give most of the IAS 18 criteria but few were able to
apply the criteria correctly to the scenario.
(i) The criteria in IAS 18 for income recognition are as follows.

The risks and rewards of ownership of the goods have been transferred to the buyer.
The entity retains neither managerial involvement nor effective control over the goods.
The amount of revenue can be measured reliably.
It is probable that the economic benefits associated with the transaction will flow to the
entity.
The costs incurred in respect of the transaction can be measured reliably.
The stage of completion of the transaction at the balance sheet date can be measured
reliably (rendering of services).
(ii) The $150,000 received on 1 September 20X7 cannot be recognised as income at that point
because the risks and rewards of ownership have not yet been transferred.
The $150,000 should be credited to deferred income in the statement of financial position and
$25,000 should be released to income each month as the magazines are supplied. The estimated
$20,000 each month cost of making the supply will be recognised as it arises at which point it
can be measured reliably.
Answers 197
Therefore at 31 October two months revenue can be taken into account and two months costs will
be set against that as follows:
$
Revenue 50,000
Gross profit 10,000
24 SA (5/13)
(a) The criteria that must be met before an operation can be classified as held for sale under IFRS 5 Non-
current assets held for sale and discontinued operations are:
It must be available for immediate sale in its present condition
The sale must be highly probable, management must be committed to selling the assets and have
an active programme to locate a buyer
It must be being offered at a reasonable price
The sale is expected within the next year
(b) SA Statement of profit or loss for the year ended 31 March 2013
Continuing Operations $000 $000
Revenue 2,784
Gross Profit 884
Administrative expenses W3 (368)
Distribution costs W3 (20) (388)
Profit from operations 496
Finance cost W4 (27)
Income tax W5 (87)
Profit for the period from Continuing operations 382
Discontinued Operations
Loss from discontinued operations W6 (284)
Profit for the period 98
SA Statement of financial position as at 31 March 2013
$000 $000
Non-current assets
Property, plant and equipment 983
Current Assets
Inventory 68
326
Non-current assets held for sale 431
Total Assets 1,740
Equity
Share capital 800
Total equity 1,106
Long term borrowings 450
Deferred tax (W5) 69
Total non-current liabilities 519
198 Answers
$000 $000
Current liabilities
Trade payables 51
Interest payable (W4) 14
Tax payable (W5) 50
Total current liabilities 115
Total equity and liabilities 1,740
SA Statement of changes in equity for the year ended 31 March 2013

Equity Revaluation Retained
Shares reserve earnings Total
$000 $000 $000 $000
Balance at 1 April 2012 800 80 183 1,063
Profit for period 98 98
Dividend paid (55) (55)
Balance at 31 March 2013 800 80 226 1,106
Workings - All figures in $000

(W1) Tangible Non-current Assets (continuing operations)
Plant & Equipment $000
Cost balance 1/4/12 1,010
Less discontinued operations (180)
830
Depreciation balance 1/4/12 360
220
Charge for year ([830-220] 20%) 122
342
Carrying amount at 31/3/13 488
Buildings
Cost 1/4/12 995
535
Charge for year (535x2.5%) 13
40
983
(W2) Non-current Assets - Discontinued Operations
Buildings
Cost 460
Depreciation b/f (23)
Depreciation year (460 2.5%) (12)
425
Plant and equipment
Cost 180
Depreciation b/f (140)
Depreciation year (40x20%) (8)
32
457
Fair Value 431
Loss on adjustment in value to fair value (26)
(W3)
Administration Distribution
Per trial balance 263 145
Less discontinued (30) (125)
Depreciation (W1) (122+13) 135
368 20
Answers 199
(W4) Finance charge

Years loan interest (450 6%) 27
Paid (13)
Accrued 14
(W5) Tax
Continuing Operations
Current year (50+40) 90
Decrease in deferred tax (3)
Charge for year 87
Deferred tax
Decrease in year (3)
69
(W6) Discontinued Operations

Revenue 185
Cost of sales (230)
(45)
Administration (W3+W2)(30+20) (50)
Distribution (W3) (125) (175)
(220)
Closure costs (78)
(298)
Tax refund 40
(258)
Loss on adjustment in value to fair value (W2) (26)
(284)
25 CQ (3/13)
CQ - Statement of comprehensive income for the year ended 31 December 2012
$000 $000
Revenue 1,992
Cost of sales W2 (1,107)
Gross Profit 885
Income tax expense W5 (67)
CQ Statement of financial position as at 31 December 2012

$000 $000
Non-current assets
Property, plant and equipment (W1) 1,472
Intangible assets Patent (W7) 65
1,537
Current Assets
Inventory (W8) 170
611
Total Assets 2,148
200 Answers

Equity
Share capital 750
Share premium 225
Total equity 1,349
Bank loan 375
Finance lease (W6) 27
Current liabilities
Trade payables 140
Tax payable (W5) 77
CQ Statement of changes in equity for the year ended 31 December 2012

Equity Shares Share Premium Retained earnings Total
$000 $000 $000 $000
Balance at 1 January 2012 500 150 168 818
Shares issued during year 250 75 325
Balance at 750 225 374 1,349

(W1) Tangible Non-current Assets
Cost/Valuation Land Buildings Plant & Equip. Vehicle Total
$000 $000 $000 $000 $000
Balance 1/1/12 1,015 400 482 0 1,897
Finance lease 46 46
Depreciation
Balance 1/1/12 (120) (279) 0 (399)
Charge for year (12) (51) (9) (72)
Carrying amount at 31/12/12 1,015 268 152 37 1,472
Depreciation
4003%=12
Buildings
Plant and equipment

Reducing balance = 482 279 = 203 25% = 51
Vehicle over lease period
46 1/5 = 9
(W2)
Buildings depreciation (W1) 12 0
407 140
(W4) Finance charge

35
Answers 201
(W5) Tax
Last Year b/f 32
Current year 77
109
67
Deferred tax
Decrease in year (42)
168
(W6) Lease
Opening Interest @ Closing
balance Paid Sub-total 15% balance
Year to 31/12/12 46 (12) 34 5 39
Year to 31/12/13 39 (12) 27 4 31
(W7) Patent
Cost 180
Amortisation year (18)
b/f (90)
Carrying value 72
Fair value 65
Impairment 7
Amortisation 18
25
(W8) Inventory
Balance 31/12/12 183
Obsolete items (13)
170
26 YZ (11/12)
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12 of the Study
Text. Operating leases are covered in Chapter 8. Intangible non-current assets, including patents and research
and development, are covered in Chapter 7.
Top tips. This was a fairly standard question on accounts preparation, the main complication being the
treatment of the operating lease. Under the accruals concept this should be accounted for over the 4-year period
of the lease. Standard workings were required, for example for non-current assets and expenses.
Potential areas for mistakes include:
failing to take the research costs out of the patent and writing them off against profit
incorrect calculation of deferred tax
accounting for the lease over three years instead of four
failing to realise that the share issue has already been accounted for in the trial balance
Easy marks. As with most accounts preparation questions, easy marks can be gained by making full use of the
information given in the question and inserting figures into the proformas. These easy marks can only be gained,
however, by adopting a methodical approach and laying out clear and accurate proformas.
202 Answers
YZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDING 30 SEPTEMBER 2012
$000
Revenue 9,820
Cost of sales (W2) (4,287)
Gross profit 5,533
Administrative expenses (W2) (978)
Distribution costs (W2) (515)
Finance costs (210)
Tax expense (W6) (698)
Revaluation gain on land (W4) 500
Total comprehensive income for the year 3,632
YZ STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2012

$000 $000
Assets
Non-current assets
Property, plan and equipment (W3) 13,247
Intangible asset - patent 294
13,541
Current assets
Inventory (W2) 422
1,682
Total assets 15,223

Equity
Share capital 1,700
Share premium 100
Retained earnings (3,117 170 + 3,132) 6,079
Revaluation reserve (1,800 + 500) 2,300
10,179
Loan 3,000
Deferred tax provision (430 47) 383
3,383
Current liabilities
Trade and other payables (940 + 6) 946
Current tax payable 715
1,661
YZ STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 30 SEPTEMBER 2012

Share Share Retained Revaluation
capital premium earnings reserve Total
$000 $000 $000 $000 $000
Balance at 1 October 2011 1,500 - 3,117 1,800 6,417
Issue of shares (W8) 200 100 - - 300
Dividends - - (170) - (170)
Total comprehensive income for the year - - 3,132 500 3,632

Balance at 30 September 2012 1,700 100 6,079 2,300 10,179
Answers 203
W1 Disposal of machinery
$
Cost 35,000
Accumulated depreciation (32,000)
Proceeds of disposal 8,000
Gain on disposal 5,000
Note that this amount is not significant enough to disclose separately on the face of the statement of
profit or loss and other comprehensive income, so it will be included in cost of sales as a deduction. This
is consistent with the treatment of depreciation on plant and equipment, which also goes through cost of
sales.
W2 Expenses
Cost of sales Administrative Distribution
$000 $000 $000
Per question 910 515
Gain on disposal (W1) (5)
Depreciation buildings (W3) 68
Depreciation P&E (W3) 411
Amortisation patent (W5) 42
Research costs 190
Closing inventory (242 + 180) (422)
Operating lease (W7) 6
Cost of raw materials 2,220
Direct labour 670
Opening inventory (190 + 275) 465
Production overheads 710
4,287 978 515
W3 Non-current assets
Plant and
equipment Land Buildings Total
$000 $000 $000 $000
Cost/valuation at 1 October 2011 3,900 9,000 3,400 16,300
Less: disposal (i) (35) - - (35)
Revaluation (W4) - 500 - 500
Cost/valuation at 30 September 2012 3,865 9,500 3,400 16,765
Plant and
$000 $000 $000 $000
Accum depn at 1 October 2011 2,255 - 816 3,071
Less: disposal (i) (32) - - (32)
Depreciation charge buildings
(2% 3,400) - - 68 68
Depreciation charge P&E
(25% [3,900 35] [2,255 32]) 411 - - 411
Accum depn at 30 September 2012 2,634 - 884 3,518
Carrying amount 30 September 2012 1,231 9,500 2,516 13,247
W4 Land revaluation
$000
Land value at 30 September 2011 9,000
Land value at 30 September 2012 9,500
Revaluation gain 500 Shown in other
comprehensive income and
transferred to revaluation
reserve
204 Answers
W5 Patent
$000
Cost at 1 October 2011 420
Amortisation as 1 October 2011 (84)
336
Amortisation for the year ending 30 September 2012 Show as an expense under
(420 / 10 years) (42) cost of sales.
294
W6 Tax expense
$000
Corporation tax 715
Underprovision re: prior year 30
Less: reduction in deferred tax provision (ix) (47)
698
W7 Operating lease
4-year lease, total payable 3 $8,000 = $24,000
Spread over 4 years = $6,000 p.a.
Nothing is paid in the first year, so accrue both the expense and the liability.
The lease relates to machinery therefore assume that the rental is charged to cost of sales.
W8 Share issue
200,000 $1 shares issued at a 50% (ie 50c) premium. This transaction is already reflected in the trial
balance (xi). The double entry to record this was:
$000 $000
DR Cash (200,000 $1.50) 300
CR Share capital 200
CR Share premium 100
27 QWE (9/12)
Text references. Single entity financial statements are covered in Chapters 4 to 12 of the Study Text.
Top tips. You should be familiar with the common adjustments required, such as depreciation, irrecoverable
debts, and interest. Make sure that you account for the debit and the credit side for each adjustment that you
make.
Easy marks. A good grasp of the principles of double entry should make for an easy three marks for part (a). In
part (b) a methodical approach to the working for cost of sales, administration and distribution costs can save
time and provides many of the figures for the first part of the answer. There are also generous presentation marks
for this question so make sure your answer is set out clearly and neatly.
Examiners comments. Question 3 produced some very good answers with some candidates scoring full marks.
However a considerable number of candidates were unable to prepare the journal entries to clear the suspense
account in part (a) or prepare correct calculations for the deferred development expenditure and deprecation of
property, plant and equipment.
Answers 205
Marking scheme
Marks
(a) Journal entries to clear suspense account 3
(b) SPLOCI up to gross profit 3.5

SPLOCI expenses and tax 5.0
Statement of financial position - assets 5.5
Statement of financial position equity and liabilities 4.0
Statement of changes in equity 1.5
Format and presentation 2.5
22
(a)
QWE
Journal entries to clear suspense:
Debit Credit
$000 $000
Suspense account 15
Plant and equipment disposal account 15
Cash received on disposal of some plant and equipment
Research expense account 20
Suspense account 20
Research cost to be treated as an expense
(b)
QWE - Statement of profit of loss and other comprehensive income for the year ended 31 March 2012
$000 $000
Revenue 2,220
Cost of sales W3 (1,675)
Gross Profit 545
Equity Share Retained

Shares Premium Earnings Total
$000 $000 $000 $000
Balance at 1 April 2011 930 310 621 1,861
SPLOCI for year 42 42
Balance at 31 March 2012 930 310 601 1,841
QWE - Statement of Financial Position at 31 March 2012

$000 $000
Non-current assets
Property, plant and equipment W1 2,301
Deferred development expenditure W2 105
Current assets
Inventory 214
354
2,760
206 Answers
Total assets
Equity
Share capital 930
Share premium 310
Total equity 1,841
Long term borrowings 500
Deferred tax 111
Current liabilities
Trade payables 190
Tax payable 83
Provision legal claim 25
Interest payable 10
Workings (All figures in $000)

(W1) Non-current assets
Cost Land Buildings Plant and equipment
Balance b/fwd 800 1,610 560
Disposal (W6) (82)
Balance c/fwd 800 1,610 478
Depreciation
Balance b/fwd 0 386 185
Disposal (W6) (79)
0 386 106
Year (1610x3%) 48
Year [(478 106) 12.5%)] 47
Balance c/f 0 434 153
Carrying amount 800 1,176 325

Total PPE c/f 2,301
(W2) Deferred Development Expenditure

Balance b/f 150
Years amortisation 10% (15)
Amortisation b/f (30)
Balance c/f 105
(W3)
Cost of sales Administration Distribution
Trial balance 1,605 190 72
Amortisation development expenditure W2 15
Research (from part (a) 20
Depreciation buildings W1 48
Depreciation plant and equipment W1 47
Gain on disposal PPE W6 (12)
Irrecoverable debt 32
Legal claim 25
Totals 1,675 295 72
(W4) Interest
Paid 10
Accrued 10
Answers 207
(W5) Tax
Last Year b/f 8
Current year 83
91
Increase in deferred tax 25
116
(W6) Disposal of plant and equipment

Cost 82
Less depreciation (79)
Carrying amount 3
Proceeds (15)
Gain on disposal (12)
28 DFG (5/12)
Text references. Financial statements for single entities are covered in Chapter 4 to Chapter 12 of the Study
Text.
Top tips. Do not ignore the narrative parts of longer questions like this one (see easy marks below!). Read the
requirements carefully; here you need to produce three financial statements.
Easy marks. A good knowledge of accounting standards would have enabled a well-prepared candidate to score
well on part (a) without using up too much time allocation.
Marking scheme
Marks
Treatment of items (vi) and (vii) 6.0

Statement of profit or loss and other comprehensive income 6.5
SFP - assets 5.0
SFP equity and liabilities 5.5
Maximum marks 25
(a) Item (vi) revenue recognition:
IAS 18 specifies five conditions that must be met before revenue can be recognised. The first two
conditions:
that significant risks and rewards of ownership of the goods have transferred to the buyer
the entity selling does not retain any influence or control over the goods are not satisfied by this
customer order as no goods have been despatched.
DFG should not recognise any revenue in its financial statements for the year ended 31 March 2012 and
should record the deposit received as a current liability.
Item (vii) impairment of intangible non-current assets:
An asset should be reviewed for impairment whenever circumstances indicate that an impairment may
have occurred. Due to recent economic circumstances a review has been carried out of the patent. An
impairment occurs where the assets carrying value is more than the higher of its value in use and its fair
value less cost to sell. The patents carrying value at 31 March 2012, $54,000 (after annual amortisation
of $9,000) is more than the higher of its value in use of $50,000 and its fair value $47,000. Therefore
an impairment has occurred and the patent must be written down by $4,000 to $50,000.
208 Answers
(b)
DFG Statement of profit or loss and other comprehensive income for the year ended 31 March 2012
$000
Revenue (1,200 15) 1,185
Cost of sales (W3) (642)
Gross Profit 543
Distribution costs (W3) (90) (326)
Finance cost (W4) (14)
Income tax expense (W5) (77)
DFG Statement of Changes in Equity for the year ended 31 March 2012
Equity Share Retained
shares premium earnings Total
$000 $000 $000 $000
Balance at 1 April 2011 550 110 121 781
Balance at 31 March 2012 550 110 192 852
DFG Statement of Financial Position at 31 March 2012

Non-current assets
Patent (W2) 50
Buildings (W1) 906
Plant and equipment (W1) 171 1,077
1,127
Current assets
Inventory 186
Total assets 1,448
Equity
Share capital 550
Share premium 110
Total equity 852
5% Loan notes 280
Current liabilities
Trade payables 61
Tax payable 52
Interest payable 7
Pre-paid deposit 15
Provisions 35
Answers 209

(W1) Depreciation
Buildings
Charge for year 960 260 = 700 3% = 21
Balance b/fwd 33
Balance c/fwd 54
Carrying amount 960 33 21 = 906
Plant and equipment

Cost balance b/fwd 480 120 = 360
Years depreciation 360 12.5% = 45
Other P&E cost 120
Depreciation already charged 120 12.5% 4 = 60
Annual depreciation (over two years) 30
Years depreciation P&E 45 + 30 = 75
Carrying amount at year end (480 234 45 30) = 171
(W2) Patent
Balance b/fwd cost 90
amortisation 27
63
Annual amortisation to 31/03/12 9
Carrying amount 31/03/12 54
Value in use 50
Impairment 4
(W3)
Administrative Distribution
Cost of sales expenses Costs
Trial balance: 554 180 90
Provision 35
Depreciation plant and equipment (W1) (45 + 30) 75
Patent amortisation/impairment (W2) (9 + 4) 13
642 236 90
(W4) Interest
Paid in year 7
Due for year (280 5%) 14
Accrued 7
(W5) Tax
Last year adjustment 10
Current year 52
77
(W6) Deferred Tax
Balance b/f 75
Current year 15
90
210 Answers
29 RTY (3/12) 45 mins
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12. Accounting for
non-currents assets specifically is in Chapter 6.
Top tips. Make sure that you are comfortable with accounting for non-current assets, including depreciation,
revaluations, disposals and gains and losses on disposals. This is an easy area to examine and in this question is
worth a considerable proportion of the marks.
Easy marks. Familiarity with the layout of the principal financial statements will enable you to slot in the figures
quickly; some of the figures given need no or minimal workings.
Marking scheme
Marks
Prepare the SPLOCI to gross profit 5.5
Prepare the SPLOCI expenses and tax 3.5
Prepare the SPLOCI other comprehensive income and presentation 1.5
Prepare SOFP - assets 6.5
Prepare SOFP equity and liabilities 4.0
Prepare statement of changes in equity 4.0
Maximum marks 25
RTY - Statement of profit or loss and other comprehensive income for the year ended 31 January 2012
$000 $000
Revenue 9,320
Gross Profit 3,261
Finance cost (137)
Other Comprehensive Income
Revaluation of property (W7) 1,240
1,705
RTY - Statement of Financial Position at 31 January 2012

$000 $000
Non-current assets
Property, plant and equipment 14,877
Deferred development expenditure 272
15,149
Current assets
Inventory 330
Total assets 1,900
17,049
Equity
Share capital 1,375
Share premium 2,750
Revaluation reserve 3,340
Total equity 11,377
Answers 211
Long term borrowings 2,740
Deferred tax 1,019
Total non-current liabilities 3,759
Current liabilities
Trade payables 1,080
Tax payable 765
Interest payable 68
Total current liabilities 1,913
RTY Statement of changes in equity for year ended 31 January 2012

Equity Share Retained Revaluation
Shares Premium Earnings Reserve Total
$000 $000 $000 $000 $000
Balance at 1 February 2011 1,375 2,750 2,785 2,900 9,810
SPLOCI for year 465 1,240 1,705
Disposal of revalued property (W4) 800 (800) 0
Balance at 31 January 2012 1,375 2,750 3,912 3,340 11,377

(W1) Depreciation
Cost/revalued amount Land Buildings Plant & equipment Total
Balance b/f 6,220 10,900 5,750 22,870
Revaluation adjustment 630 (2,000) (1,370)
6,850 8,900 5,750 21,500
Assets sold (1,800) (820) (2,620)
5,050 8,900 4,930 18,880
Depreciation
Balance b/f 2,610 3,900 6,510
Assets sold (800) (800)
2,610 3,100 5,710
Revaluation adjustment (2,610) (2,610)
Depreciation for year 445 458 903
. 445 3,558 4,003
Carrying amount 31 Jan 2012 5,050 8,455 1,372 14,877
(W2) Deferred development expenditure

Balance b/f 455
Expenditure in year 71
526
Years amortisation (254)
272
Years amortisation:
Capitalised in previous years 1,199
Expenditure in 2011 71
1,270
Amortised at 20% 254
(W3)
Cost of sales Administration Distribution
Trial balance 4,939 1,225 679
Depreciation (W1) 903
Research 163
Development amortisation (W2) 254
Gain on disposal of non-current assets (248)
Totals 6,059 1,225 679
212 Answers
(W4) Disposal of non-current assets

Land Plant and equipment Land
Carrying value 1,800 (820-800)= 20 Revalued amount 1,800
Selling price 2,060 8 Cost 1,000
Profit/(loss) 260 (12) Reversal of revaluation 800
(W5) Interest
Paid 69
Current liability 68
(W6) Tax
Balance b/f 35
Year 765
800
SPLOCI 755

Current liability tax 765
Provision deferred tax 1,019
(W7) Revaluation of Land and buildings
Land (W1) 630
Buildings (W1) (2,610 2,000) 610
1,240
30 ABC (11/11)
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12. Construction
contracts are covered in Chapter 11.
Top tips. This was a pretty standard accounts preparation question, however the inclusion of the construction
contracts may have put you off. Exam technique is important here. You must get the proformas on to your paper
and fill in the easy numbers first. Then tackle the areas you are comfortable with. In our answer, we have left the
construction contract until last as it is definitely the most tricky part.
These errors were easy to make:
Calculating the plant and equipment depreciation on a straight line basis instead of the reducing balance
basis.
Not recording the accrued interest payable on the long term loan in both the SPLOCI and the SOFP or
recording the accrued interest as $58,000 instead of $57,000.
Incorrectly including the underprovision of tax in the tax payable balance in the SOFP or forgetting to
include it in the SPLOCI tax charge.
Easy marks. There were plenty of easy marks to be gained in this question by inserting all the numbers that
didn't require calculation into the proformas.
Answers 213
ABC STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME FOR THE YEAR ENDING 30
SEPTEMBER 2011
$000
Revenue (9,500 + 6,400(W4)) 15,900
Gross profit 4,964
Administrative expenses (W1) (1,045)
Profit on disposal (15 (75 - 65))) 5
Interest payable (2,300 5%) (115)
ABC STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2011

$000 $000
Assets
Non-current assets
Property (W2) 6,875
Plant and equipment (W2) 2,073
8,948
Current assets
Inventory 310
Trade receivables (810 - 25) 785
Construction contract amount due from
customer (W4) 490
2,025
Total assets 10,973
Equity
Share capital 2,500
Share premium 1,500
6,652
Long-term borrowings 2,300
Deferred tax (250 + 19) 269
Current liabilities
Trade payables 235
Tax payable 910
Construction contract gross amounts due to
customer (W4) 550
Interest payable (115 58) 57
1,752
Total liabilities and equity 10,973
ABC STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 30 SEPTEMBER 2011
Share Share Retained
capital premium earnings Total
$000 $000 $000 $000
Balance at 1.10.10 2,500 1,500 627 4,627
Dividends (250) (250)
Total comprehensive
income for the year 2,275 2,275
Balance at 30.09.11 2,500 1,500 2,652 6,652
214 Answers
Workings
1 Expenses
$000 $000 $000
Per question 3,210 1,020 590
Depreciation charge (W2) 1,066
Construction contracts (W4) 6,660
Irrecoverable debt write off 25
10,936 1,045 590
Plant and
$000 $000 $000 $000
Cost at 30.09.10 4,930 3,500 7,500 15,930
Disposal (75)
Cost at 30.09.11 4,855 3,500 7,500 15,930
Accumulated depn at 30.09.10 2,156 - 3,750 5,906
Disposal (65) - - -
Depreciation charge 691* - 375 1,066
Accumulated depn at 30.09.11 2,782 4,125 6,907
Carrying amount at 30.09.11 2,073 3,500 3,375 8,948

* (4,855 2156 + 65) 25% = 691
3 Tax
Current tax $000
Estimated tax charge for the year 910
Plus underprovision from previous year 15
Increase in deferred tax provision 19
944
4 Construction contracts
Contract 1 Contract 2 Total
$000 $000 $000
Overall profitability of contract
Contract value 11,000 8,000
Costs to date 3,750 2,250
Costs to complete 5,400 6,750
Expected profit/loss 1,850 (1,000)
Recognise loss immediately
Percentage complete 40% 25%
Amounts to include in financial statements $000 $000 $000
Revenue (11,000 40%)/(8,000 25%) 4,400 2,000 6,400
Cost of sales (balancing figure) 3,660 3,000 6,660
Profit/expected loss (1,850 40%) 740 (1,000) (360)
Gross amounts due to/from customers Contract 1 Contract 2

$000 $000
Costs incurred 3,750 2,250
Recognised profits less recognised losses 740 (1,000)
4,490 1,250
Less progress billings to date (4,000) (1,800)
Amount recognised as asset/(liability) 490 (550)
Answers 215
31 ZY (9/11)
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12. Finance leases
are covered in Chapter 8. Redeemable preference shares are covered in Chapter 12.
Top tips. This was a pretty standard accounts preparation question, but with some very tricky adjustments to put
through. As with all accounts preparation questions, you should set out your proformas and insert the easy
numbers first.
The finance lease added an extra dimension to the PPE working but all you had to do for the PPE working was
to insert the cost of the new leased assets into the standard workings. If you are not comfortable with the
standard workings for finance leases, go back to Chapter 8 to revise as it seems to be a popular topic with the
examiner.
There were a couple of adjustments required to inventory. The write down was not too difficult, but it was easy
to forget to adjust sales/receivables as well as inventories for the returned goods, watch out for this in your real
exam.
The finance charge was a really tricky number to get right as you had to include the preference share dividend,
the full years worth of interest on the borrowings and the finance lease interest charge. Dont forget that
redeemable preference shares are classified as liabilities and not as equity.
Easy marks. There were easy marks to be gained in this question by inserting all the numbers that didn't require
calculation into the proformas, for example, share capital, share premium, dividends paid, long term loans etc.
Examiners comments. This question produced some very good answers with some candidates scoring full
marks. However a considerable number of candidates lost marks on the finance lease, the cumulative
redeemable preferred shares and inventory adjustments.
Marking scheme
Marks
Sales revenue 1
Cost of sales 2
Distribution costs
Profit on disposal 1
Finance cost 2
10
Inventory 1
Trade receivables 1
Cash
Equity and reserves 1
Deferred tax 1
Long-term borrowings
Finance lease 2
Preferred shares 1
Trade payables
Tax payable 1
Interest payable 1
11
216 Answers
Statement of changes in equity

Share capital
Share premium
Revaluation reserve
Retained earnings 1
3
Presentation 1
(a) ZY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDING 30 JUNE 2011
$000
Revenue (2,084 - 30) 2,054
Gross profit 908
Profit on disposal of vehicle (W3) 10
Finance costs (W5) (29)
(b) ZY STATEMENT OF FINANCIAL POSITION AS AT 30 JUNE 2011

$000 $000
Assets
Non-current assets
Property (W3) 828
Plant and equipment (W3) 557
1,385
Current assets
Inventory (W2) 385
Trade receivables (280 48 30) 202
Cash 229
816
Total assets 2,201

Equity
Share capital 500
Share premium 270
1,406
Long-term borrowings 320
Preferred shares 150
Finance lease liability (W6) 78
Current liabilities
Trade payables 120
Finance lease liability (W6) 22
Tax payable (W4) 56
209
Answers 217
ZY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 30 JUNE 2011

Share Share Revaluation Retained
capital premium Reserve earnings Total
$000 $000 $000 $000 $000
Balance at 1.07.10 500 270 220 288 1,278
Total comprehensive
income for the year 218 218
Dividends (90) (90)
Balance at 30.06.11 500 270 220 416 1,406
Workings
1 Expenses
$000 $000 $000
Per question 338 221
Opening inventory 358
Purchases 987
Closing inventory (W2) (385)
Depreciation 186
Irrecoverable debt write off 48
1,146 386 221
2 Closing inventories
$000
Per question 390
Less write down of inventory* (20)
Add returned goods 15
385
* Inventory should be valued at the lower of cost and NRV:
$000
Cost 100
NRV (110 30) 80
Write down required 20

PROPERTY CARRYING AMOUNT
$000 $000
Balance b/f (844 8) 836 Depreciation charge (844 1%) 8
Balance c/f 828
836 836
PLANT AND EQUIPMENT CARRYING AMOUNT

$000 $000
Balance b/f (864 249) 615 Disposal (95 95) 0
Additions (finance lease) 120 Depn charge (864 + 120 (finance 178
lease) 95 (disposal) 20%)
Balance c/f 557
735 735
Profit on disposal of vehicle =10 (proceeds) 0 (carrying value) = $10,000

4 Tax
Deferred tax $000
Deferred tax provision required 38
B/f deferred tax provision (45)
Decrease required credit to profit or loss (7)
218 Answers
Current tax
Estimated tax charge for the year 56
Plus underprovision from previous year 15
71
Total charge to profit or loss 64

5 Finance charges
$000
Redeemable preference share dividends (150 4% 6/12) 3
Long term borrowings interest (320 5%) 16
Finance lease interest (W6) 10
29
Accrued interest
Long term borrowings (320 5% 6/12) 8
Redeemable preference share dividends 3
11
6 Finance lease
$000
1.7.10 Fair value of asset 120
Finance charge @ 7.93% 10
Repayment (30)
Balance 30.6.11 100
Finance charge @ 7.93% 8
Repayment (30)
Balance 30.6.12 78
Non-current liability 78
Current liability (100 78) 22
32 MN (5/11)
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12. Discontinued
operations is covered in Chapter 5. Calculation of provisions is covered in Chapter 10.
Top tips. This was a tricky question with lots of twists! The discontinued operation may have thrown you, but
remember that by following the recommended step-by-step approach covered in the Text, you would have had a
good chance of scoring many of the easy marks before attempting to tackle the discontinued operation.
The tax charge on continuing operations required quite a few adjustments: a credit to the SPLOCI for the reduced
deferred tax provision, plus a charge for the tax for the year, plus an increase of $10,000 because the
discontinued operation was due to receive a tax credit. Dont worry if you didnt get all of these, just remember to
set out your workings clearly and you will get marks for the items you did include.
Accounting for the discontinued operation and the assets held for sale was quite involved as there were a few
things to remember to do in the financial statements. This isnt the first time discontinued operations have been
examined, so if you struggled with this question, go back to the Study Text Chapter 5 to revise and then attempt
some more questions from the Kit.
These errors were easy to make, look out for them in your exam:
Including the bank overdraft as cash at bank in current assets
Not recording the accrued interest payable on the long term loan in both the SPLOCI and the SOFP
Not including the impairment on assets held for sale in the loss from discontinued operations for the year
Forgetting to include the charge for the increase in the warranty provision in the SPLOCI.
Easy marks. There were still easy marks to be gained in this question by inserting all the numbers that didn't
require calculation into the proformas, for example, share capital, share premium, dividends paid, long term
loans etc. Calculating the depreciation charge for the year was pretty standard and you should have been able to
do this. If you remembered the expected value approach for provisions, then the warranty provision was also
fairly straightforward.
Answers 219
Marking scheme
Marks
Sales revenue 1
Cost of sales 3
Finance cost 1
Discontinued operation 2
10
NCA held for sale 1
Current assets 1
Share capital
Share premium
Retained earnings
Deferred tax 1
Overdraft
Trade payables
Tax payable 1
Interest payable 1
9

Share capital
Share premium
Retained earnings 1
3
Presentation 2
(a) MN STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDING 31 MARCH 20X1
$000
Revenue (1,120 80*) 1,040
Cost of sales (W2) (553)
Gross profit 487
Finance costs (300 4%) (12)
Profit for the year from continuing operations 203
Discontinued operations
Loss for the year from discontinued operations (W5) (189)
* To remove the discontinued operations results

220 Answers
(b) MN STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X1

$000 $000
Assets
Non-current assets
Current assets
Inventory 65
166
Non-current assets held for sale 176
Total assets 2,165

Equity
Share capital 600
Share premium 200
1,561
Current liabilities
Overdraft 14
Trade payables 51
Interest payable (300 4%) 12
Tax payable (W4) 67
Provision (W3) 82
226
MN STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 31 MARCH 20X1

$000 $000 $000 $000
Balance at 1.04.X1 600 200 777 1,577
Dividends (30) (30)
Total comprehensive
Balance at 31.03.X2 600 200 761 1,561
Workings
Continuing operations
Accumulated
Cost depreciation
continuing continuing CA at 31 Depn charge CA at 31
Asset type activities activities March 20X0 for year March 20X1
$000 $000 $000 $000 $000
Land 1,220 0 1,220 0 1,220
Buildings 700 140 560 35 525
Plant &
equipment 240 142 98 20 78
2,160 282 1,878 55 1,823
Answers 221
Discontinued operations
Accumulated
Cost depreciation
discontinued discontinued CA at 31 Depn charge CA at 31
Asset type operations operations March 20X0 for year March 20X1
$000 $000 $000 $000 $000
Land 150 0 150 0 150
Buildings 40 20 20 2 18
Plant &
equipment 60 35 25 5 20
250 55 195 7 188
Assets held for sale
Impairment on reclassification as held for sale = 188 176 = $12,000
2 Expenses
$000 $000 $000
Per question 622 160 170
Depreciation continuing activities (W1) 55
Depreciation discontinued activities (W1) 7
Increase in warranty provision (W3) 6
Less discontinued operation (137) (40) (90)
553 120 80
3 Warranty provision
$000
Provision required (0.1 190 + 0.15 20 + 0.75 8) 82
B/f provision (76)
Increase required charge to profit or loss 6
4 Tax
Deferred tax $000
Provision required 78
B/f provision (83)
Decrease required credit to profit or loss (5)
Tax charge in SPLOCI $000

Estimated income tax charge per question 67
Add back tax credit applicable to discontinued operation 10
Less credit for decrease in deferred tax provision (5)
Charge in SPLOCI 72
5 Discontinued operation
$000
Revenue 80
Cost of sales (130 + 7 (W1)) (137)
Administration expenses (40)
(187)
Income tax credit 10
(177)
Less impairment loss on assets held for sale (12)
(189)
222 Answers
33 XB (11/10)
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12. Calculation of
income tax on company profits is covered in Chapter 18 and deferred tax is covered in Chapter 19.
Top tips. The question specified that 8 marks out of 14 were available for the tax calculations, so this should
have highlighted to you that tax was a major issue in part (a). Dont let this put you off though, you should still
lay out your statement of comprehensive income proforma and work through the TB and the adjustments
plugging in the figures to your proforma. This will give you the accounting profit figure required to then work out
the income tax charge. Part (b) was a pretty straightforward preparation of a statement of financial position and
a statement of changes in equity.
These errors were easy to make:
Charging all tax depreciation at 25% instead of 50% for the new additions and 25% for the remaining
balance
Not recording the accrued interest payable on the long term loan in both the SPLOCI and the SOFP
Incorrectly including the underprovision of tax in the tax payable balance in the SOFP or forgetting to
include it in the SPLOCI tax charge
didn't require calculation into the proformas, particularly in part (b). The time pressure may have got to you in
this question though as there was a lot to do.
Marking scheme
Marks
Sales revenue
Cost of sales 1
Distribution costs
Administration expenses
Other costs
Finance cost 1
Presentation
6
Tax computation
Accounting profit
Add back: entertaining expenses 1
political donation 1
accounting depreciation 1
Less: tax depreciation 2
Deferred tax 2
8
Total 14
Answers 223

Land
Current assets 1
Share capital
Share premium
Retained earnings
Deferred tax
Trade payables
Tax payable 1
Interest payable 1
Maximum of 7

Share capital 1
Share premium 1
Retained earnings 1
Maximum of 3
Presentation 1
11
(a) XB STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR THE YEAR ENDING 31 OCTOBER 20Y0
$000
Revenue 690
Cost of sales (237 + 86 (W)) (323)
Gross profit 367
Administrative expenses (185)
Other costs (12 + 5) (17)
Finance cost (3 + 3% 200 6/12) (6)
Income tax expense (31(W) - 2(W) + 6) (35)
Working
Taxation
$000 $000
Accounting profit 97
political donation 12
accounting depreciation (W2) 86
103
Less: tax depreciation (W2) (78)
Taxable profit 122
Tax charge @ 25% 31

Carrying value Tax base
$000 $000
Cost 320
Depreciation 25% (192)
Balance 31.10.X9 128 90
Additions 110 110
238 200
Depreciation (20% (320 + 110)) (86)
Tax depreciation ((110 50%) + (90 25%) (78)
Balance 31.10.Y0 152 122
224 Answers
Deferred tax at 31.10.Y0 = (152 122) 25% = $7,500, round to $8,000

Decrease in deferred tax balance = $8,000 - $10,000 = $2,000
Note. The question specifies working to the nearest $000.
(b) XB STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20Y0
$000 $000
Assets
Non-current assets
Land 730
Property, plant and equipment (a) 152
882
Current assets
Inventory 18
343
Total assets 1,225
Equity
Share capital 630
Share premium 99
909
Deferred tax (a) 8
Current liabilities
Trade payables (77 3) 74
Tax payable (a) 31
Interest payable (3% 200 6/12) 3
108
XB STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 31 OCTOBER 20Y0

$000 $000 $000 $000
Balance at 1.09.X9 300 (bal.fig) 0 (bal.fig) 168 468
Issue of share capital 330 99 429
Dividends (50) (50)
Total comprehensive
Balance at 31.10.Y0 630 99 180 909
34 EZ (5/10)
Text references. Preparation of single company financial accounts is covered in Chapters 4 to 12.
Top tips. This question is relatively straightforward if you know your proformas the best way to get to grips
with the proformas is through question practice. These errors were easy to make:
Incorrectly accounting for the land revaluation
Not recording interest payable on the long term loan in both the SPLOCI and the SOFP
Incorrectly accounting for the operating lease charge and forgetting to include the operating lease payable.
didnt require calculation into the proformas. The property, plant and equipment calculation was also fairly
straightforward. Dont be put off by the mention of deferred tax all you had to do was deduct 10 from the
deferred tax provision and from the income statement tax charge!
Answers 225
EZ STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

$000
Revenue 720
Cost of sales (418 + 44 (W1)) (462)
Gross profit 258
Loss on disposal of non-current assets (2 7) (5)
Impairment of land (675 700 + 10) (15)
Operating lease (W2) (24)
Loss from operations (66)
Finance cost (4% 250) (10)
Loss before tax (76)
Income tax expense (18 10) (8)
Loss for the year (84)
Loss on revaluation of land (10)
Total comprehensive loss for the year (94)
EZ STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X9
$000 $000
Assets
Non-current assets
Land 675
Property, plant and equipment (W1) 285
960
Current assets
Inventory 112
284
Total assets 1,244
$000 $000
Equity
Share capital 600
Share premium 300
Retained earnings 5
905
Deferred tax 20
Current liabilities
Trade payables 32
Operating lease payable 9
Tax payable 18
Interest payable 10
69
EZ STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 31 MARCH 20X9
capital premium surplus earnings Total
$000 $000 $000 $000 $000
Balance at 1 April 20X8 400 (bal.fig) 200 (bal.fig) 10 181 791
Dividends (92) (92)
Total comprehensive
income for the year (10) (84) (94)
Balance at 31 March 20X9 600 300 0 5 905
226 Answers
Workings
$000
Cost at 31 March 20X8 480
Less disposal (37)
Accumulated depreciation at 31 March 20X8 (144)

Disposal 30
Charge for year (443 10%) (44)
(158)
Depreciation charged to administrative expenses

2 Operating lease
$000
Total charge over 30 months (2.5 24) 60
Charge per month (60/30) 2
Charge for year (2 12) 24
35 XY (Specimen paper)
Text references. Deferred tax is covered in Chapter 19. Preparation of single company financial accounts is
covered in Chapters 4 to 12.
Top tips. Dont be put off by part (a), the deferred tax is not too difficult to calculate. Dont forget that you need
to calculate the movement on the deferred tax provision for the statement of comprehensive income. For part (b)
the key to success is familiarity with the format of the statements. The best way to achieve this is through
practising your question technique. Easy errors to make are:
Not accounting for the impairment of the land
Not recording interest payable on the long term loan in both the SPLOCI and the SOFP
Ignoring the underprovision for tax in the previous year
Not including the gain on available-for-sale investments in the revaluation reserve.
Easy marks. There were easy marks to be gained by inserting all the numbers that didnt require calculation into
the proformas eg revenue, trade payables, trade receivables, cash, share capital, share premium.
(a) Deferred tax at 31 March 20X9

$000
Accounting value
Cost (630 378) 252
Accounting depreciation (630 20%) (126)
Carrying amount 126
Tax WDV
Cost (630 453) 177
Tax depreciation @ 25% (44)
Tax written down value 133
Temporary difference (7)
Deferred tax @ 25% (2)
Change in deferred tax balance

$000
Deferred tax liability at 31.03.X8 (19)
Less deferred tax asset at 31.08.X9 (2)
Credit to income tax expense (21)
Answers 227
XY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

FOR YEAR ENDING 31 MARCH 20X9 (extract)
$000
Income tax expense reduction in deferred tax 21
XY STATEMENT OF FINANCIAL POSITION AT 31 MARCH 20X9 (extract)

$000
Non-current assets
Deferred tax asset 2
(b) XY STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

$000
Revenue 1,770
Cost of sales (908 + 126 (part a)) (1,034)
Gross profit 736
Profit on disposal of non-current assets (W2) 9
Administrative expenses (303 + 14 (W1)) (317)
Finance cost (5% 280) (14)
Gain on available for sale investments 44
XY STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X9
$000 $000
Assets
Non-current assets
Land 729
Available for sale investments 608
Deferred tax asset 2
1,465
Current assets
Inventory 76
307
Total assets 1,772
Equity
Share capital 500
Share premium 200
Revaluation surplus (160 + 44) 204
1,326
Current liabilities
Trade payables 56
Tax payable 96
Interest payable 14
166
228 Answers
XY STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDING 31 MARCH 20X9

capital premium surplus earnings Total
$000 $000 $000 $000 $000
Balance at 1 April 20X8 400 (bal.fig) 150 (bal.fig) 160 321 1,031
Dividends (50) (50)
Total comprehensive
income for the year 44 151 195
Balance at 31 March 20X9 500 200 204 422 1,326
Workings
1 Impairment of land
$000
Less disposal (39)
Fair value at 31 March 20X9 729
Impairment of land (14)
Charge to administrative expenses

2 Profit on disposal of land
$'$000
Proceeds 48
Carrying amount of land (39)
3 Income tax expense
$000
Under provision from prior year 12
Current year charge 96
Reduction in deferred tax (21)
87
36 Objective test answers: Group financial statements

1 D
$000
Ordinary shares 400
Retained earnings at 1 January 20X7 100
Retained for 9 months to acquisition date (80 9/12) 60
560
Add goodwill 30
590
2 D
$
Consolidated retained earnings 560,000
Less Mercedes plc (450,000)
Add back unrealised profit (50,000 25/125) 10,000
120,000
3 C
$
Cost of investment 50,000
Share of post-acquisition retained earnings (20 35%) 7,000
Less dividend received (10 35%) (3,500)
Less impairment (6,000)
47,500
Answers 229
4 B
$000
Profit on sale (160,000/4) 40,000
Unrealised profit (40,000 25%) 10,000
Group share (10,000 30%) 3,000
5 A
Colossal plc Enormous Ltd
$ $
Retained earnings per question 275,000 177,000
Less pre-acquisition (156,000)
Depreciation on FV adjustment (20,000/4) (5,000)
16,000
Goodwill impairment (W) (12,000)
Enormous Ltd 16,000
Group retained earnings 279,000
Working
$ $
Consideration transferred 300,000
Share capital 100,000
Fair value adjustment 20,000
(276,000)
Goodwill at acquisition 24,000
Impairment (50%) 12,000
6 C
$
Share of post-acquisition retained earnings ((140 80) 40%) 24,000
Unrealised profit (30,000 25% 40%) (3,000)
141,000
7 C
$ $
(190,000)
Goodwill at acquisition 20,000
Impairment (10,000)
Goodwill at 31 December 20X9 10,000
8 A
A B
$ $
Retained earnings at 31 December 20X9 210,000 160,000
Less: pre-acquisition retained earnings (90,000)
70,000
Group share of B post-acquisition retained earnings
($70,000 100%)
Goodwill impairment (10,000)
Group retained earnings 270,000
9 B
$ $
Share premium 50,000
(250,000)
10 A $140,000 + $80,000 + $40,000 = $260,000
230 Answers
37 Club, Green and Tee (5/13)

(a) If an impairment review indicates that goodwill has increased in value, the increase is deemed to be
internally generated goodwill. Internally generated goodwill is not allowed to be recognised in the financial
statements.
Club will therefore not recognise the increase in goodwill and will include goodwill in its statement of
financial position at its original value.
(b)
CLUB GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2013
$000 $000
Assets
Non-current assets
PPE (50,050 + 30,450 + 1,000 (W5) 20 (W7)) 81,480
Intangible asset: goodwill (W2) 10,570
Investment in associate (W3) 8,573
100,623
Current assets
Inventory (34,910 + 9,310 192 PUP (W6)) 44,028
Trade receivables (38,790 + 16,530 960 (W6) 54,245
115 (W8))
Cash and cash equivalents (5,010 + 1,480 + 115 6,605
(W8))
104,878
Total assets 205,501

Equity
Share premium 0
Retained earnings (W4) 23,441
136,061
Long term borrowings (32,000 + 15,000) 47,000
Current liabilities
Trade payables (11,320 + 10,830 960 (W6)) 21,190
Loan interest payable (800 + 450) 1,250
22,440
Workings
W1 Group structure
Club
100% 3,980/15,920 But there is
= 25% significant
influence (iv)
Green Tee
Retained earnings 1 April 2011 (i) Retained earnings 1 April 2012
$3,000,000 $1,300,000
RE 31 March 13 (SOFP) 3,590,000
Less profit for the year (per
SPL)
(2,290,000)
RE at acquisition 1,300,000
Answers 231
W2 Goodwill on acquisition of Green

$000 $000
Less: fair value of identifiable net assets acquired
Share premium 3,470
Fair value adjustment (W5) 1,200
(25,040)
Goodwill at end of reporting period 10,570
W3 Investment in associate
$000
Cost of associate 8,000
Share of post-acquisition retained reserves (W4) 573
Less: group impairment losses on associate to date
-
8,573
W4 Retained earnings
Club Green Tee
$000 $000 $000
Retained earnings per SOFP 15,630 10,650 3,590
Less: retained earnings at acquisition (W1) (3,000) (1,300)
Fair value adjustment movement (W5) (200)
Less: PUP adjustment (W6) (192)
Less: PUP adjustment re: sale of machinery (W7) (20)
7,450 2,290
Green post acquisition retained earnings (7,450 100%) 7,450
Tee share of post acquisition retained earnings (2,290 573
25%)
Less: group share of impairment losses to date -
23,441
W5 Fair value adjustment (acquisition 1 April 2011)

At At end of
acquisition reporting
date Movement period
$000 $000 $000
Buildings 1,200 (200) 1,000 Note 1
1,200 (200) 1,000
Goodwill Retained Consolidated
(W2) earnings SOFP
(W4)
Note 1: Two years post-acquisition = 1,200 / 12 years 2 years = 200
W6 Inter-group trading
Club (parent) sold goods to Green (subsidiary)
Sale price 960,000 = 1331/3%
Cost of sales 720,000 = 100%
Profit 240,000 = 331/3%
20% of the goods remain in Greens closing inventory so 80% of the profit is unrealised, therefore reduce
consolidated inventory by $192,000 and reduce Clubs retained earnings by $192,000.
The goods have not been paid for so in Clubs books there is an inter-group receivable due of $960,000
and Green has a payable of $960,000. These must be eliminated on consolidation.
232 Answers
W7 Sale of machinery
Club (parent) sold machinery to Green (subsidiary)
Proceeds 115,000
Carrying amount (90,000)
Profit on disposal 25,000
Less: proportion realised through excess depreciation
(1/5 25,000) (5,000)
20,000 Note
Note: Remove from Clubs retained earnings as unrealised profit (see W4) and reduce group PPE.
W8 Cash in transit
Cash in transit of $115,000 paid by Green to Club:

DR Cash and cash equivalents $115,000
CR Receivables (intra-group) $115,000
38 TX, SX and LW (3/13)

(a) IAS 27 Consolidated and separate financial statements states that the key concept that determines
whether an entity is a subsidiary of another entity is that of control. Any situation that gives an entity
control of another creates a parent/subsidiary relationship.
IAS 27 provides the following instances where control can be achieved with fewer than 50% of equity
shares:
Power over more than 50% of voting rights by virtue of an agreement with other investors
Power to govern the financial and operating policies of the entity under a statute or agreement
Power to appoint or remove the majority of the members of the board of directors or equivalent
governing body and control of the entity is by that board or body
Power to cast the majority of votes at meetings of the board of directors or equivalent governing
body and control of the entity is by that board or body
(b)
TX GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2013
$000 $000
Assets
Non-current assets
PPE (545 + 480 + 68 (W5)) 1,093
Intangible asset: goodwill (W2) 0
Investment in associate (W3) 205
1,298
Current assets
Inventory (221 + 55 11 PUP (W6)) 265
Trade receivables (98 + 75 44 (W6) 15 (W7)) 114
Cash and cash equivalents (72 + 0 + 15 (W7)) 87
466
Total assets 1,764

Equity
Share capital 800
Share premium 400
Retained earnings (W4) 342
1,542
Current liabilities
Trade payables (156 + 47 44 (W6)) 159
Bank overdraft (0 + 63) 63
222
Answers 233
Workings
W1 Group structure
TX
100% 150/500
= 30%
SX LW
Retained earnings 1 Jan 2012 (i) Retained earnings 1 Jan 2012
$110,000 $70,000
W2 Goodwill on acquisition of SX
$000 $000
Consideration transferred 530
Share capital 360
Share premium 0
Fair value adjustment (W5) 72
(542)
Negative goodwill (credit to retained earnings) (12)
$000
Cost of associate 190
Less: group impairment losses on associate to date
-
205
TX SX LW
$000 $000 $000
Retained earnings per SOFP 300 140 120
Less: retained earnings at acquisition (W1) (110) (70)
Add: negative goodwill (W2) 12
26 50
SX post acquisition retained earnings (26 100%) 26
LW share of post acquisition retained earnings (50 15
30%)
Less: group share of impairment losses to date -
342
W5 Fair value adjustment (acquisition 1 Jan 2012)

At At end of
$000 $000 $000
Buildings 72 (4) 68 Note 1
72 (4) 68
(W2) earnings SOFP
(W4)
Note 1: One year post-acquisition = 72 / 18 years 1 year = 4
TX (parent) sold goods to SX (subsidiary)
Sale price 44,000 = 1331/3%
Cost of sales 33,000 = 100%
Profit 11,000 = 331/3%
234 Answers
All of the goods remain in SXs closing inventory so all of the profit is unrealised, therefore reduce
consolidated inventory by $11,000 and reduce TXs retained earnings by $11,000.
The goods have not been paid for so in TXs books there is an inter-group receivable due of $44,000 and
SX has a payable of $44,000. These must be eliminated on consolidation.
W7 Cash in transit
Cash in transit of $15,000 paid by SX to TX:
39 AZ, PQ and SY (11/12)
Text references. Group financial statements are covered in Chapters 13 to 16 of the Study Text. Fair values are
covered in Chapter 14 and revaluation of non-current assets in Chapter 6.
Top tips. Consolidation questions require excellent time management skills if they are to be tackled successfully,
and they also require good exam techniques, particularly when it comes to setting out and producing the
workings you need to fill out the proforma.
Part (a) of this question has a small narrative element and a calculation, for four marks in total; it is important
that you do not spend any more than your strict time allocation on this part.
In part (b) of this question it is not explicitly stated whether PQs share premium and revaluation reserve are pre-
or post-acquisition; in the answer they have been treated as pre-acquisition. If you need to make an assumption
in the exam make it clear to the examiner what that assumption is, and stick with it throughout your answer.
Easy marks. Some figures can be found in the question and put into the proforma without resorting to workings,
but as with most consolidation questions the process is what is being examined and this is what needs to be
shown clearly to the examiner.
(a) (i) IAS 27 allows an investment in a subsidiary to be recorded in the parents individual financial
statements at cost or at fair value.
If fair value is used, the investment is valued at the number of shares held multiplied by the
market price of the share. This is because the investment represents shares held in another entity
and the fair value of those shares is the amount at which they can be bought or sold in an active
market. The fair value of each share is therefore its market price.
(ii) The fair value of PQs net assets acquired by AZ on 1 October 2010 was:
$000
Share capital 100
Share premium 50
Retained earnings (i) 38
Fair value adjustment property (300 200) 100
Fair value adjustment plant and equipment (117 97) 20
368
Answers 235
(b)
AZ GROUP CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 2012
$000 $000
Assets
Non-current assets
PPE (400 + 297 + 112 (W5) 18 (W7)) 791
Intangible asset: goodwill (W2) 112
1,039
Current assets
Inventory (190 + 60 13 PUP (W6)) 237
Trade receivables (144 + 63 52 (W6) 60 (W8)) 95
461
Total assets 1,500

Equity
Share capital 900
Share premium 300
Revaluation reserve -
1,337
Current liabilities
Trade payables (96 + 119 52 (W6)) 163
Workings
W1 Group structure
AZ
100% 80/400 But there is
= 20% significant
influence (iv)
PQ SY
Retained earnings 1 Oct 2010 (i) Retained earnings 1 Oct 2011
$38,000 $40,000
RE 30 Sep 12 (SOFP) 95,000
Less profit for the year (v) (55,000)
RE at acquisition 40,000
W2 Goodwill on acquisition of PQ
$000
Less: fair value of identifiable net assets acquired (a) (ii) (368)
132
Less: impairment losses to date (iii) (20)
Goodwill at end of reporting period 112
$000
Less: group impairment losses on associate to date -
136
236 Answers
AZ PQ SY
$000 $000 $000
Less: retained earnings at acquisition (W1) (38) (40)
Less: PUP adjustment re: sale of machinery (W7) (18)
93 53 55
PQ post acquisition retained earnings (53 100%) 53
SY share of post acquisition retained earnings (55 20%) 11
Less: group share of impairment losses to date (iii) (20)
137
W5 Fair value adjustment (acquisition 1 October 2010)

At At end of
$000 $000 $000
Property (300 200) 100 - 100 Note 1
Plant and equipment (117 97) 20 (8) 12 Note 2
120 (8) 112
(W2) earnings SOFP
(W4)
Note 1: Assume no movement as depreciation policy is given for plant and equipment only.
Note 2: Two years post-acquisition = 20 / 5 years 2 years = 8
PQ (subsidiary) sold goods to AZ (parent)
Sale price 52,000 = 133 1/3%
Cost of sales 39,000 = 100%
Profit 13,000 = 33 1/3%
All of the goods remain in AZs closing inventory so all the profit is unrealised, therefore reduce
consolidated inventory by $13,000 and reduce PQs retained earnings by $13,000.
The goods have not been paid for so in PQs books there is an inter-group receivable due of
$52,000 and AZ has a payable of $52,000. These must be eliminated on consolidation.
W7 Sale of machinery
AZ (parent) sold machinery to PQ (subsidiary)
Proceeds 74,000
Carrying value (50,000)
Profit on disposal 24,000
Less: proportion realised through excess depreciation
(1/4 24,000) (6,000)
18,000 Note
Note: Remove from AZs retained earnings as unrealised profit (see W4) and reduce group PPE.
W8 Cash in transit
Cash in transit of $60,000 paid by AZ to PQ:
Answers 237
40 Wood, Plank and Bush (9/12)
Text references. Group financial statements are covered in Chapters 13 to 16 of the Study Text.
Top tips. Consolidation questions require a planned, methodical approach if they are to be completed in the
time available. Sufficient practice on the common adjustments/calculations such as goodwill and intra-group
trading will enable you to tackle these confidently and get some figures into your answer at the outset.
Easy marks. There were marks available for a mainly narrative answer in part (a).
Examiners comments. The answer to part (a), explanation of the treatment of an inter-group transfer of a piece
of machinery at a profit to the holding entity, was very poor with many candidates not attempting an answer and
a large proportion of the rest explaining that the profit should be increased to record the transfer gain. A number
of the answers to part (b) simply added the holding entitys and subsidiarys figures together, making no attempt
at consolidation adjustments other than a goodwill calculation. There were notable fewer candidates using
proportional consolidation in this examination.
Marking scheme
Marks
(a) Explanation of treatment of assets sold 3
(b) Calculation of goodwill on acquisition of Plank 2.5

Calculation of investment in Bush 1.5
Calculation of consolidated retained earnings 3.5
Consolidated statement of profit or loss and other comprehensive income 6.5
Consolidated statement of financial position 8.0
22
(a) The sale to Plank must be recognised in the group consolidated accounts at carrying amount, with no
profit or loss recognised. Therefore the following adjustments need to be made:
Cancel the profit on the sale - reduce consolidated profit for the year/consolidated retained earnings
by $20,000.
Cancel the increase in depreciation [($95,000-$75,000)/10], $2,000 - increase consolidated
profit for the year/consolidated retained earnings by $2,000.
Reduce consolidated non-current assets property, plant and equipment in the statement of
financial position by $20,000-$2,000 = $18,000.
(b) Investment of Wood in Plank
Wood purchased all 6,000,000 shares in Plank on 1 April 2011.
100% shares purchased therefore treat Plank as wholly owned subsidiary of Wood from 1 April 2011.
Investment of Wood in Bush
Wood purchased 1,540,000 of Bushs 5,500,000 shares on 1 April 2011.
This gave Wood 28% of Bushs equity.
As Wood has in excess of 20% of Bushs equity and can exercise significant influence over all aspects of
Bushs strategic and operational decisions Wood will treat Bush as an associated entity from 1 April
2011.
238 Answers
Workings (All workings in $000)

(i) Fair value of net assets of Plank at acquisition
Equity shares 6,000
8,630
(ii) Goodwill - Plank

Cost 9,200
Fair value of net assets acquired: 8,630
Goodwill 570
Impairment (80)
Balance at 31 March 2012 490
(iii) Investment in associate Bush

Cost 2,420
Add group share of post acquisition profits
(1,240 410) = 830 28% = 232
Investment at 31 March 2012 2,652
(iv) Intra-group trading

Mark up on cost 100% = 100/200 or 50% margin on selling price.
Selling price 520; unrealised profit = 520 50% = 260
All goods remain in inventory 260
Dr. Cr.
Consolidated cost of sales 260
Consolidated current assets inventory 260
Consolidated revenue 520
Loan interest
Dr Cr
Accrue interest receivable by Wood:
Receivables interest 155
Interest receivable SPLOCI 155
Receivables interest 155
Loan interest payable 155
Interest payable SPLOCI 155
Interest receivable SPLOCI 155
Consolidated interest payable = (810+440 155) = 1,095
Consolidated receivables interest (155 155) = 0
Consolidated trade receivables
Wood 13,400
Plank 5,710
Less intra-group sales (520)
Less cheque in transit (210)
18,380
Consolidated trade payables

Wood 3,910
Plank 3,740
Less intra-group sales (520)
7,130
(v) Excess depreciation

Economic life 15 years, straight line basis
Excess depreciation = 1,350/15 = 90
Answers 239
(vi) Consolidated Retained Earnings

Balance Wood at 1 April 2011 (5,400 3,490) 1,910
Add consolidated profit for year 5,829
Balance 31 Jan 2012 7,739
(vii) Consolidated Property, plant and equipment

Wood 11,820
Plank 7,240
Adjustment for sale of asset, net (see (a)) (18)
Excess depreciation (90)
20,302
Wood Group Consolidated statement of profit of loss and other comprehensive income for year ended 31
March 2012
$000
Revenue(15,500+6,900 520) 21,880
Cost of sales (8,700+3,080-520+260+90+20 2) (11,628)
Gross profit 10,252
Expenses (1,250+750+80) (2,080)
Share of profit of associated entity 232
Tax (1,250+230) (1,480)
Wood Group - Consolidated statement of financial position as at 31 March 2012

$000 $000
Non-current assets
Property, plant and equipment (vii) 20,302
Goodwill (ii) 490
Investment in associate (iii) 2,652
23,444
Current assets
Inventory (12,060 + 3,215 260) 15,015
Trade receivables (iv) 18,380
Cash and cash equivalents (1,730+510+210) 2,450
35,845
59,289
Total assets
Equity shares 38,900
Share premium 5,520
Retained earnings (vi) 7,739
52,159
Current liabilities 7,130
Trade payables (iv) 59,289
41 Loch, River and Stream (5/12)

Text references. Consolidated financial statements are covered in Chapter 13 to Chapter 16 of the Study Text.
Top tips. As with all questions involving groups, a methodical approach is essential. See the step-by-step guide
in Chapter 14 of the Study Text.
Easy marks. An accurate journal in part (a) could have scored 3 easy marks
240 Answers
Marking scheme
Marks
Journal 3.0
Goodwill 3.0
Investment in associate 1.5
Intra-group transactions - workings 2.0
Consolidated retained earnings 3.5
Statement of profit or loss and other comprehensive income 6.0
SOFP 6.0
Maximum marks 25
(a) Consideration for River paid in shares:
Cost $950,000; share market value $2. Therefore Loch issued 475,000 shares at a premium of
$475,000.
Journal
Dr Cr
$000 $000
Investment in River 950
Equity shares 475
Share premium 475
(b) Investment of Loch in River
Loch purchased all 600,000 shares in River on 1 April 2011.
100% shares purchased therefore treat River as wholly owned subsidiary of Loch from 1 April 2011.
Investment of Loch in Stream
Loch purchased 156,000 of Streams 520,000 shares on 1 April 2011.
This gave Loch 30% of Streams equity.
As Loch has in excess of 20% of Streams equity and can exercise significant influence over all aspects of
Streams financial and operating policies Loch will treat Stream as an associated entity from 1 April
2011.
Loch Group Consolidated Statement of Profit or Loss for year ended 31 March 2012
$000
Revenue (1,500 + 693 220 (W6)) 1,973
Cost of sales (865 + 308 + 12 (W5) 220 (W6) + 73 (W6)) (1,038)
Gross profit 935
Expenses (124 + 70 + 20 (GW imp)) (214)
Finance cost (80 + 40 15 (inter-co)) (105)
Share of profit of associate (30% 80) 24
Tax (118 + 20) (138)
Answers 241
Loch Group - Consolidated Statement of Financial Position as at 31 March 2012:

$000 $000
Non-Current Assets
Property, plant and equipment 2,092
(1,193 + 767 + 132 (W5))
Goodwill (W2) 56
2,395
Current Assets
Inventory (1,107 + 320 73 (W6)) 1,354
Trade receivables (1,320 + 570) 1,890
3,390
Total assets 5,785

Equity Shares (3,500 + 475) 3,975
Share premium 475
Retained Earnings (W4) 602
Current Liabilities
Trade payables (393 + 340) 733
5,785
Workings
W1 Group structure
Loch
100% 156/520
= 30%
River Stream
Retained earnings 1 April 2011 Retained earnings 1 April 2011
$130,000 $45,000
W2 Goodwill on acquisition of River

$000 $000
Share capital 600
Fair value adjustment (W5) 144
(874)
Goodwill at acquisition 76
Less: impairment losses to date (20)
Goodwill at end of reporting period 56
$000
Share of post-acquisition retained earnings (125,000 45,000)
30% (W4) 24
247
242 Answers
Loch River Stream
$000 $000 $000
Less: retained earnings at acquisition (130) (45)
Finance income not recorded by Loch 15
243 80
Share of River post acquisition retained earnings (100%
243
243)
Share of Stream post acquisition retained earnings (30%
80) 24
Less: group share of impairment losses to date (20)
602
W5 Fair value adjustment

At At end of
$000 $000 $000
Building (Note 1) 144 (12) 132
144 (12) 132
(W2) earnings SOFP
(W4)
Note 1: One year post-acquisition = 144 / 12 years 1 year = 12
W6 Provision for unrealised profit
Sale price 150% 220
Cost of sales 100% (147)
Profit 50% 73
Step 1: Remove intra-group trading:
Dr Revenue 220
Cr Cost of sales 220
Step 2: Remove unrealised profit (note all inventory still held):
Dr Loch retained earnings (& increase cost of sales) 73
Cr Inventory 73
W7 Cash in transit
Cash in transit of $26,000 paid by River to Loch:
42 Tree, Branch and Leaf (3/12)

Text references. Group financial statements (including Associates) are dealt with in Chapters 13 to 16 of the
Study Text.
Top tips. Exam technique is crucial when dealing with groups as there is a lot to think about. Getting the group
structure right at the beginning is essential if your subsequent calculations are to be accurate so it is worth
spending enough time on this. Dont make the common mistake of consolidating associates. Look carefully at the
information you are given on intra-group trading and set out your workings clearly.
Answers 243
Marking scheme
Marks
Goodwill 2.5
Investment in associate 2.0
Consolidated retained earnings 5.0
Consolidated SPLOCI 7.0
Consolidated SOFP 8.5
Maximum marks 25
Workings (All workings in $000)
(i) Fair value of net assets of Branch at acquisition
Equity Shares 790
Fair value adjustment 240
1,410
(ii) Goodwill - Branch

Cost 1,500
Goodwill 90
(iii) Investment in associate - Leaf

Cost 550
(220 70) = 150 40% = 60
Investment at 31 January 2012 610

Mark up on cost 50% = 50/150 or 33.3% margin on selling price.
Selling price 180; profit = 180 33.3% = 60
2/3 remain in inventory - unrealised profit 60 2/3 = 40
Dr. Cr.
Consolidated revenue 180
Current accounts:
Tree current account with Branch 123
Less cheque in transit 28
95 Cancels
Branch current account with Tree 95 Cancels
Loan interest
Accrue interest receivable by Tree 30
Dr Cr
Interest payable 30
Interest receivable 30
Consolidated interest payable = (102 + 59 30) = 131
Consolidated interest receivable (30 30) = 0
(v) Excess depreciation
Excess depreciation = 240/10 = 24
244 Answers

Balance Tree at 1 Feb 2011 (665 620) 45
Add consolidated profit for year 761
Balance 31 Jan 2012 806
Alternative calculation:
Balance - Tree (665 + 30) 695
Branch - group share of post acquisition profits (495 380) = 115
Associate - Leaf, group share of post acquisition profits (iii) 60
Cancel unrealised profit in inventory (iv) (40)
806
(vii) Consolidated Property, plant and equipment
Tree 1,535
Branch 1,155
2,906
Tree Group Consolidated Statement of Comprehensive Income for year ended 31

January 2012 $000
Revenue(2,200 + 777 180) 2,797
Cost of sales (1,112 + 456 180 + 24 + 40) (1,452)
Gross profit 1,345
Expenses (221 + 115) (336)
Share of profit of associated entity 60
Finance cost (131)
Tax (145 + 32) (177)
Tree Group - Consolidated Statement of Financial Position as at 31 January 2012

$000 $000
Non-Current Assets
Property, plant and equipment (vii) 2,906
Goodwill (ii) 90
Investment in associate (iii) 610
3,606
Current Assets
Inventory (1,360 + 411 40) 1,731
Trade receivables (1,540 + 734) 2,274
Cash and cash equivalents (47 + 75 + 28) 150
4,155
Total assets 7,761

Equity Shares 3,900
Retained Earnings (vi) 806
4,706
Current Liabilities
Trade payables (2,690 + 365) 3,055
7,761
Answers 245
43 PH, SU and AJ (11/11)
Text references. Preparation of the consolidated statement of financial position is covered in Chapter 14.
Accounting for associates is covered in Chapter 16.
Top tips. Dont get carried away with part (a), stick to the time allocation and then move on to part (b). If you
couldnt remember these definitions, go back to your Study Text and revise as you could pick up some easy
marks with a question like this in your real exam.
The consolidated statement of financial position was a reasonable consolidation on which you should have
comfortably passed. There were a lot of marks available for going through the mechanics of consolidating the
parent and subsidiary, make sure you stick to your exam technique to get these first. There were a couple of
tricky parts that you may have not known what to do with: the cash in transit and the additional depreciation on
the fair value adjustment. Easy errors to make are:
Not including the fair value uplift in your goodwill calculation
Not including the depreciation on the fair value uplift in your retained earnings working
Including the parents loan to the subsidiary as part of the groups long-term loans.
Easy marks. There were easy marks to be gained in part (a) for explaining control. In part (b), there were easy
for inserting the figures for PHs share capital and long-term borrowings straight from the question onto your
answer, and then for going through the mechanics of consolidation and showed your workings, even if you didnt
get it all right!
(a) Control is defined by IFRS 10 as follows: An investor controls an investee when the investor is exposed,
or has rights, to variable returns from its involvement with the investee and has the ability to affect those
returns through power over the investee.
Control can usually be assumed to exist when the parent owns more than half (ie over 50%) of the
voting power of an entity unless it can be clearly shown that such ownership does not constitute control,
which is rare.
IFRS 10 states that an investor controls an investee only if all three of the following apply; the investor
has:
(i) Power over the investee;
(ii) Exposure to, or rights to, variable returns from its involvement with the investee; and
(iii) The ability to use its power over the investee to affect the amount of the investors returns.
Power may be obtained from direct ownership of voting rights or may be derived from other rights, such
as the right to appoint and remove key personnel.
(b) PH GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 SEPTEMBER 2011
$000 $000
Non-current assets
Intangible: goodwill (W2) 18,610
Property, plant and equipment (50,390 + 57,590 +1,235 (W5)) 109,215
115,300
Current assets
Inventory (10,160 + 14,410 1,200(W6)) 23,370
Receivables (21,400 + 13,200 90) 34,510
Bank (1,260 + 3,600 + 2,800) 7,660
65,540
246 Answers
$000 $000
Share capital (PH only) 126,000
160,425
Long-term loan 32,700
Current liabilities
Payables (12,600 + 5,400 90) 17,910
Workings
1 Group structure
PH
100% 33%
SU AJ
2 Goodwill
$000 $000
Net assets acquired as represented by:
Ordinary share capital 48,000
Retained earnings on acquisition 7,680
Fair value adjustment on PPE (W5) 1,300
(56,980)
Goodwill 18,610
3 Investment in associate
$000
Cost of associate 16,400
Share of post-acquisition retained reserves (W4) 1,270
17,670
4 Retained earnings
PH SU AJ
$000 $000 $000
Per Question 26,500 15,600 28,800
Less pre-acquisition (7,680) (24,990)
Unrealised profit (W6) (1,200)
Depreciation on FV adjustment (W5) (65)
25,300 7,855 3,810
Group share of SU post acquisition RE 7,855
(7,855 100%)
Group share of AJ post acquisition RE 1,270
(3,810 331/3%)
34,425
5 Fair value adjustments

At acquisition Movement At year end
date
$000 $000 $000
Buildings 1,300 (65)* 1,235
(W2) Earnings PPE
(W4)
*1,300/20 years = 65
Answers 247
6 Intra-group trading
$000
Revenue 1331/3% 4,800
Cost 100% (3,600)
Profit 331/3% 1,200
Unrealised profit 1,200
44 AX (5/10)
Text references. Accounting for associates is covered in Chapter 16. Preparation of a consolidated statement of
financial position is covered in Chapter 14.
Top tips. This is a pretty straightforward consolidation question. Though you might have been pushed for time
because you had to do both the consolidated statement of financial position and the consolidated statement of
comprehensive income. The question tried to throw you off course with a negative retained earnings balance in
the subsidiary but dont worry about it, just put it into your calculations! Part (a) was a basic corporate tax
calculation that you should have found easy the question even supplied the tax depreciation amount to use.
Calculating the change in the deferred tax provision required a bit more thought.
Working methodically through part (b) using our recommended approach is the best way to make sure you have
included all the balances and get the most marks.
Not adjusting retained earnings for the tax calculated in part (a)
Incorrectly calculating goodwill due to the negative retained earnings figure
Forgetting to remove the intra-group sales figures from revenue and cost of sales
Easy marks. There were easy marks to be gained in part (a) for calculating the corporate income tax. In part (b),
there were easy marks for doing the basic adding across procedure for consolidation, filling in your proforma as
you go.
(a) AX CORPORATE INCOME TAX FOR YEAR ENDED 31 MARCH 20X9

$000 $000
Accounting depreciation 31
35
Less: tax depreciation (49)
Taxable profit 250
Tax charge @ 25% 63
Deferred tax provision

Difference between carrying amount and tax base increased by 49,000 31,000 = $18,000
Increase in deferred tax provision = 25% 18,000 = $4,500 (round to $5,000)
248 Answers
(b) AX CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME

$000
Revenue (820 + 285 55) 1,050
Cost of sales (406 + 119 55 +5 (W2)) (475)
Gross profit 575
Distribution costs (48 + 22) (70)
385
Income from associate (51 22%) 11
Finance cost (18 + 5) (23)
Taxation (16 + 63 + 5) (84)
Profit for the year/Total consolidated income for the year 289
AX CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X9
$000 $000
Assets
Non-current assets
Property, plant and equipment (1,120 + 700 + 75) 1,895
Goodwill (W3) 137
2,188
Current assets
Inventory (205 + 30 5(W2)) 230
Trade receivables (350 + 46) 396
656
Total assets 2,844
Equity attributable to owners of the parent
Share capital 1,500
Total equity 2,043
Deferred tax (120 + 16 +5) 141
Current liabilities
Trade payables (92 + 29) 121
Tax payable (16 + 63) 79
Bank overdraft 20
220
Workings
1 Group structure
AX
100% 22%
AS AA
2 Unrealised profit/Intra-group sales

$000
Sale price (125%) 25
Cost price (100%) (20)
Unrealised profit 5
Answers 249
DR Group retained earnings $5,000

CR Group inventory $5,000
DR Revenue $55,000
CR Cost of sales $55,000
3 Goodwill
$000 $000
Ordinary share capital 600
Retained earnings on acquisition (72)
Fair value adjustment on land 75
(603)
Goodwill 137
$000
Cost 145
Share of profit for the year (22% 51) 11
156
5 Retained earnings
AX AS AA
$000 $000 $000
Per Question 518 15 100
Less pre-acquisition retained earnings 72 (49)
Less current tax charge (a) (63)
Less increase in DT provision (a) (5)
Less unrealised profit (PUP) adjustment (W2) (5)
450 82 51
Group share of AS post acquisition retained
earnings (82 x 100%) 82
Group share of AA post acquisition retained
earnings (51 x 22%) 11
543
45 PSA (Specimen paper)
Text references. Accounting for associates is covered in Chapter 16. Preparation of the consolidated statement of
financial position is covered in Chapter 14.
Top tips. Dont get carried away with part (a), stick to the time allocation and then move on to part (b). Dont
forget to include a short discussion on the relevant ethical issues in your answer to part (a).
The consolidated statement of financial position was fairly straightforward, but did contain a couple of tricky
parts. Easy errors to make are:
Not including the depreciation on the fair value uplift in your retained earnings working
Incorrectly calculating the investment in associate balance due to the loss made by the associate in the
year
Easy marks. There were easy marks to be gained in part (a) for explaining equity accounting. In part (b), there
were easy marks for calculating trade payables and receivables and cash, and for inserting the figures for Ps
share capital and long-term borrowings straight from the question onto your answer.
250 Answers
(a) DRAFT MEMO

To: The Directors of P
From: A Management Accountant
Treatment of A in the consolidated financial statements
A is classified as an associate under IAS 28 because P can exercise significant influence (but not control)
over As strategic and operating decisions.
IAS 28 requires associates to be accounted for in the consolidated financial statements using the equity
method.
Under the equity method, P will take account of its share of the earnings of A, whether or not A distributes
the earnings as dividends. This is achieved by adding Ps share of As profit after tax to the consolidated
profit of P. In the statement of financial position, the investment in A is recorded initially at cost and then
each year will increase (or decrease) by the amount of Ps share of As change in retained reserves.
A will not be consolidated as a subsidiary as P does not exercise control over it.
It would not be in line with IAS 28 to include A as a simple investment of $13,000 in the consolidated
financial statements. Including A as a simple investment would suggest that P did not have influence over
the strategic and operating decisions of A. This would be potentially misleading to users of the financial
statements.
The CIMA code of Ethics states that professional accountants should behave with integrity. Producing
potentially misleading information is a breach of integrity and therefore is unethical.
(b) P CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X9
$000 $000
Assets
Non-current assets
Goodwill (W4) 12,600
109,270
Current assets
Inventory (8,000 + 12,000 1,000) 19,000
Trade receivables (17,000 + 11,000 250 4000) 23,750
Cash and cash equivalents (1,000 + 3,000 + 2,000) 6,000
48,750
Equity attributable to owners of the parent
Total equity 121,270
Long-term borrowings 26,000
Current liabilities
Trade payables (10,000 + 5,000 250 4,000) 10,750
Workings
1 Group structure
100% 40%
S A
Answers 251

$000
P carrying value of PPE 40,000
S carrying value of PPE 48,000
Fair value uplift 1,000
Less additional depreciation* (50)
88,950
* Additional depreciation for fair value uplift = 1,000,000/20 = $50,000 per annum
3 Unrealised profit
$000
Sale price (cost plus 1/3) 4,000
Cost price (sales price 3/4) (3,000)
Unrealised profit 1,000
DR Group retained earnings

CR Group inventory
4 Goodwill
$000 $000
Ordinary share capital 40,000
Retained earnings on acquisition 6,400
Fair value adjustment on buildings 1,000
(47,400)
Goodwill 12,600
$000
Cost 13,000
Share of loss for the year (40% (7,800 21,000)) (5,280)
7,720
6 Retained earnings
P S A
$000 $000 $000
Per Question 21,000 13,000 7,800
Less pre-acquisition (6,400) (21,000)
Unrealised profit (W3) (1,000)
Depreciation on FV adjustment (50)
20,000 6,550 (13,200)
S 100% 6,550
A 40% (5,280)
21,270
46 Parsley
Text references. Consolidated financial statements are covered in Chapters 13-16.
Top tips. Points to watch in this question are:
(a) Correct consolidation technique not proportionate consolidation
(b) Elimination of intra-group transactions
(c) Adjustments to inventory, receivables and cash
252 Answers
(a) Goodwill arising on acquisition of Sage

$000 $000
Net assets acquired:
27,000
Goodwill 3,000
(b) (i) PARSLEY
CONSOLIDATED STATEMENT OF PROFIT OF LOSS AND OTHER COMPREHENSIVE INCOME
$000
Revenue (135m + 74m 12m) 197,000
Impairment of goodwill (3,000 2,250) (750)
Finance charges (W2) (12)
Taxation (19,000)
(ii) PARSLEY
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 20X9
$000 $000
Non-current assets
Intangible: goodwill 2,250
Property, plant and equipment (net book value):
$(74,000,000 + 39,050,000) 113,050
115,300
Current assets
Inventory (10,630,000 + 4,498,000 1,000,000 (W1)) 14,128
Receivables (W3) 20,886
Bank 14,744
49,758
165,058
128,790
8% loan notes 150
Current liabilities
Payables (W4) 6,118
Taxation 18,000
Dividends: Parsley 12,000
36,118
165,058
Answers 253
Workings
1 Cost of sales
$000
Parsley 70,000
Sage 30,000
100,000
Less intra-group (12,000)
88,000
Add back unrealised profit in inventory $(12m 8m) 25% 1,000
89,000
2 Finance charges
$000
Per question Sage 16
Less loan interest payable to Parsley: $50,000 8% (4)
12
3 Receivables
$000 $000
Parsley 18,460
Sage 12,230
Dividends 8,000
Loan interest 4
Intra-group 1,800
(9,804)
20,886
4 Payables
$000 $000
Parsley 6,000
Sage 1,922
Loan interest (W2) 4
Intra-group 1,800
(1,804)
6,118
5 Retained earnings
Parsley Sage
$000 $000
Per question 37,540 15,000
Less provision for unrealised profit (W1) (1,000)
Pre-acquisition (2,000)
13,000
Goodwill impairment (W6) (750)
35,790
Share of Sage 13,000
48,790
6 Impairment of goodwill
$000
Goodwill at acquisition (part (a)) 3,000
Impairment 750
254 Answers
(c) The purpose of consolidated accounts is to present the financial position of connected companies as that
of a single entity, the group. This means that, in the consolidated statement of financial position, the
only profits recognised should be those earned by the group in providing services to outsiders. Similarly,
inventory should be valued at the cost to the group.
When a company sells goods to another company in the same group, it will recognised revenue and profit in
its own books. However, from the point of view of the group, no sale has taken place, because the goods
have not been sold outside the group. The sale must therefore be eliminated from revenue and the
unrealised profit (that is profit on inventory not sold outside the group) must be eliminated from inventory.
47 Tom, Dick and Harry
Text references. The consolidated statement of financial position is covered in Chapter 14. Associates are
covered in Chapter 16.
Top tips. Calculating the goodwill value in part (a) is tricky, however, you should be able to explain the treatment
of negative goodwill under IFRS 3 to gain some easy marks. Watch out for the extra depreciation charge created
when the fair value exceeds the book value of non-current assets. In this question you have been given the extra
depreciation charge, but in your exam you might be asked to calculate it. Remember that to calculate the extra
depreciation charge, you need to divide the fair value adjustment by the remaining useful life.
In part (b), dont forget to set out your proforma and insert the easy numbers first.
(a) (i) Goodwill on acquisition of Dick

$
Consideration paid 200,000
Less net assets acquired represented by:
Share capital (100,000)
Retained earnings (90,000)
Plus fair value adjustment (50,000)
(240,000)
Goodwill (40,000)
(ii) Treatment of negative goodwill under IFRS 3

If goodwill calculated is negative it means that the aggregate value of the net assets acquired may
exceed what the parent company paid for them. Under IFRS 3, this is referred to as a bargain
purchase. In this situation, IFRS 3 requires that:
(a) The group should first re-assess the amounts at which it has measured both the cost of the
combination and the acquired net assets. This is to identify any errors in the calculation and
to check that a bargain purchase really has occurred.
(b) Any negative goodwill remaining after this exercise should be recognised immediately in
profit or loss.
(b) TOM GROUP
CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 OCTOBER 20X1
$000 $000
Non-current assets
Property, plant and equipment (W2) 373
490
Current assets
Inventory (100 + 70 2 (W3)) 168
Receivables (170 + 40) 210
Bank (190 + 30) 220
598
1,088
Answers 255

Share capital 500
948
Current liabilities (110 + 30) 140
1,088
Workings
1 Group structure
Tom
100% 30%
Dick Harry
$000
Tom 205
Dick 120
Depreciation adjustment (2)
373
3 Unrealised Profit
Total profit 25,000/5 = 5,000
Profit on goods left in stock = 5,000 40% = 2,000
DR Retained earnings, CR Group inventory
$000
Cost of investment 115
Share of post-acquisition retained earnings ((150 130) 30%) 6
Impairment (4)
117
5 Retained earnings
Tom Dick Harry
$000 $000 $000
Per individual statements 370 130 150
Less pre-acquisition (90) (130)
40 20
Unrealised profit (W2) (2)
Negative goodwill (part (a)) 40
Depreciation adjustment (2)
Impairment of investment in associate (4)
Dick (40 100%) 40
Harry (20 30%) 6
448
48 ZA
Text references. The consolidated statement of financial position is covered in Chapter 14 and the consolidated
statement of comprehensive income is covered in Chapter 15. Associates are covered in Chapter 16.
Top Tips. Note that you are specifically asked for a working for retained earnings. The adjustments for intra-
group trading may be on the face of the consolidated statement of financial position or in a separate working.
256 Answers
(a) Calculation of goodwill on the acquisition of ZB

$000 $000
Share of net assets acquired
Share capital 4,000
4,060
Goodwill 485
NOTE. Goodwill is fully written off and will not appear in the statement of financial position. The
impairment will be deducted from retained earnings.
(b) ZA GROUP
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
$000
Revenue (870 + 285 240*) 915
Cost of sales (540 + 119 240* + 20(W2)) (439)
Gross profit 476
Distribution costs (54 + 36) (90)
Share of profit of associate (40 30%) 12
Income tax expense (40 + 25) (65)
* To remove intra-group revenue

ZA GROUP
$000 $000
Non-current assets
Property, plant and equipment (3,000 + 3,300) 6,300
Current assets
Inventory (1,500 + 800 20(W3)) 2,280
Receivables (1,800 + 750 30) 2,520
Bank (600 + 350) 950
5,750
12,762
Equity
$1 Ordinary shares 9,000
9,872
Current liabilities
Payables (1,220 + 200 30) 1,390
Tax (700 + 800) 1,500
2,890
Workings
1 Group structure
ZA
30%
100%
ZB ZC
Answers 257
2 Unrealised profit on intra-group sale

20
Profit on intra-group sale is $240,000 = $40,000
120
Unrealised profit is $40,000 50% = $20,000
Dr retained earnings, Cr group closing inventory

$000
Cost of investment 800
Share of post-acquisition retained earnings ((340-300) 30%) 12
Less impairment (100)
712
4 Retained earnings
ZA ZB ZC
$000 $000 $000
Per question 1,325 200 340
Unrealised profit (W3) (20)
Less pre-acquisition (60) (300)
140 40
Impairment of goodwill/investment in
associate (485+100) (585)
ZB 140
ZC (40 30%) 12
872
(c) Significant influence can usually be determined by the holding of voting rights in the entity, generally in
the form of shares.
Significant influence may take various forms:
(i) Participation in the policy making process
(ii) Material transactions between investee and investor
(iii) Board representation
(iv) Provision of technical advice
(v) An interchange of personnel between the companies
49 Objective test answers: General principles of taxation

1 B The tax authorities do not have the power to detain company officials. Their powers relate to
documents and information (eg information held on computer).
2 Direct taxation is charged directly on the person or entity that is intended to pay the tax.
3 C Equity
4 Tax evasion is manipulation of the tax system by illegal means to avoid paying taxes.
5 Domestic legislation and legal decisions
Tax authority practice
International treaties
Supranational bodies
6 B The person or entity that finally bears the cost of the tax.
7 The tax authority whose tax laws apply to an entity or person.
8 A Power of arrest.
9 C Effective incidence
258 Answers
10 Any three of the following:

(1) To give a date from which penalties and/or interest can accrue
(2) To get funds in as quickly as possible for use by central government
(3) To reduce backlogs and extra work for the tax department
(4) To prevent entities deducting tax at source, eg employers collecting payroll tax, from spending it
before it reaches the tax authority
11 A An example of hypothecation is the 'congestion charge' levied on London motorists that can only be
spent on London transport.
12 Equity: the tax burden should be fairly distributed
Efficiency: tax should be easy and cheap to collect
Economic effects: the government must consider the effect of taxation policy on various sectors of the
economy
13 A
14 A Formal incidence
15 C Naturally, tax authorities like to minimise the tax gap.
16 C International tax treaties (eg double taxation treaties) are a source of tax rules.
The other options are all sources of accounting rules.
50 Objective test answers: Types of taxation I

1 (a) Tax is deducted at source, so non-payment is not an issue
(b) The costs of collection are borne by employers
(c) The funds are received at the same time each month, which helps financial planning
2 C The company acts as a tax collector on behalf of the tax authority. Therefore any tax deducted is
put in a payable account until the money is actually paid to the tax authority. The balance on the
payable account represents the amount collected but not yet paid over.
3 Accounting profit + disallowable expenditure non-taxable income tax allowable expenditure = taxable
profit
4 C Tax deducted at source before payment of interest or dividends.
5 A A progressive tax
6 (a) Under group loss relief, it is possible to set the losses of a group member against the profits of
another group member. If the profit-making group member pays tax at a higher rate than the one
making the loss, the total tax liability of the group for the year can be reduced.
(b) Claiming group loss relief can help improve group cash flows as the loss is relieved more quickly.
7 A The classical system
$000
Company income tax (400,000 25%) 100
Personal income tax (250,000 30%) 75
175
8 B The company income tax that has already been paid on the distribution is imputed to the
shareholder as a tax credit.
9 D The head office is located, and all board meetings take place in, the Cayman Islands. Therefore the
place of management is in the Cayman Islands.
10 The EU issues rules on sales taxes, which must be applied by all member states.
Answers 259
11 Interest payments
Dividends
Royalties
Capital gains accruing to non-residents
12 Full deduction
Exemption
Credit
13 B Double taxable treaties deal with overseas income.
14 D The country where most of the entity's products are sold.
15 B $
50,000 12% 6,000
Less already paid (5,000)
Balance due: 1,000
16 B Corporate income tax is due on all profits of the branch, not just those remitted.
17 C EA will be deemed resident in Country C, which is its place of management.
18 D A construction project is only a permanent establishment if it lasts more than 12 months.
19 Net assets and consumption
20 C Under the OECD model, an entity is considered to have residence in the country in which it has a
permanent establishment, which includes a place of management.
21 $20,000
$
Net dividend 90,000
Withholding tax 10,000
Gross dividend 100,000
Underlying tax (100,000 200,000/1,000,000) $20,000
22
$ $
Proceeds of sale 425,000
Less costs of sale (8,000)
417,000
Cost:
Purchase price 155,000
Refurbishment of building 50,000
(205,000)
Indexation allowance on building
and refurbishment costs (100 + 50) 35% (52,500)
Capital gain 159,500
Tax at 25% 39,875
Note: no indexation is allowed on land.
51 Objective test answers: Types of taxation II

1 A suitable commodity would have the following characteristics:
A limited number of large producers
Products that are easily defined
A commodity produced in large volume
2 C Sales tax is an indirect tax, all the others are direct taxes.
3 B As long as they are registered for sales tax, options A, C and D merely act as tax collectors, it is the
end consumer who suffers the tax.
260 Answers
4 $
DA Input tax (200 15%) (30)
Output tax (500 15%) 75
Total due 45
DB Input tax (75)
Output tax (1,000 15%) 150
Total due 75
Total 120
5 $
Sale by ZA (500 15%) 75
Sale by ZB (1,000 15%) 150
Total paid 225
6 D Sales taxes such as VAT are indirect
7 B $1,450
$
VAT output tax (200 50 15%) 1,500
VAT input tax (200 35 15%) (1,050)
VAT payable 450
Excise duty payable (200 5) 1,000
Total payable 1,450
8 Amount paid = $3,000
$
Output VAT 120,000 15% 18,000
Input VAT 100,000 15% (15,000)
Amount paid 3,000
9
$ $
CU: Output tax (250 15%) 37.5 CZ: Output tax (690 15/115) 90.0
Input tax (115 15/115) (15.0) Input tax (250 15%) (37.5)
Payable 22.5 Payable 52.5
10 VAT paid $15,000

Gross profit $170,000
$
Output VAT (253,000 15/115) 33,000
Input VAT (138,000 15/115) (18,000)
Amount paid 15,000
Revenue (253,000 100/115) + 70,000 290,000
Cost of sales (138,000 100/115) (120,000)
11 C $5,550
Workings $
Cost 14,000
Excise duty 3,000
17,000
VAT @ 15% 2,550
19,550
Taxes paid = $3,000 + $2,550 = $5,550
12 $000
Output tax (18,400 15/115) 2,400
Input tax (10,000 + 4,000 15%) (2,100)
VAT due from FE 300
Note that VAT is deductible on purchases relating to zero-rated outputs, but not on purchases relating to
exempt outputs
Answers 261
13 B $ $
Accounting profit 350,000
Add: depreciation 30,000
disallowed expenses 15,000
45,000
395,000
Less: non-taxable income 25,000
tax allowable depreciation 32,000
(57,000)
Taxable profit 338,000
14 D $ $
Less: depreciation 30,000
(45,000)
305,000
Add: non-taxable income 25,000
57,000
15 A $ $
Accounting loss (350,000)
430,000
80,000
(57,000)
16 B $m $m
Taxable profit 50
Less: depreciation 15
disallowed expenses 1
(16)
34
Add: non-taxable income 3
tax allowable depreciation 4
7
17 D $ $
65,000
315,000
Less: tax allowable depreciation (30,000)
Tax payable = $285,000 25% = $71,250.

262 Answers
18 C $ $
50,000
410,000
(65,000)
Tax payable = $345,000 25% = $86,250.
19 B $ $
55,000
555,000
(85,000)
Tax payable = $470,000 25% = $117,500.
20 D $ $
42,000
292,000
Less: tax allowable depreciation (30,000)
Tax payable = $262,000 25% = $65,500.

21 Tax due = $22,500
$
Less non-taxable income (15,000)
Add non allowable expenditure 10,000
Tax = $90,000 25%
= $22,500
22 $2,000
$000
Revenue 45
Operating costs (23)
Finance costs (4)
Taxable allowance (20 50%) (10)
Taxable amount 8
Tax @ 25% 2
23
$
30 September 20X3 Tax on trading profits = 200 25%= 50,000
30 September 20X4 No tax to pay
30 September 20X5 Tax on trading profit = (150 120) 25% = 7,500
Tax on capital gains = (130 100) 25% = 7,500
15,000
24 A $320,000 less prior year over-provision ($290,000 $280,000)
Answers 263
52 Objective test answers: Deferred tax
1 A $
Over provision for prior period (2,000)
Provision for current period 50,000
Increase in deferred tax charge 5,000
Charge to income statement 53,000
2 C $
Under provision for prior period 200
Decrease in deferred tax charge (5,000)
3 A Item 2 consists of permanent differences, all the rest are temporary differences.
4 D All four items have a carrying amount equal to their tax base.
5 B IAS 12 states that deferred tax assets and liabilities should not be discounted.
6 $287,500 $
Taxable temporary differences b/f 850,000
Depreciation for tax purposes 500,000
Depreciation charged in the financial statements (450,000)
Revaluation surplus 250,000
Taxable temporary differences c/f 1,150,000
Deferred tax at 25% 287,500
7 D $
Over-provision for prior period (27,500)
Decrease in deferred tax charge (10,000)
Credit to income statement (7,500)
8 D $
Under-provision for prior period 2,800
Increase in deferred tax charge 5,000
9 Deferred tax balance = $55,625

Tax written down value:
$
1 Oct 20X3 cost 900,000
20X4 tax allowance 50% 900,000 (450,000)
30 Sept 20X4 tax written down value 450,000
20X5 tax allowance 25% 450,000 (112,500)
30 Sept 20X5 tax written down value 337,500
Accounting carrying value:
$
Cost 900,000
Depreciation 2 (900-50)/5 (340,000)
30 Sept 20X5 accounting carrying value 560,000
Temporary difference = $560,000 337,500
= $222,500
Deferred tax balance = $222,500 25%
= $55,625
264 Answers
10
$
Taxable profit for the year 946,000
Tax at 25% 236,500
Prior year over-provision (31,000)
Increase in deferred tax provision 117,000
11 Deferred tax balance at 31 March 20X7 = $34
Deferred tax balance at 31 March 20X8 = $(2)
Tax written down value:
$ 000
1 Apr 20X5 cost 600
20X6 tax allowance (50% 600,000) (300)
31 Mar 20X6 tax written down value 300
20X7 tax allowance (25% 300,000) (75)
20X8 tax allowance (25% 225,000) (56)
Accounting carrying value:
$000
Cost 600
Depreciation (2 (600/5)) (240)
31 Mar 20X7 carrying value 360
1 Apr 20X7 impairment review (120)
1 Apr 20X7 carrying value 240
Depreciation X7/X8 (240/3) (80)
31 Mar 20X8 carrying value 160
31 March 20X7
Temporary difference = $360 $225 = $135,000
Deferred tax balance = $135 25% = $34,000
31 March 20X8
Temporary difference = $160 $169 = $(9,000)
Deferred tax balance = $(9) 25% = $(2,000)
Note. The question specifies working to the nearest $1,000.
12 $200,250
$
Accounting profits 822,000
Entertaining expenses 32,000
Political donation 50,000
904,000
Government grant (103,000)
Tax at 25% 200,250
13 $18,750
Carrying value Tax base
$ $
1 October 20X5 400,000 400,000
Depreciation 25% (100,000)
Tax depreciation 50% (200,000)
Balance 30 Sept 20X6 300,000
Depreciation 25% (75,000)
Balance 30 Sept 20X7 225,000 150,000
Difference between carrying value and tax base = $225,000 150,000 = $75,000
Deferred tax at 25% = $18,750
Answers 265
14
Carrying value Tax base Difference
$ $ $
1 April 20X7 220,000 220,000
Depreciation (220,000/8) (27,500)
Balance 30 March 20X8 192,500 110,000 82,500
Revaluation 50,000
242,500 110,000
Depreciation (242,500/7) (34,643)
Balance 30 March 20X9 207,857 82,500 125,357
Deferred tax balance at 30 March 20X9 = 125,357 25% = $31,339
Deferred tax balance at 30 March 20X8 = 82,500 25% = $20,625
Movement on deferred tax balance at 30 March 20X9 = 31,339 20,625 = $10,714
15
Temporary
difference
B/f (12,500 5,000) 7,500
20X3 (2,120 1,630) 490
20X4 (1,860 1,590) 270
20X5 (1,320 1,530) (210)
Balance at 31 December 20X5 8,050 25% = 2,012.50
16
Accounting Deferred tax
book value Tax basis Difference Balance
(25%)
$$$$ $$ $ $
Cost 1.4.X4 500,000 500,000
Depreciation to 31.3.X5 (100,000)
Tax depreciation 50% - (250,000) - -
400,000 250,000 150,000 37,500
Depreciation to 31.3.X6 (100,000)
Tax depreciation 25% - (62,500) - -
Balance at 31.3.X6 300,000 187,500 112,500 28,125
Revaluation 1.4.X6 120,000
420,000
Depreciation (420,000/3) (140,000)
Tax depreciation 25% - 46,875 - -
Balance at 31.3.X7 280,000 140,625 139,375 34,844
Deferred tax balance 31.3.X6 28,125

Deferred tax balance 31.3.X7 34,844
Income statement charge X6/X7 6,719
53 Section B answers: Taxation I

(a) (i) Jurisdiction relates to the power of a tax authority to charge and collect tax. Competent jurisdiction
refers to the authority whose tax laws apply to an entity or person.
(ii) Hypothecation is the ring-fencing of revenue from certain types of tax for certain types of
expenditure only, eg revenue raised from road taxes can only be spent on road improvements.
(iii) A taxable person is a person liable to pay tax. In this context, person refers to individuals but also
to companies and other entities that are liable to pay tax.
(iv) Regressive tax structure a tax structure whereby the rate of tax falls as income rises.
(v) The tax gap is the gap between the tax theoretically collectable and the amount actually collected.
266 Answers
(b) (i) Indirect taxation is charged indirectly on the final consumer of the goods or services and is a tax
on consumption or expenditure. An example is a sales tax (eg VAT in the UK; TVA in France). As
value is added, the tax increases cumulatively.
Indirect taxes are not actually paid by the business. Instead, the business acts as a tax collector on
behalf of the tax authorities. For example, a business charges sales tax on its sales (output tax)
and it pays sales tax on its purchases (input tax). The difference between output tax and input tax
is paid over to the tax authorities.
(ii) Unit taxes are based on the number or weight of items, eg excise duties on the number of
cigarettes or on the weight of tobacco.
Ad valorem taxes are based on the value of the items, eg a sales tax or value added tax.
(c)
INCOME STATEMENT (EXTRACT) $000
Income tax expense (W1) 1,145
STATEMENT OF FINANCIAL POSITION (EXTRACT)
Deferred tax (W2) 1,750
Current liabilities
Income tax 1,000
Workings
1 Income statement
$
Income tax for year 1,000,000
Over-provision in previous year (5,000)
Increase in deferred tax 150,000
Income tax expense 1,145,000
2 Deferred tax
$
Opening balance 1,600,000
Increase in year 150,000
Closing balance 1,750,000
(d)
Examiner's comments. Most candidates could define withholding tax whilst many candidates found
difficulty defining underlying tax. A common error Part (ii) was not grossing up the amount received before
calculating withholding tax. As many candidates did not know what underlying tax was they could not
calculate it.
(i) Withholding tax is deducted at source by the tax authority before a payment is made. This occurs
most commonly when dividends are paid to non-residents. The tax authority has no power to tax
the non-resident, so it taxes the dividend at source.
Underlying tax is the tax which has already been suffered by the profits from which a dividend is
paid. When the recipient pays tax on his dividend income, this means that the dividend has
effectively been taxed twice. To mitigate this, some tax authorities operate an imputation system,
by which the recipient obtains relief for the underlying tax.
(ii) $45,000 represents 9/10 of the amount prior to withholding tax, so withholding tax is therefore
$45,000/9 = $5,000.
(iii) The amount of dividend prior to withholding tax was $50,000. This has already been taxed at
20% (100/500). Therefore $50,000 is 80% and the other 20% is the underlying tax - $12,500.
(e)
Examiner's comments. It was surprising how many candidates could not correctly calculate VAT when the
figure inclusive of VAT was given.
Answers 267
(i)
$
Revenue (40,250 100/115) 35,000
Cost of sales:
Purchases plus excise duty 12,000
Repackaging (6,900 100/115) 6,000
(18,000)
Net profit 17,000
(ii)
$
VAT output tax (35,000 15%) 5,250
VAT input tax (18,000 15%) (2,700)
Due to VAT authorities 2,550
54 Section B answers: Taxation II

(a) (i) Governments might apply specific excise duties:
To discourage people from consuming too much of a substance which is harmful to health
such as alcohol and tobacco
To raise funds to pay for the consequences of the consumption of these harmful substances
for example, the additional health care required for patients with smoking-related illnesses
To discourage the excessive use of products which damage the environment, such as the
use of petrol or diesel in vehicles and aircraft
To raise maximum revenue by targeting goods which are widely used and relatively
expensive.
(ii) A single stage sales tax is chargeable once in the supply chain, usually at the point of sale to the
end customer. The tax paid is not recoverable. An example of a single stage sales tax is the retail
sales tax applied in the USA.
A multi stage sales tax is chargeable and deductible at different points in the supply chain, such as
VAT in the UK. As value is added the tax increases cumulatively. Tax paid by an entity at one point
in the supply chain is usually recoverable by deducting it from the tax charged at the next point in
the supply chain. The end consumer therefore bears all the VAT. A multi-stage sales tax can also
be cumulative, where no credit is received for tax paid in the previous stage.
(b) Power to review and query filed returns
The tax authorities usually have the power to ask for further information if they are not satisfied with a
filed return. These queries must be answered or there may be legal penalties.
Power to request special reports or returns
The special report may take the form of asking for details of pay and tax deducted from an individual
employee, where there are indications that the tax rules have been broken. There have been instances of
casual employees having a number of jobs but using a number of false names, so that the tax authority
has been defrauded.
Power to examine records
Most tax authorities have the power to inspect business records to ensure compliance. If mistakes in returns
have been made, the tax authority may be able to re-open earlier years and collect back taxes owed.
Powers of entry and search
Where the tax authority believes fraud has occurred, it can obtain warrants to enter a business's premises
and seize the records.
Exchange of information with tax authorities in other jurisdictions
This has become very important as a counter-terrorism measure in recent years. One tax authority may
become aware of funds being moved to another country in suspicious circumstances. It will then warn the
tax authority in that other jurisdiction. Exchange of information is also useful in dealing with drug
smuggling and money laundering.
268 Answers
(c) If a company makes payments to an individual or another company resident in a different tax jurisdiction,
it may have to pay withholding tax to the tax authority of its own jurisdiction.
The reason for this is to stop companies paying all their earnings abroad and then stopping trading
without paying any tax to the tax authorities of the country where they are resident. Therefore the local tax
authority will take a payment on account of the final tax liability by deducting at source a withholding tax
from all payments sent abroad. The withholding tax can be as low as 5% or as high as 40%.
Payments affected are usually interest payments or dividends.
Alternative answers. You would also have scored marks for stating royalties or capital gains accruing to
non-residents.
(d) Double taxation agreements

A company is taxed in the country it is resident in for tax purposes. Tax residency can be determined in
different ways in different jurisdictions, so that a company may find itself deemed to be resident in two
different countries. For example if a company is legally incorporated in one country, but has its place of
effective management in another country, it may be deemed resident in both countries and its income
may be taxed in both countries ie it may suffer double taxation.
Countries need double taxation agreements to determine which country such tax a companys income in
this kind of situation. Double taxation agreements also specify what kind of reliefs are available to
companies who have a taxable presence in more than one country.
Methods of giving relief
One way is to give full deduction for foreign taxes paid. However this is not always appropriate,
particularly if the country where the tax is paid has a high tax rate and the other has a low rate.
Relief may be given by exemption. In this case, if income is taxed in Country A, then it will not be taxed
in Country B.
Another way of giving relief is by credit. This usually occurs where the tax rate in Country A is higher than
that in Country B. Instead of deducting the full amount of tax paid in Country A, Country B credits the
amount it would have paid in Country B. For example, the income is $10,000 and the tax rate in Country
A is 30%, while that in Country B is 20%. The tax paid in Country A will be $3,000 but the double tax
relief allowed in Country B will be $2,000 (20% $10,000).
(e)
Examiner's comments. Most candidates were able to explain the meaning of avoidance and evasion, with
fewer highlighting the difference between them. Some candidates gave odd examples of tax avoidance,
such as 'claiming capital allowances' or 'claiming loss relief'. These are not examples of tax avoidance,
they are proper application of the tax legislation and are not 'loopholes'.
Several candidates stated that giving double taxation relief on overseas profits was a means of preventing
tax avoidance, which is incorrect.
Many candidates did not give enough examples or sufficient detail within the examples to earn full marks.
(i) Tax avoidance is successful tax planning. It is arranging the financial affairs of an individual or an
entity in such a manner as to minimise tax liability. It is perfectly legal.
Tax evasion is the use of illegal means to avoid paying tax, such as not declaring income, claiming
deduction for non-deductible expense, or contravening tax legislation.
(ii) Although only evasion is illegal, avoidance is just as much of a problem for government. Methods
that governments can use to reduce avoidance and evasion are:
Anti-avoidance legislation. This outlaws specific avoidance schemes.
Deducting tax at source such as the PAYE system in the UK.
Keeping the tax system as simple as possible to minimise the number of factors that can be
manipulated.
Making sure that penalties for evasion are high enough to act as a deterrent.
Increasing the efficiency of the tax collection and investigation machinery.
Having a tax system which is not generally perceived as unfair. An unfair system makes
people feel justified in avoiding tax.
Answers 269
55 Section B answers: Taxation III

(a) Deferred tax disclosure and note
$m
Deferred tax provision 0.50
Provision at 30 April 20X3 0.58
Deferred tax credit in income statement (0.08)
Provision at 30 April 20X4 0.50
Working
Deferred tax
$m
Temporary difference at 30 April 20X3 2.30
Temporary difference at 30 April 20X4 2.00
Deferred tax at 30 April 20X3 (2.30 25%) 0.58
Deferred tax at 30 April 20X4 (2.00 25%) 0.50
Reduction in deferred tax provision 0.08
Alternative approach
The reduction in provision can also be calculated as follows:
$m
Reversal of temporary differences ((2.30 2.00) 25%) 0.08
(b) Tax on profit on ordinary activities note to income statement

$m
Tax on profit for the period 1.40
Overprovision for previous period ($750,000 $720,000) (0.03)
Increase in deferred tax liability ($300,000 $250,000) 0.05
Total tax charge 1.42

$m
Deferred tax (0.25 + 0.05) 0.30
Current liabilities
Current tax 1.40
(c)
Examiner's comments. Part (i) was fairly well done; most candidates seem to be getting the idea of
temporary differences and deferred tax balances. However, some had trouble with the dates. The asset
had been owned for three years but many candidates calculated four or even five years before working out
the temporary difference.
270 Answers
Accounting
value Tax value
$ $
Cost 200,000 200,000
Depreciation/Allowance year to 30 September 20X3 (40,000) (100,000)*
Balance at 30 September 20X4 160,000 100,000
Depreciation/Allowance year to 30 September 20X4 (40,000) (25,000)**
Balance at 30 September 20X5 120,000 75,000
Depreciation/Allowance year to 30 September 20X5 (40,000) (18,750)***
Balance 30 September 20X5 80,000 56,250
Disposal proceeds (60,000) (60,000)
Loss/balancing charge 20,000 (3,750)
* (200,000 50%)
** 20X4: (100,000 25%) = $25,000
*** 20X5: (100,000 25,000) = 75,000 25% = $18,750
(i) Timing difference at 30 September 20X5 (80,000 56,250) = 23,750
Tax at 25% = $5,938
(ii) The carrying value of the asset at 30 September 20X6 is $80,000. Disposal at $60,000 will give
rise to an accounting loss of $20,000.
(iii) At the date of disposal the tax WDV of the asset is $56,250. Disposal at $60,000 gives rise to a
balancing charge of $3,750.
(d)
Examiner's comments. Very few candidates provided a fully correct answer to this question, and some
demonstrated very little knowledge of deferred tax.
Some candidates used the wrong periods, some failed to apply the tax rate to the year end balances and
some described the credit to the income statement as a charge.
Year ended Cost Depreciation Tax allowance

$ $ $
31.3.X4 250,000 50,000 125,000
31.3.X5 250,000 50,000 31,250
100,000 156,250
(i) Deferred tax balance: 31.3.X4: (125,000 50,000) 25% = $18,750
(ii) Deferred tax balance: 31.3.X5: (156,250 100,000) 25% = $14,063
(iii) Income statement credit: year ended 31.3.X5 = (18,750 14,063) = $4,687
(e)
Examiner's comments. Some candidates filled a page or more with calculations but did not show how the
results would be used. You must answer the question asked, in this case the question asked for tax
payable so the answer must state the taxable profits and tax payable otherwise the question has not been
answered.
$
Gain on disposal of plant and equipment (4,000)
Depreciation (5,000 + 3,200 + 6,000) 14,200
40,000
Tax depreciation:
Buildings (30,000 25%) (7,500)
Plant and equipment first year (30,000 50%) (15,000)
disposal balancing allowance (7,875 5,000) (2,875)
Fixtures and fittings (5,625 25%) (1,406)
Tax due for year ended 30 April 20X8 at 25% 3,305
Answers 271
56 Mixed objective test answers bank 1 (Specimen paper)

1 D Tax evasion is a way of paying less tax by illegal methods
Tax avoidance is a way of arranging your affairs to take advantage of the tax rules to pay as little
tax as possible, and is legal.
2 D
$
Add: disallowable expenditure: entertaining 15,000
book depreciation 12,000
99,000
Less: tax allowable depreciation (40,000 25%) (10,000)
89,000
Tax at 25% $89,000 = $22,250
3 B The effective incidence is on Bs customers.
4 C This is a classical system of taxation as company income tax is charged on all the profits of the
entity, whether distributed or not. This leads to double taxation of dividends as dividends are paid
out of taxed profits and are then chargeable to personal income tax in the hands of the
shareholder. Under an imputation system the shareholder would receive a tax credit for some or all
of the underlying tax.
5 Understandability and Comparability
6 Any two of: Confidentiality, Integrity, Professional behaviour
7 B The purpose of an external audit is to enable the auditor to express an opinion on whether the
financial statements are prepared, in all material respects, in accordance with an identified
financial reporting framework. The auditor will express this opinion using the phrases give a true
and fair view or present fairly, in all material respects.
8 A In accordance with IFRS 3, goodwill arising on acquisition is recognised at cost and then reviewed
annually for impairment.
9 A Per IAS 2, inventories should be measured at the lower of cost and net realisable value.
$
Cost 2.20
Net realisable value:
Selling price 3.50
Less additional costs for repair and sale (1.50)
2.00
Therefore, inventories held at $2.00 each

Total value 300 $2.00 = $600
10 C ST is a related party of Z as he is a member of key management personnel of Z
JT is related part of Z as he is a close family member of ST.
272 Answers
57 Mixed objective test answers bank 2 (5/10)

1 C A 'good tax' should be convenient, equitable, certain and efficient according to Adam Smith's
canons of taxation.
2 D In a progressive tax structure, the rate of tax rises as income rises.
3 B $3,461
Carrying amount Tax base
$ $
Cost 60,000 60,000
Depreciation/Tax-depreciation (12,000) (30,000)
Balance at 31.3.X7 48,000 30,000
Balance at 31.3.X8 38,400 22,500
Balance at 31.3.X9 30,720 16,875
Deferred tax = 25% (30,720 16,875) = $3,461

4 A IAS 1 deals with the format of financial statements.
5 A Timeliness is an enhancing qualitative characteristic.
6 B (500 12) (300 12) = 2400 6/12 = $1,200 profit
7 D A: project is not yet viable, costs are therefore research costs and cannot be capitalised
B: payment is for research and therefore cannot be capitalised
C: project is not expected to generate future economic benefits therefore costs cannot be
capitalised
8 B Interest = (24 6 ) 106 = $38k
Sum-of-the-digits = 6(6+1)/2 = 21
$
Fair value 106.00
Interest (6/21 38) 10.86
Repayment (24.00)
Capital balance at end of year 1 92.86
Interest (5/21 38) 9.05
Repayment (24.00)
Capital balance at end of year 2 77.91
9 C The costs of restructuring the head office do not form part of the post-tax profit or loss of the
discontinued operation, or of the post-tax gain or loss recognised on the measurement to fair value
less costs to sell or on the disposal of the foreign operations.
10 A $98,000
DEFERRED TAX
$000 $000
Bal c/f 38 Bal b/f 27
I/S (bal fig) 11
38 38
CURRENT TAX
$000 $000
Cash paid (bal fig) 98 Bal b/f 106
Bal c/f 119 I/S (122-11) 111
217 217
Answers 273

1 B The imputation system
Classical Imputation
$ $
Tax on profits (25% 750) 187,500 187,500
Shareholder:
Dividend received 350,000
Tax at 30% 105,000 105,000
Less tax credit (350 25%) (87,500)
Tax on dividend (30%) 17,500
Total tax due 292,500 205,000
2 C The tax payable is the same if it is collected by PAYE or in one lump sum.
3 A The formal incidence of a tax is on the person or organisation who has direct contact with the tax
authorities.
4 D A deadline will not help ensure the correct amount of tax is paid.
5 Net VAT due = output VAT input VAT
UF ZF
Output VAT $ $
Standard rate
($2,875 15/115)/($6,900 15/115) 375 900
Input VAT
Purchases
($1,000 15 %)/($2,875 15/115) (150) (375)
VAT due 225 525
6 B The auditor should issue an audit report with a qualified opinion on the basis that the
misstatement identified is material, but not pervasive to the financial statements. The audit opinion
should be modified to include the phrase In our opinion, except for the effects of the matter
described in the Basis for Qualified Opinion paragraph, the financial statements present fairly, in
all material respects .
7 D Treasury shares are shown in the statement of financial position as a deduction from equity.
8 C Regulatory bodies is not a topic discussed by the Conceptual Framework.
9 C MN is a related party of Z as MN is a member of the key management personnel of Z (marketing
director), and also owns 20% of the equity of Z which is presumed to give MN significant influence
over Z.
Note that IAS 24 states that the following are not necessarily related parties: a customer, supplier,
franchisor, distributor or general agent with whom the entity transacts a significant volume of
business, merely by virtue of the resulting economic dependence.
10 A External revenue is only considered when determining reportable operating segments as at least
75% of total external revenue must be reported by operating segments.

1 C Progressive tax
A is paying tax at a rate of 17/75 = 23%
B is paying tax at a rate of 4.8/44 = 11%
Therefore the tax rate appears to increase as profits increase, which indicates a progressive tax
system.
2 B (ii) and (iii) are potential disadvantages of PAYE.
274 Answers
3 Under the OECD model an entity will have residence in the country of its effective management.
4 D $11,400
$
Excise duty (2,000 $3) 6,000
VAT ((15 + 3) 2,000) 15% 5,400
Tax due 11,400
VAT is calculated on the total of the cost plus excise duty.

5 C High tax rates mean high tax bills for individuals and companies, and therefore may increase the
incentive to avoid or evade paying tax in order to reduce costs. Imprecise and vague tax laws mean
that individuals or companies may consider it easier to try to find tax loopholes, and therefore the
incidence of tax evasion and avoidance may increase.
6 A A change in the presentation of the depreciation expense from administration expenses to cost of
sales is considered to be a change accounting policy. The change will reduce gross profit and will
have an effect on the financial ratios of the company.
A change in depreciation method and a change in the level of warranty provision are both changes
in accounting estimates. The creation of a provision is not a change in accounting policy. In
accordance with IAS 37, a provision should only be made when three criteria are satisfied (past
event, probably outflow of economic benefits and obligation) and it appears from the question that
those conditions where not satisfied until the current accounting period, even though the incident
happened in the previous year.
7 D A reportable segment is an operating segment which exceeds the thresholds set out in IFRS 8. An
operating segment is a component of an entity that generates revenues and incurs expenses,
whose operating results are reviewed by the entitys chief operating decision maker to make
decisions about resources allocation and assess its performance, and for which discrete financial
information is available.
There is no requirement in IFRS 8 for the segments results to be prepared using the same accounting
policies as the financial statements. The segment information instead should be presented in the way
that it is viewed by management along with a reconciliation to the reported figures.
Geographical disclosures are required on a country by country basis only if they are material.
8 $32,000
$000
Consideration 185
Less fair value of net assets acquired:
Share capital (150)
Share premium (15)
Fair value adjustment on acquisition (10)
Goodwill 32
9 $25,900
$
Share of post-acquisition reserves (30% (6,500 3,500)) 900
25,900
10 $3,300
$
Sales (125%) 33,000
Cost of sales (100%) (26,400)
Profit (25%) 6,600
PURP = 50% 6,600 = $3,300

Answers 275

1 D Corporate income tax and individual income tax are direct taxes. VAT and import duty are indirect
taxes.
2 B When an asset is disposed of for more than its original cost, a capital gain arises.
3 C This is a specific unit tax as it is a charge on each unit (litre) of a specific product (imported
petroleum products). The answer cannot be a general consumption tax because the tax applies to
a particular product only, and is therefore not general. Ad valorem taxes are based on the value of
the items, eg a sales tax or value added tax, therefore B and D are also incorrect.
4 Tax evasion is a way of paying less tax by illegal methods, for example by not declaring income or
claiming fictitious expenses.
5 C Corporate residence is usually determined on the basis of place of incorporation, place of effective
management and control or place of permanent establishment.
6 B IAS 24 specifically excludes an entitys main customer or supplier from being a related party
merely because of the resulting economic dependence.
7 $355,000
Number of shares issued (2,400,000/6) 400,000
$
Share premium on issue (400,000 (2 1)) 400,000
Less share issue costs offset against share premium (45,000)
Credit to share premium account 355,000
8 $15,000
$000
Consideration 342
Less fair value of net assets acquired:
Share capital (200)
Share premium (40)
Retained earnings (62)
Fair value adjustment on acquisition (350 325) (25)
Goodwill 15
9 $87,500
$
Share of post-acquisition reserves (35% (130 - 80)) 17,500
87,500
10 C
$
Sales (133.33%) 48,000
Cost of sales (100%) (36,000)
Profit (33.33%) 12,000
PURP = 60% 12,000 = $7,200

Adjustment required in consolidated financial statements is:
1 Remove intragroup balances: Dr payables $48,000, Cr receivables $48,000
2 Remove PURP in inventory: Dr retained earnings $7,200, Cr inventory $7,200
276 Answers

1 D The principles of a modern tax system are efficiency, equity and economic effects.
2 D The formal incidence of a tax is on the person or organisation who has direct contact with the tax
authorities.
3 A Deferred tax arises on temporary differences. Entertaining expenses are not deductible for tax
purposes and are therefore a permanent difference and will not give rise to deferred tax.
4 A $55,750
$000 $000
Proceeds of sale 1,200
Less costs of sale (9)
1,191
Cost:
Purchase price 600
Purchase costs 5
(605)
Indexation allowance (605 60%)
(363)
Capital gain 223
Tax at 25% 55.75
5 B The tax gap is the gap between the tax theoretically collectable and the amount actually collected.
6 C IAS 24 states that a significant customer is not necessarily a related party merely by virtue of the
resulting economic dependence.
7 A Research expenditure can never be capitalised and must be expensed in accordance with IAS 38.
8 C Adjusting events are events that provide further evidence of conditions that already existed at the
reporting date. Only C is non-adjusting.
9 B IFRS 8 specifies that an operating segment is a component of an entity whose operating results are
regularly reviewed by the entitys chief operating decision maker. The 10% test is the test used to
determine whether an operating segment is reportable.
10 C Revenue can only be recognised when all of the conditions laid down in IAS 18 are satisfied,
including the condition that the entity has transferred the significant risks and rewards of
ownership of the goods to the buyer. As GY still has the goods, the risks and rewards of owning
those goods are still with GY and have not been transferred to ZZ. Therefore no revenue can be
recognised. The cash received should be classified as a liability.

1 B VAT is collected by the shop and passed on to the tax authorities via its VAT return. The other
options are all direct taxes.
2 The tax base of an asset or a liability is the value of that item for tax purposes.
3 C Deferred tax arises in this case because the accounting treatment is different from the tax
treatment.
4 D
$000
Add depreciation 42
Add amortisation 15
917
Less tax depreciation (51)
Taxable profit 866
Tax @ 25% 216.5
Answers 277
5 D This is sometimes referred to as ring-fencing.

6 A Under IAS 24 the finance director is key management personnel and his wife a close family
member.
7 C IAS 38 Intangible assets allows recognition if:
future economic benefits will flow to the entity and
the asset can be reliably measured
Option A would be advertising costs, B a provision, and D is internally generated and may not
therefore be recognised as an asset.
8 According to IFRS 8 an operating segment is a component of an entity that engages in business activity
and whose operating results are regularly reviewed by the entitys chief operating decision maker to make
decisions about resources to be allocated to the segment and assess its performance.
9 Any four from the following:
the entity has transferred the significant risks and rewards of ownership of the goods to the buyer
the entity retains neither continuing managerial involvement nor effective control over the goods sold
the amount of revenue can be measured reliably
it is probable that the economic benefits associated with the transaction will flow to the entity
The costs incurred to the seller can be measured reliably

1 Under the OECD model tax convention an entity will generally have residence for tax purposes in the
country of its effective management.
2
$
Input tax 32,333 15% = (4,850)
Output tax 63,250 15/115 = 8,250
VAT due to be paid 3,400
Answer $3,400
3 B The profit is taxed as the income of the entity for the year.
4 Any two from
Power to review and query filed returns
Power to request special reports or returns
Power to examine records
Powers of entry and search
Power to exchange information with tax authorities in other jurisdictions
Power to impose penalties
5 D An indirect tax is a tax on expenditure (or consumption) rather than income and it is effective on
the customer (or consumer).
6 D Independence is a state of mind that is essential for accountants but it is not formally stated as a
principle in the Code.
7 C The overall supervising body is the IFRS Foundation.
8 B In accordance with IAS 37 a provision of $20,000 should be recognised in because there is a
probable outflow relating to the case brought by the school. The probability of winning the case
against the subcontractor is a contingent asset that should not be recognised, but is should be
disclosed by way of a note.
9 A The asset should be valued at fair value less the cost of disposal ($800 $50 = $750).
10 C $1,000,000 discount rate 0.500 = $500,000 (or $463,000 plus 8%)
278 Answers

1 C Tax assessments issued by the local tax authority are part of the tax administration system, not a
source of tax rules.
2 A Over the life of an asset, the tax depreciation should equal the purchase price of the asset less any
amount realised on disposal. When disposal takes place there is often a balancing allowance to
account for any difference.
$
Purchase price of asset 90,000
Tax depreciation (75,760)
Carrying amount for tax purposes 14,240
Proceeds on disposal (10,000)
Balancing allowance 4,240
3 A
$
Sales excluding VAT (138,000 100/115) 120,000
Cost of goods (70,000)
Profit 50,000)
4 Tax jurisdictions often differentiate between different types of income and apply different rules to how
each type of income is taxed. This is known as a schedular system.
5 C Under the OECD model JZ will be deemed to be resident in the country of its effective
management. Management board meetings take place in Country O, so this will be the country of
effective management.
6 B Bias is not a threat identified in the CIMA code; the other two are: advocacy and intimidation.
7 The two main responsibilities are:
To review, on a timely basis, newly identified financial reporting issues not specifically addressed
in IFRSs
To clarify issues where unsatisfactory or conflicting interpretations have developed, with a view to
reaching a consensus on the appropriate treatment
8
$
Purchase price of asset 420,000
Add: import duties 30,000
450,000
Indexation allowance (450,000 40%) 180,000
630,000
Selling price less selling costs (700,000 10,000) (690,000)
Gain on disposal 60,000
Tax payable @ 25% 15,000
9 B Revenue for the month of June (one-sixth of the $6,000 received) will be recognised in the
statement of profit or loss and other comprehensive income, and the remainder will be credited to
deferred income.
10 C IFRS 8 requires entities to adopt the management approach to identifying operating segments,
which means that if a segment is separately identified for internal management accounting, it
should be recognised as such in the published financial statements.
Answers 279

1 C Direct taxes are imposed on the income of individuals and the profits made by companies. Items
(i) and (iv) are examples of indirect taxes.
2 B Clarification is sometimes required after an IFRS has been published and is effective. Options A, C
and D are part of the development process.
3 B
SOFP CA Tax WDV Difference
$ $ $
1 October 2011 132,000 82,500
Depreciation (220,000 1/5) (44,000)
Tax depreciation (82,500 25%) (20,625)
88,000 61,875 26,125
Deferred tax @ 25% 6,531
4 D Neutrality, completeness and free from error.
5 A A disclaimer of opinion is issued where the auditor has been unable to obtain sufficient,
appropriate audit evidence and the item(s) about which the auditor lacks sufficient, appropriate
audit evidence is/are believed to be material and pervasive. Without this evidence the auditor is
unable to come to a conclusion regarding the financial statements and must therefore issue a
disclaimer of opinion.
6 D Since the analysis prepared by E is used to calculate her own staff bonus, there is clearly a self-
interest threat.
7 A The direct method extracts the information for the statement of cash flows directly from the
accounting records. The indirect method uses information contained in the financial statements.
8 Factors that influence accounting and disclosure practices include:
National company law
National accounting standards
Tax laws sources of finance and capital markets
Cultural differences
Local and national factors in particular countries may specify formats for the presentation of financial
information (eg UK Companies Act) or may specify items that must be disclosed (eg directors
emoluments).
9 C An adjusting event is one which provides evidence of conditions that existed at the end of the
reporting period. The court case was known about at the year end because a provision had been
recognised in the financial statements.
10 B
$
1 July 2012 12,000
Receive cash in advance for six months July 2012 to December 2012
Liability at year end 12,000 3/6 6,000
$
Supply goods 10,000 units @ $200 per 100 units
July 2,000
August 2,000
September 2,000
Revenue for the year to 30 September 2012 6,000
280 Answers

1 D
2 B
3 To ensure that for similar investments all entities are allowed the same rates of depreciation for tax
purposes.
Entities can use any rate for accounting depreciation, so to ensure that all entities are taxed equally the
tax authority sets rates for tax depreciation for all entities. The tax depreciation rates then replace
accounting depreciation in the tax computations.
4 B
5 D
6 C
7 B
8 Any four from:
Investors
Lenders
Employees
Business contacts customers, suppliers, competitors
General public
Government
9 A
10 C

1 A
2 D
3 Two from:
Exemption
Tax credit
Deduction
4
Cost $650,000
Duties $25,000
$675,000
Indexation $337,500
$1,012,500
Sales price $1,200,000
Less charges $17,000
$1,183,000
Profit $1,183,000 $1,012,500 = $170,500
Tax @ 25% = $42,625
Answer: $42,625
5 D
6 C
7 Any two from:
Answers 281
Multinational entities could benefit from access to a wider range of international finance
opportunities. This could have the effect of reducing financing costs;
Multinational entities could benefit from improved management control as all parts of the entity
would be reporting using one consistent basis;
Multinational entities could benefit from greater efficiency in accounting departments as they
would not have to spend time converting data from one accounting basis to another;
Multinational entities could benefit from easier consolidation of overseas subsidiaries results when
preparing group accounts.
8 Any two from:
To give advice to the IASB on agenda decisions;
To give advice to the IASB on the priorities in its work;
In relation to major standard setting projects to inform the IASB of the views of organisations and
individuals on the Council;
To give any other advice to the IASB or the Trustees.
9 Relevance and faithful representation
10 Opinion
68 Mixed section B answers bank 1 (Specimen paper)

(a) (i) Determining corporate residence is important as corporate income tax is usually residency-based.
If an entity is deemed to be resident in a country, it will usually have to pay corporate income tax
in that country.
(ii) Determining the corporate residence of ATOZ will depend on the tax rules of the countries ATOZ is
connected with. For example, if a company is incorporated in the UK, it is usually deemed to be
resident in the UK for tax purposes. However, if a company is incorporated overseas but its main
place of management is the UK, it could also be deemed to be resident in the UK.
If a company has a presence in more than one country, it could be deemed by local law to be
resident in all of those countries, and therefore it could be taxed more than once on the same
income.
Where this is the case, the OECDs model tax convention suggests that the company will be
deemed to be resident in the country in which it has its place of effective management.
Therefore ATOZ will be deemed to be resident in NOP according to the OECDs model.
(b) (i) A single stage sales tax is chargeable once in the supply chain, usually at the point of sale to the
end customer. The tax paid is not recoverable.
However, VAT is chargeable and deductible at different points in the supply chain. Tax paid by an
entity at one point in the supply chain is usually recoverable by deducting it from the tax charged
at the next point in the supply chain. The end consumer therefore bears all the VAT.
(ii) Net VAT due = output VAT input VAT
Output VAT $000
Standard rate ($230k 15/115) 30
Zero rate ($115k @ 0%) 0
30
Input VAT
Purchases ($130 15%) (19.5)
Equipment ($345k 15/115) (45.0)
(64.5)
Net VAT due to WX (34.5)
282 Answers
(c) The possible advantages of having accounting standards based on principles are as follows.
Standards based on principles dont go out of date in the same way as those based on rules. For
instance, the expenditure RS is concerned with may be a new type of expenditure that wasnt often
incurred when the prescriptive standard was originally drafted, and therefore wasnt included. In a
principles based standard, this wouldnt be a problem as the spirit of the standard would need to
be applied to see if the expenditure should be recognised as an asset.
It is more difficult for a company to manipulate information to avoid applying a standard based on
principles than it is for a standard based on rules. For example, if the standard included a specific
value that had to be reached in order to be recognised as an asset, then the company could
manipulate its expenditure to fall just below this value to avoid recognition.
Standards based on principles have broader application than those based on rules. For example RSs
expenditure was not included in the list of items in the rules-based standard and so it is not clear
whether the item should be capitalised or not. This would not be the case in principles-based standards
as professional judgment would be applied to determine how the expenditure should be treated.
Standards based on principles are less likely to contradict each other than those based on rules as
they are all based on the same basic principles. For example, a rules-based standard may require
revenues and expenditures to be matched in an entirely different manner depending on which
industry they were generated in.
Standards based on rules require that many detailed standards covering all possible situations have to
be produced. This can result in complexity in financial reporting as there are a considerable number of
standards to be followed. Having standards based on principles avoids this.
(d) Held for sale
Provided that the manufacturing facility is being marketed for a reasonable price and it is unlikely that the
plan to sell should change, the manufacturing facility should be classified as held for sale in the financial
statements because it meets the criteria detailed in IFRS 5:
(i) The facility is available for immediate sale
(ii) The sale is highly probable (ie management are committed to the plan, are actively engaged in
finding a purchaser and expect the sale to take place within one year)
In the statement of financial position, the manufacturing facility should be measured at the lower of its
carrying value and fair value less costs to sell.
It should be presented separately from other assets, and the assets and liabilities should not be offset:
$m
Non-current assets held for sale ($3.6m $0.2m) 3.4
Liabilities associated with non-current assets held for sale 0.8
Discontinued Operation
As the manufacturing facility is held for sale and represents a separate major line of business (apparent as
it is classified as a reportable segment per IFRS 8), it should be classified as a discontinued operation per
IFRS 5.
BD should disclose a single amount in the statement of comprehensive income for the discontinued
operation, which is the total of:
(i) The loss for the year of ($0.5m)
(ii) The post-tax gain or loss recognised on the measurement to fair value less costs to sell of the
manufacturing facility.
BD should give detailed analysis of this figure either in the notes to the accounts or on the face of the
statement of comprehensive income.
Additionally, net operating, investing and financing cash flows associated with the manufacturing facility
should be disclosed separately in the statement of cash flows or in the notes.
(e) Office lease
The office lease should be treated as an operating lease under IAS 17 because substantially all the risks
and rewards of ownership are not passed to C under the lease. For example, the length of the lease is
Answers 283
significantly less than the useful life of the office, and the minimum lease payments are significantly less
than the fair value of the office at the inception of the lease.
The lease rentals should be recognised on a straight line basis over the lease term. The rent free period
should be recognised as a discount over the whole lease term.
Expense at 31 March 20X9: (4 12,000)/5 = $9,600
No asset is recognised for the office.
Computer system lease
The computer system lease should be treated as a finance lease under IAS 17 because substantially all
the risks and rewards of ownership are passed to C under the lease. For example, the computer system is
leased for the whole of its useful life and the minimum lease payments are equivalent to the cost of the
assets on inception of the lease.
The finance costs associated with the lease will be accounted for under the actuarial method:
$
1.4.X8 Cost 35,720
Interest at 12.5% 4,465
Lease payment (15,000)
31.3.X9 25,185
31.3.Y0 13,333
31.3.Y1 0
At 31 March 20X9, C will have the following entries in its financial statements:
STATEMENT OF COMPREHENSIVE INCOME (extract) $
Administrative expenses
Office lease rental 9,600
Depreciation computer system (35,720/3) 11,907
Finance costs
Interest on finance lease 4,465
STATEMENT OF FINANCIAL POSITION (extract) $

Assets
Computer systems (35,720 35,720/3) 23,813
Finance lease 13,333
Current liabilities
Finance lease (25,185 13,333) 11,852
Rent payable 9,600
(f) (i) The treatment of preference shares under IAS 32 and IAS 39 depends on the contractual terms of
the preference share.
If the terms of the preference share mean that the issuer has an obligation to deliver cash or other
financial assets in the future, the preference share is classified as a financial liability under
IAS 32. Under IAS 39, the finance cost of the preference shares, which includes any dividends
payable and any redemption amount payable, should be calculated and then allocated over the life
of the preference shares using the effective interest method.
If the terms of the preference share mean that the issuer does not have an obligation to deliver
cash or other financial assets in the future, the preference share is classified as equity under
IAS 32.
(ii) The preference shares are redeemable and cumulative so PS has an obligation to deliver cash in
the future. Therefore the preference shares should be classified as a financial liability. The finance
cost associated with the preference shares (ie the outstanding balance multiplied by the effective
interest rate) should be shown in the statement of comprehensive income.
284 Answers
STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 20X9

$
Preference shares 1,211,642
STATEMENT OF COMPREHENSIVE INCOME FOR YEAR ENDED 31 MARCH 20X9
$
Finance cost 61,642
69 Mixed section B answers bank 2 (5/10)

(a) Tax avoidance is a way of arranging your affairs to take advantage of the tax rules to pay as little tax as
possible. It is perfectly legal. Cee has avoided tax by taking expert tax advice and investing her money in a
tax efficient way in order to pay less tax.
Tax evasion is a way of paying less tax by illegal methods, eg not declaring the income or money
laundering. Gee has evaded tax by not declaring all the income he earns on his annual tax return and so
reducing his tax bill.
(b) (i) Unit taxes are taxes based on the number or weight of items, eg excise duties on cigarettes or
tobacco. W pays a unit tax of $1 per bottle when the wine is bottled.
Ad valorem taxes are taxes based on the value of the items, eg a sales tax or value added tax and
are usually expressed as a percentage of the value. For example, W charges VAT at 15% on each
bottle of wine sold for $8.05, therefore each bottle costs $7 plus VAT at 15% = $1.05.
Output VAT $000
Standard rate ($1.05 10,000) 10.5
Input VAT
Purchases ($30,000 15%) (4.5)
6.0
Unit tax (10,000 $1) 10.0
Total indirect tax due 16.0
(c) Jurisdiction relates to the power of a tax authority to charge and collect tax. Competent jurisdiction is the
authority whose tax laws apply to an entity or person. The competent jurisdiction is usually the tax
authority in the country where the entity is deemed to be resident for tax purposes.
The OCED Model Tax Convention suggests that a company is deemed resident in the place of its effective
management. As the senior management of H meet regularly in Country X, H will be deemed to be
resident in Country X and will be subject to the tax laws of the tax authority in Country X. Similarly, S will
be deemed resident in Country Y and will be subject to the tax laws of the tax authority in Country Y.
A withholding tax is a tax that is deducted by the local tax authorities when an entity resident in that
country pays funds overseas, for example when a subsidiary pays a dividend to a foreign parent. The 10%
tax charged by Country Y on the dividend declared by S is a withholding tax.
The dividend will be taxed twice because it will be included in the worldwide income of H and so taxed in
Country X. However, because Country Y and Country X have a double taxation agreement, it is likely that
H will be able to get tax relief for the withholding tax suffered.
(d) (i) The objective of an audit of financial statements is to enable the auditor to express an opinion on
whether the financial statements are prepared, in all material respects, in accordance with an
identified financial reporting framework.
(ii) Inventory is overstated by $1m. The required adjustment is:
DR Profit before tax $1m
CR Inventory (SOFP) $1m
The adjustment represents 25% of profit and therefore is a material misstatement.
Answers 285
If the directors refuse to amend the financial statements for this misstatement, then the auditors should
issue a qualified opinion. An adverse opinion is not required as the misstatement is not pervasive.
The qualified opinion paragraph should state that the financial statements give a true and fair view except
for the identified misstatement relating to the overstatement of closing inventory.
(e) Year to 31.3.X8 35% complete
Expected profit/(loss) on contract:
As at 31.03.X8 As at 31.03.X9
$m $m
Total revenue 63 63
Costs to date (18) (44)
Costs to complete (36) (20)
Expected profit/(loss) 9 (1)
As at 31.03.X9, 75% (35% + 40%) complete:

Total to 31.03.X9
$m
Revenue (63 75%) 47
Costs (64 75%) (48)
Profit/(loss) (1)
Amounts to be included in statement of comprehensive income for year to 31.03.X9:

Year to 31.03.X9
$m
Revenue (47 22) 25
Costs (48 18) (30)
Profit/(loss) ((1) 4) (5)
Amounts to be included in statement of financial position at 31.03.X9:

Current assets
Gross amount due from customer 31.03.X9
$m
Costs incurred to date (26 + 18) 44
Less: recognised profits less recognised losses ( 4 (5)) (1)
43
Less: progress billings to date (22 + 15) (37)
Amount due from customer 6
(f) Briefing note treatment of shoe factory

Exclusion of factory results
It would not be in line with IFRSs to completely exclude from the financials statements the results of the
factory for the year. To do so would distort the overall results of the company, making it look more
profitable than it currently is and thereby misleading users of the accounts. This would be unethical.
Completely excluding the results of the factory would breach the fundamental principles of the CIMA Code
of Ethics for accountants to demonstrate professional behaviour in complying with the relevant laws and
standards, and also to act with integrity (ie honesty) in their work.
Appropriate treatment of the factory
If the factory is classified as a discontinued operation per IFRS 5, then the loss made by the factory in the
year is separately disclosed in the statement of comprehensive income, after profit from continuing
operations. This would make it clear to users that the factory, although loss making, will not be part of
future operations.
To be classified as a discontinued operation, the factory must firstly have either been disposed of or
classified as held for sale under IFRS 5. To be classified as held for sale, the factory must be available for
sale in its present condition and the sale must be highly probable. Because management have not yet
committed to a plan to find a buyer for the factory, the sale is not highly probable. Therefore, the factory
cannot be classified as held for sale or as a discontinued operation.
286 Answers
As such, management must disclose the full loss made by the factory within continuing operations in the
statement of comprehensive income.
Marking scheme
Marks
(a) 1 marks available for each method plus illustration, up to a maximum of 5
Four methods for relieving trading losses are:

1 Carry the loss forward against future trading profits
31.08.X9 31.08.Y0 31.08.Y1
$ $ $
Trading profit/(loss) (30,000) 10,000 50,000
Offset previous trading loss (10,000) (20,000)
Capital gain/(loss) 5,000
Taxable profit 5,000 30,000
Tax at 25% 1,250 7,500
Trading loss carried fwd (30,000) (20,000)
2 Offset the loss against other income or capital gains of the same period
The trading losses can be offset against the capital gains made by ZK in 20X9. In the illustration below,
the trading losses remaining in 20X9 have also been carried forward to be offset against the trading
profits of the following years. Some countries may not allow the remaining losses to be carried forward.
31.08.X9 31.08.Y0 31.08.Y1
$ $
Trading profit/(loss) (30,000) 10,000 50,000
Offset trading loss against (5,000) (10,000) (15,000)
capital gain/trading profit
Tax at 25% 8,750
Trading loss carried fwd (25,000) (15,000)
3 Carry the loss back against profits of previous periods

Some countries, including the UK, allow trading losses to be carried back against the taxable profits of
previous periods. If we assume that ZK made a taxable profit of $40,000 in 20X8, we can illustrate this
method of relief as follows.
31.08.X8 31.08.X9 31.08.Y0 31.08.Y1
$ $ $
Trading profit/(loss) 40,000 (30,000) 10,000 50,000
Carry back trading loss against (30,000)
profits
Taxable profit 10,000 5,000 10,000 50,000
Tax at 25% 2,500 1,250 2,500 17,500
Answers 287
4 Offset the loss against the profits of another group company (group loss relief)
If ZK is part of a group of companies, then the trading loss made by ZK in 20X9 could be transferred to
another company in that group and offset against the taxable profits of that company instead. For
example, assume that ZK is the parent of ZL and ZL makes a trading profit of $40,000 in 20X9, the
trading loss made by ZK could be offset as follows.
ZK ZL
31.08.X9 31.08.X9
$ $
Trading profit/(loss) (30,000) 40,000
Transfer trading loss (30,000)
Taxable profit 5,000 10,000
Tax at 25% 1,250 2,500
Trading loss carried fwd
Marking scheme
Marks
(b) (i) Explaining the meaning of withholding tax 1
Explanation of why countries levy withholding tax 1
2
(ii) Calculation underlying tax 1
Calculation withholding tax 1
Calculation tax due 1
3
Total 5
(i) A withholding tax is a tax levied on payments, such as interest payments, dividends and royalties, made
by a company to another company or individual resident in another country.
Withholding taxes are levied because countries have no power to tax non-resident companies, so they
charge withholding tax to ensure that they gain some income from the payments made by non-resident
companies with operations in their country to overseas companies or individuals.
(ii) Tax paid by SV on dividend
$000
Net dividend received 3,375
Withholding tax (3,375 10/90) 375
Gross dividend 3,750
Underlying tax (3,750 1,875/(12,500 1,875) 662

Total tax paid by SV on dividend 1,037
Tax due by HW
$000
Dividend received 3,750
Add on underlying tax 662
Total 4,412
Tax @ 25% 1,103
Less: WHT (375)
Less: ULT (662)
Tax payable in Country X 66l
Tutorial note: Underlying tax is calculated as follows:

tax actually paid by foreign company
Underlying tax = gross dividend
foreign company ' s profit after tax
288 Answers
Marking scheme
Marks
(c) 1 marks available for each explanation, up to a maximum of 5
The TWO fundamental qualitative characteristics of financial information are as follows.

Relevance
Information is said to be relevant if it is capable of making a difference to the decisions made by users of that
information. To be relevant therefore information must have a predictive value and/or a confirmatory value. This
will help users evaluate past, present and future events, or confirm or correct their past evaluations. So relevant
information has both a predictive and confirmatory role. The relevance of information is affected by its
materiality.
Faithful representation
To be useful to its users, financial information must represent faithfully that which it either purports to represent
or could reasonably be expected to represent. Faithful representation requires financial information to be
complete, neutral and free from error.
The FOUR enhancing qualitative characteristics of financial information are as follows:
Comparability
Information is more useful if it can be compared with similar information about other entities and/or other
accounting periods. Consistency in the preparation of financial information helps achieve comparability. For this
to be possible users must be informed of the accounting policies employed in the preparation of the financial
statements and any changes to those policies and their effect. The financial statements must also show
corresponding amounts for the previous period.
Verifiability
Information must be verifiable in order to give assurance to the users of financial information that the information
has been prepared so that it faithfully represents the economic phenomena it purports to represent. Verification
can be direct or indirect.
Timeliness
Financial information is required by users in order to make decisions based on that information. It must therefore
be made available to users in a timely manner if it is to be capable of influencing the decisions they make.
Understandability
Financial statement information should be readily understandable to users. For this purpose users are assumed
to have a reasonable knowledge of business and economic activities and accounting, and a willingness to study
the information with reasonable diligence. The information provided should be presented in a clear and concise
manner.
Tutorial note: the requirement specified that you explain only TWO of the FOUR enhancing qualitative
characteristics. The others are provided for learning purposes.
Marking scheme
Marks
(d) (i) Goodwill calculation 2

(ii) Explanation of how goodwill is recorded, including IFRS 3 treatment 3
5
Answers 289
(i) Goodwill arising on acquisition of PN

$000 $000
Consideration transferred (2.5 180) 450
Share of net assets acquired
Share capital 180
Share premium 60
350
Goodwill 100
(ii) Treatment of goodwill in HBs group financial statements at 31 August 20Y0

HB should record the goodwill in its consolidated statement of financial position under the caption
Intangible non-current assets: goodwill arising on consolidation.
The goodwill should be initially recognised as the difference between the fair value of the purchase
consideration and the fair value of the identifiable assets and liabilities, as calculated above.
IFRS 3 does not permit amortisation of goodwill. Instead it should be tested for impairment at least
annually. After initial recognition, goodwill is measured at the original amount less any
accumulated impairment losses.
Assuming there is no impairment at 31 August 20Y0, the goodwill should be included in the
statement of financial position at the original amount calculated on acquisition of $100,000.
Marking scheme
Marks
(e) mark per valid point, up to a maximum of 5
(i) 80,000 preferred shares in ABC

The preference shares in ABC do not have any voting rights attached to them so if HI purchased these
shares, it would not have the power to control or exercise significant influence over the financial and
operating policies of ABC. The investment should be classified as a simple non-current asset investment
in the consolidated financial statements and should be accounted for in accordance with IAS 39.
(ii) 40,000 equity shares and 50,000 preference shares in ABC
An investment in 40,000 equity shares would give HI a shareholding of 40%. As this is more than 20% of the
voting power of ABC, it should be assumed that HI will have significant influence over ABC. ABC should be
classified as an associate of HI and accounted for using the equity method in the consolidated financial
statements of HI. The preference shares should be accounted for as a simple investment as per (i) above.
(iii) 70,000 equity shares
An investment in 70,000 equity shares would give HI a shareholding of 70%, as this is more than 50%
of the voting power of ABC, it should be assumed that HI will have the power to control ABC unless it can
be clearly shown otherwise, however this is rare. ABC should be classified as a subsidiary of HI and
consolidated on a line by line basis in the consolidated financial statements of HI.
290 Answers
Marking scheme
Marks
(f) (i) Site reinstatement explanation of why provision required 1
inclusion of provision present value 1
2
(ii) Earthquake explanation of why non-adjusting event 1
treatment in financial statements 1
3
Total 5
(i) Site reinstatement

IAS 37 requires that a provision for the costs of reinstating this site is set up immediately when the
licence is obtained. This is because a legal obligation exists to reinstate the site at the date the licence is
obtained. The provision should be the present value of the estimated costs to reinstate the site, so at 31
August 20Y0 this is $3m. The income statement should also include the unwinding of the discount on
the fair value of the provision when it was first recorded in the accounts at 1 September 20X9 to 31
August 20Y0.
The costs of reinstating the site should be capitalised along with the costs of the buildings and equipment
used in the mine.
(ii) Earthquake
Assuming that the financial statements have not yet been authorised for issue, the earthquake is a non-
adjusting event in accordance with IAS 10. This is because it is indicative of conditions that arose after
the end of the reporting period.
No adjustments should be made to the financial statements at 31 August 20Y0 for this event and no
provision for the repair costs should be included in the accounts at this date. The closure of the mine for
six months and the repair costs of $1m means that the earthquake is likely to be a material event and as
such should be disclosed in a note to the accounts at 31 August 20Y0.
Marking scheme
Marks
(a) (i) Accounting profit
Add back accounting depreciation
Less tax depreciation
Tax due
Total 2
(ii) Temporary differences 1
Deferred tax 1
Income statement credit 1
3
Total 5
Answers 291
(i) $57,375
$
Add back accounting depreciation (500/5) 100,000
Less tax depreciation (500 50% 25%) (62,500)

Tax due at 25% 57,375
(ii) Deferred tax credit for year ended 31 March 20X8 = $9,375
31.03.X7 31.03.X8
$
Book value 400,000 300,000
Tax WDV 250,000 187,500
Temporary difference 150,000 112,500
Deferred tax liability at 25% 37,500 28,125
Credit to income statement (28,125 37,500) 9,375
Marking scheme
Marks
(b) (i) mark for each valid point, up to a maximum of 2
(ii) Sales price
Deductible selling expenses
Cost of asset
Capital gain
Tax due 1
Total 5
(i) A capital gain arises when an asset is disposed of for more than its original cost. Most tax regimes have
separate rules covering the tax of capital gains and the tax of trading profits.
A capital gain is usually calculated as the disposal proceeds less the tax written down value of the asset
being disposed of (ie original cost less tax depreciation allowed). Some countries allow the cost of
improvements or the costs incurred to sell the asset to be deducted from the sales proceeds. Some
countries also allow the original cost of the asset to be adjusted up to current prices by the use of an
index, such as the Retail Price Index, before calculating the capital gain. This prevents the taxpayer from
having to pay tax on a gain which is simply the result of inflation.
Capital gains tax is calculated as: capital gain capital gains tax rate.
(ii) $29,000
$
Sale price 1,000,000
Less allowable costs (6,000)
Less cost of asset (850 + 5 + 8 + 15) (878,000)
Capital gain 116,000
Capital gains tax at 25% 29,000
Marking scheme
Marks
(c) (i) mark for each valid point, up to a maximum of 2
(ii) Gross dividend 1
ULT 2
3
Total 5
292 Answers
(i) Underlying tax (ULT) is the tax which has already been suffered by the profits from which a dividend is
paid. This happens when an entity receives a dividend from a foreign entity when the dividend has been
paid out of taxed profits.
Underlying tax is calculated as :
Underlying tax = gross dividend tax actually paid by foreign company
foreign companys profit after tax
The gross dividend is the dividend paid by the foreign entity before withholding tax.
(ii) $48,750
$000
Net dividend received 156
Withholding tax (156 20/80) 39
Gross dividend 195
Underlying tax = (195 130/(650 130)) = $48,750
Marking scheme
Marks
(d) 1 mark per well explained point, up to a maximum of 5
The possible advantages of having principle-based accounting standards as opposed to prescriptive standards are
as follows.
Standards based on principles dont go out of date in the same way as those based on rules. For example
if a prescriptive standard includes a list of common items that would qualify for specific treatment, the list
may go out of date as economies progress and develop.
It is more difficult for a company to manipulate information to avoid applying a standard based on
principles than it is for a standard based on rules. For example, if the standard included a specific value
that had to be reached in order to be recognised as an asset, then the company could manipulate its
expenditure to fall just below this value to avoid recognition.
Standards based on principles make it harder for entities to avoid applying a standard as the terms of
reference are broader.
Standards based on principles are less likely to contradict each other than those based on rules as they
are all based on the same basic principles. For example, a rules-based standard may require revenues
and expenditures to be matched in an entirely different manner depending on which industry they were
generated in.
Standards based on rules require that many detailed standards covering all possible situations have to be
produced. This can result in complexity in financial reporting as there are a considerable number of
standards to be followed. Having standards based on principles avoids this.
Marking scheme
Marks
(e) (i) Objective of financial reporting 3
(ii) Underlying assumption: going concern 2
5
Answers 293
(i) The Conceptual Framework states that: 'The objective of general purpose financial reporting is to provide
financial information about the reporting entity that is useful to existing and potential investors, lenders
and other creditors in making decisions about providing resources to the entity. These decisions involve
buying, selling or holding equity and debt instruments, and providing or settling loans and other forms of
credit.'
Financial reporting provides information about a reporting entitys economic resources, claims against
those resources and changes in resources and claims.
(ii) The underlying assumption outlined in the Conceptual Framework is going concern.
Going concern
Financial statements are usually prepared under the assumption that the business is a going concern. This
means that it will continue to operate in approximately the same manner for the foreseeable future (at least the
next 12 months). In particular, the entity will not go into liquidation or scale down its operations in a material
way.
If the entity is not considered to be a going concern, the financial statements should be prepared on another
basis, usually the break-up basis, where the assets of entity are included in the accounts at their 'break-up'
value.
Marking scheme
Marks
(f) 1 mark per well explained point, up to a maximum of 5
As a professional accountant, CX has an obligation to act in accordance with the fundamental principles in the
CIMA Code of Ethics. These include objectivity and integrity. CX is in a position where she may be compromising
these principles.
Objectivity requires that a professional accountant should not allow bias, conflict of interest or undue influence of
others to override professional or business judgements.
CXs objectivity is being threatened because the board members are pressurising CX to use assumptions which
she believes will grossly overestimate the forecast profits, which overrides her professional judgement on what
those assumptions should be.
Integrity requires a professional accountant to be straightforward and honest in all professional and business
relationships.
CXs integrity is being threatened because she is being asked to be dishonest and use assumptions which she
believes are not reflective of the true situation.
The possible options CX could take are
In the first instance, CX could inform her direct line manager (possibly a board member) that she is very
unhappy with the forecasts and try to persuade them that the figures are inappropriate and should not be
used.
If the board insist on using these figures, CX should try and distance herself from the forecasts and refuse
to have her name documented on them.
CX could consider calling the CIMA ethics helpline to ask for advice
If the situation is not appropriately resolved, CX should consider resigning her position and seeking
employment elsewhere.
294 Answers
Marking scheme
Marks
(a) (i) 1 mark per well made point 2
(ii) Output VAT 1

Input VAT 1
VAT refund
3
Total 5
(i) A single stage sales tax is chargeable once in the supply chain, usually at the point of sale to the
end customer. The tax paid is not recoverable.
However, VAT is chargeable and deductible at different points in the supply chain. Tax paid by an
entity at one point in the supply chain is usually recoverable by deducting it from the tax charged
at the next point in the supply chain. The end consumer therefore bears all the VAT.
Output VAT $000
Z - Standard rate ($207k 15/115) 27
Y - Zero rate ($90k @ 0%) 0
27
Input VAT
Purchases ($200 15%) (30)
Net VAT refund due to SV (3)
Marking scheme
Marks
(b) (i) 1 mark per well made point, up to a maximum of 2
(ii) 1 mark per well made point, up to a maximum of 3
Total 5
(i) Deferred tax arises because the accounting treatment of a transaction is different to the tax
treatment of the transaction, resulting in temporary differences. Deferred tax is the tax attributable
to temporary differences.
Temporary differences arise because of timing differences between the tax treatment and the
accounting treatment, for example, items are accounted for on an accruals basis in the financial
statements, but may be treated on a cash basis when calculating the tax due.
(ii) A deferred tax debit balance is called a deferred tax asset.
Deferred tax assets are the amounts of income taxes recoverable in future periods relating to:
tax deductible temporary differences
unused tax losses or unused tax credits that have been carried forward from previous periods.
Deferred tax assets should only be recognised in so far as it is probable that taxable profits will be
available against which they can be utilised.
So if a business is loss making, and it is not probable that it will make a profit, then the deferred
tax asset should not be recognised.
Answers 295
Marking scheme
Marks
(c) (i) 1 mark per well made point, up to a maximum of 2
(ii) 1 mark per well made point, up to a maximum of 3
Total 5
(i) Under the worldwide approach to taxing entities, entities pay income tax on their worldwide
income in the country they are deemed to be resident in for tax purposes.
Their worldwide income includes income generated in the country they are deemed resident for tax
purposes, as well as income that has been generated in other countries, for example, income
arising because the entity has a factory in that country or has investments in that country.
(ii) The worldwide approach can lead to income being taxed twice, once in the country in which it is
earned, and again in the country where the entity earning the income is deemed resident.
Double tax relief is often available to reduce the amount of tax payable in this situation. Double tax
agreements between countries specify the relief available for double tax between those countries.
Because there are different methods of determining tax residency, an entity may be deemed
resident in two countries and its worldwide income taxed twice.
Double tax agreements can help reduce the tax payable in this situation by clarifying which country
a company is deemed to be resident in. The OECDs model tax agreement suggests that a
company should be deemed to be resident in its place of effective management.
Marking scheme
Marks
(d) (i) 1 mark per well made point, up to a maximum of 5
Accounting regulations in a country are influenced by many different sources.

The main influences come from:
National company law such as the UK Companies Act. Accounting regulations can be codified in
law and companies must comply with the legal requirements.
National accounting standards. Many countries have now adopted IFRSs as their accounting
standards, but may have their own local standards for smaller entities. In the UK, entities which
are not listed can apply UK GAAP.
Tax laws. Some countries accounting requirements are driven by what is required for tax purposes,
so accounting profit largely mirrors taxable profit.
Other influences include:
Sources of finance and capital markets. There is a greater demand for information and disclosure
when finance is raised from external sources such as shareholders. Local stock exchange
regulations may also specify certain information that has to be disclosed.
Cultural differences. The culture of a country and the values that society has can have an
influence on accounting regulations and disclosures required by entities.
296 Answers
Marking scheme
Marks
(e) (i) 1 mark per definition, up to a maximum of 2
(ii) 1 mark per point, up to a maximum of 3
Total 5
(i) An asset is a resource controlled by an entity as a result of past events and from which future
economic benefits are expected to flow to the entity.
A liability is a present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow of resources from the entity.
(ii) An asset or a liability can only be recognised in the financial statements if it meets the definition of
an asset or a liability and it also satisfies the following recognition criteria specified in the IASBs
Conceptual Framework:
(a) It is probable that any future economic benefit associated with the item will flow to or from
the entity.
(b) The item has a cost or value that can be measured with reliability.
Marking scheme
Marks
(f) (i) 1 mark per well explained point, up to a maximum of 5
IFRS 5 requires that assets held for sale are carried at the lower of their carrying amount and fair value
less costs to sell. Managements decision to re-classify the property as a non-current asset at its previous
carrying amount ignores the requirements of IFRS 5 and is therefore wrong.
As a professional accountant, WZ has an obligation to act in accordance with the fundamental principles
in the CIMA Code of Ethics. These include integrity and objectivity.
Integrity requires a professional accountant to be straightforward and honest in all professional and
business relationships.
WZs integrity is under threat because he is being asked to agree to an accounting treatment which is
knows is incorrect. If he agrees, then he is being dishonest.
Objectivity requires that a professional accountant should not allow bias, conflict of interest or undue
influence of others to override professional or business judgements.
WZs objectivity is under threat because management are pressurising WZ to agree to using an accounting
treatment which he knows is wrong. If he agrees, he will have allowed undue influence of others to
override his professional judgement.
The possible options WZ could take are:
WZ should inform management of the correct accounting treatment in accordance with IFRS 5 and
recommend that they do not reclassify the property as a non-current asset at carrying value.
If management insist on ignoring IFRS 5, WZ should try and distance himself from the financial
statements.
WZ could consider calling the CIMA ethics helpline to ask for advice
If the situation is not appropriately resolved, WZ should consider resigning his position and seeking
employment elsewhere.
Answers 297

(a)
(i) $ $
Accounting profit per financial statements 165,000
Add back items of expense that are not tax allowable:
Entertaining 9,800
Depreciation property, plant and equipment 42,000
Depreciation vehicles (18/6) 3,000
54,800
219,800
Deduct items of income that are not taxable or tax allowances given:
Tax depreciation property, plant and equipment 65,000
Tax depreciation vehicles (18 50%) 9,000
(74,000)
Tax due = 145,800 25% = $36,450

(ii) Income tax expense charged to the statement of profit or loss: $43,700
$
Current tax expense 36,450
Increase in deferred tax provision (W) 7,250
43,700
Working deferred tax

$
Increase in deferred tax provision for PPE ((65 42) 25%) 5,750
Increase in deferred tax provision for vehicles ((9 3) 25%) 1,500
7,250
(b) (i)
$
Output VAT
Sales (105,800 15/115) 13,800
Input VAT
Perfume (50,000 1.2*) 15% (9,000)
Repackaging (9,775 15/115) (1,275)
VAT due to tax authorities 3,525
* VAT is payable on the cost plus excise duty

(ii)
$
Revenue (105,800 100/115) 92,000
Cost of sales:
Purchases plus excise duty
(50,000 1.2) 60,000
Repackaging (9,775 100/115) 8,500
(68,500)
Net profit 23,500
(c) A tax base is the thing that is subject to tax. Taxes can be classified according to their tax base (ie what
is being taxed).
Three examples of a tax base are:
Income or profits (personal income tax and company income tax)
Assets (tax on capital gains, wealth and inheritance taxes)
Consumption (or expenditure, eg taxes on alcohol, cigarettes or fuel and sales taxes).
298 Answers
(d) An entity has maintained its capital if it has as much capital at the end of the period as it had at the
beginning of the period. Any amount over and above that required to maintain the capital at the beginning
of the period is profit. It is important to know which concept of capital is being adopted as this
determines how profit is calculated.
There are two concepts of capital:
Under a financial concept of capital, such as invested money or invested purchasing power, capital is the
net assets or equity of the entity. The financial concept of capital is adopted by most entities.
Under a physical concept of capital, such as operating capability, capital is the productive capacity of the
entity based on, for example, units of output per day.
There are therefore two concepts of capital maintenance:
(a) Financial capital maintenance. Under this concept, a profit is only earned if the money amount of
the next assets at the end of the period is greater than the money amount of the net assets a the
beginning of the period.
(b) Physical capital maintenance. Under this concept, a profit is only earned if the physical productive
capacity of the entity at the end of the period is greater than at the beginning of the period.
(e) (i) Materiality - A matter is material if its omission or misstatement could influence the economic
decisions of users taken on the basis of the financial statements.
Materiality is a judgment and there are no rules as to what makes an item material. Some items
are material by nature and some items are material due to their size. A good rule of thumb for
determining if an item is material by size is to consider items that are 5% or more of net profit or
1% or more of revenue to be material.
The capitalised research expenses are approximately 11% (500/4,500) of net profit and are
therefore likely to be material.
(ii) The research expenditure should not be capitalised, instead it should be expensed in accordance
with IAS 38. Assuming management refuse to change the financial statements, then the financial
statements will contain a material error.
However, this error is restricted to the research expenses and is not pervasive to the financial
statements. Therefore a modified opinion should be issued. The opinion should be qualified on the
grounds that the misstatement is material, but not pervasive, to the financial statements. The opinion
will contain the phrase true and fair view, except for and then a description of the issue.
(f) Section 320 of the 2010 CIMA Code (previously Section 220 of the 2007 Code) deals with the
preparation and reporting of information.
It specifies that a professional accountant in business should maintain information for which they are
responsible so that it describes the true nature of transactions, assets and liabilities, and is timely,
accurate and complete.
The fundamental principles of the CIMA Code of ethics require RS to act with both integrity and
objectivity. Integrity requires RS to act honestly and objectivity requires RS to not allow bias or conflict of
interest or undue influence from others to override his professional judgment.
RS is being pressurised to present information that does not reflect the true nature of the transactions and
is not accurate.
Therefore RSs integrity is under threat as he is being asked to be dishonest.
RSs objectivity is under threat as he may be unduly influenced by others to change the information or
may give in to the self-interest he has in the figures due to his bonus being affected.
Answers 299

(a) Deferred tax balance at 31 December 2011:
Carrying Value Tax base
$000 $000
Cost 1 January 2010 440 440
Year to 31 December 2010 (55) (220)
385 220
Revaluation 1 Jan 2011 70 0
455 220
Year to 31 December 2011 (65) (55)
390 165
At 31 December 2010: $385,000 $220,000 = $165,000

At 31 December 2011: $390,000 $165,000 = $225,000
Change (Increase) $60,000
Tax at 25% = $15,000
Deferred tax movement in year to 31 December 2011:

Debit to income statement of $15,000
Deferred tax balance at 31 December 2011:
Credit balance $225,000 25% = $56,250
(b) (i) Zero rated means that no VAT is charged on sales but UYT can reclaim VAT paid on its inputs.
Exemption from VAT means that the revenue earned is exempt from VAT, so no VAT is charged but
UYT cannot reclaim the portion of input VAT that relates to the exempt goods. If an actual figure
cannot be calculated it will be on a proportional basis.
Excl VAT VAT 15%
$ $
Inputs:
Cost 400,000 60,000
Input VAT claim limited to 450/600 45,000
Outputs:
Standard rate 450,000 67,500
Exempt 150,000 0
600,000 67,500
Net 22,500
(ii) Net Vat due to be paid is $22,500
(c) Under the classical system of taxation, company income tax is charged on all of the profits of the entity,
whether distributed or not. Dividends are paid out of taxed profits and are then chargeable to personal
income tax in the hands of the shareholder. In this case the dividends have been taxed twice.
Under the imputation system, the underlying company income tax that has already been paid is imputed
to the shareholder as a tax credit. The shareholder pays income tax on the dividend but deducts the tax
credit, therefore avoiding the problem of double taxation of dividends.
If the personal income tax rate of the shareholder is higher than the rate of tax credit the shareholder may
have to apply additional tax on the dividend, however it will still only have been taxed once.
With systems using the full imputation system all of the underlying corporate income tax is passed to the
shareholder as a tax credit. If a partial imputation system is used only part of the tax paid by the entity
will be passed to the shareholder.
YT has received a dividend from LKJ and will have received a tax credit for the proportion of tax paid by
LKJ on the underlying profit. As LKJ is an entity resident in Country X it will have paid corporate income
tax at 25% on its taxable profit for the year. This will be passed on to its shareholders as a tax credit as
Country X uses the full imputation system..
300 Answers
YT will receive a tax credit and will be able to set this tax credit against any tax due on the dividend
leaving additional tax to be paid if YTs personal tax rate is higher than 25%.
YT is therefore incorrect in thinking that his dividend has been taxed twice.
(d) The four main entities involved in developing and implementing IFRS are:
IFRS Foundation (formerly known as the International Accounting Standards Committee
Foundation (IASCF).
Role a broad range of responsibilities including strategy, governance and fund raising
International Accounting Standards Board (IASB)
Role responsibility for all technical matters including the preparation and publication of
international financial reporting standards
IFRS Advisory Council (formerly known as the Standards Advisory Council)
Role to provide a forum for consultation with the outside world. Provides strategic advice to the
IASB and informs the IASB of public views on major standard setting projects.
IFRS Interpretations Committee (formerly known as the International Financial Reporting
Interpretations Committee IFRIC)
Role to review newly identified financial reporting issues and to provide guidance and
clarification on the application and interpretation of IFRSs
(e) (i) ISA 200 Overall objectives of the independent auditor and the conduct of an audit in accordance
with international standards on auditing states that the objective of an audit is to enable the
auditor to express an opinion as to whether the financial statements are prepared, in all material
respects, in accordance with an identified financial reporting framework and as to whether they
give a true and fair view of the affairs of the entity.
(ii) Any three from:
Managements responsibility for the financial statements
Report should state that management is responsible for the preparation and fair
presentation of the financial statements.
Auditors responsibility
Report should state that the responsibility of the auditor is to express an opinion on the
financial statements based on the audit.
Scope of the audit of the financial statements
Report should give an overview of the type of work done during the audit, such as obtaining
audit evidence, risk assessment, procedures selected and the evaluation of the accounting
policies used.
Auditors opinion
Report should give the auditors opinion on whether the financial statements give a true and
fair view or are presented fairly in all material respects, in accordance with the applicable
financial reporting framework.
(f) The ethical problem that XQ faces is that a professional accountant in business should prepare or present
information fairly, honestly and in accordance with relevant professional standards so that the information
will be understood in its context. A professional accountant is expected to act with integrity and objectivity
and not allow any undue influence from others to override his professional judgement.
XQ is facing pressure from others to change the results and therefore break the CIMA Code.
XQ is being asked to misrepresent the facts of the actual situation which would be contrary to the CIMA
Codes fundamental principles of integrity and objectivity. XQ would also be breaking the due care
requirement of the CIMA Code.
Answers 301
XQ should apply safeguards to eliminate the threats or reduce them to an acceptable level. As other staff
are offering incentives XQ will need to decline these and refuse to alter the accounting information.
XQ should also consult with his line manager. XQ may also wish to get advice from the CIMA helpline.
The situation is unlikely to require XQ to seek legal advice or resign.

(a) The use of statements of cash flows is very much in conjunction with the rest of the financial statements.
Users can gain further appreciation of the change in net assets, of the entitys financial position (liquidity
and solvency) and the entitys ability to adapt to changing circumstances by affecting the amount and
timing of cash flows.
Statements of cash flows enhance comparability as they are not affected by differing accounting policies
used for the same types of transactions or events.
Cash flow information of a historical nature can be used as an indicator of the amount, timing and
certainty of future cash flows. Past forecast cash flow information can be checked for accuracy as actual
figures emerge. The relationship between profit and cash flows can be analysed as can changes in prices
over time.
(b) Deferred tax and provisions for income tax
(i) Deferred tax is the estimated future tax consequences of transactions and events that have been
recognised in the financial statements of the current and previous periods. Deferred tax arises due
to the temporary differences between the accounting profit and the taxable profit. The temporary
differences cause the carrying value of some items in the statement of financial position to be
different from their tax base (the amount recognised for tax calculation).
(ii) TXs statement of comprehensive income shows an increase in deferred tax, this suggests that
temporary differences increased by $800,000 in the year to 31/3/2012. The main reason was
probably an increase in non-current assets causing the tax depreciation to be $800,000 more than
the accounting depreciation for the year to 31/3/2012, thus causing the increase of $200,000 in
deferred tax provision.
(iii) Current tax is the estimated amount of corporate income tax payable on the taxable profits of the
entity for the period. The amount of current tax is accrued in the financial statements and carried
forward as a current liability to the next accounting period when it will be paid. When the tax is
paid there will usually be a difference between the amount paid and the amount accrued. If the
amount paid is less than the amount accrued there will be an over provision of income tax. The
amount over provided will be an adjustment to the income tax expense in the following period. In
TX the current tax estimate for year to 31 March 2011 was $650,000, the statement of cash
flows shows that $600,000 was paid in the following period leaving a balance of $50,000 over
provided.
(c) PQ Tax Calculation for the year ended 31 March 2012

$000
Accounting profits before tax 387
Less finance income after tax (85)
Add gross finance income 100
Add back:
Depreciation 92
Amortisation 14
508
Less tax depreciation 98
Taxable profits 410
Tax at 25% 102.5
Less tax suffered on foreign interest received:
Gross interest 85 15 / 85 = (15)
Tax due 87.5
302 Answers
(d) Indirect tax

(i) Excise Duty is a selective commodity tax, levied on certain types of goods. It is a unit tax based on
the weight or size of the tax base. E.g. Petroleum products, tobacco products alcoholic drinks and
motor vehicles.
Single stage sales tax is a more general consumption tax. It is applied at one level of the
production/distribution chain only. It can be applied to any level but when it is used in practice it is
most often applied at the retail sales level. Single stage sales taxes are levied as a percentage of
value, e.g. retail sales value.
(ii) From the revenue authoritys point of view, the characteristics of commodities that make them
most suitable for excise duty to be applied are:
Few large producers
Inelastic demand with no close substitutes
Large sales volumes
Easy to define products covered by the duty
(e) Income and equity

(i) Income: Increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to combinations from equity participants;
Equity: Residual interest in the assets of the entity after deducting all its liabilities.
(ii) Income is recognised if:
It meets the definition of income in (i) above.
The increase has a cost or value that can be measured reliably.
Income is recognised in the statement of comprehensive income with due regard to materiality.
(f) Benefits of an audit
Briefing Note
To: Chief Executive
The benefits of having an external audit carried out each year:
The external audit should give an independent opinion on the truth and fairness of the accounts
and therefore the shareholders should have comfort that there is no material error or
misrepresentation of the financial position of the entity in the statements presented
Whilst the auditors are conducting the audit they will consider the controls in place and may be
able to give constructive advice to management
Whilst the purpose of the audit is not to find fraud, the fact that an external review is taking place
is likely to act as a fraud deterrent
Applications to third parties for finance may be enhanced
Avoids breaking the law, for some entities an audit is not an option. Local legislation relating to
entities may require an annual independent audit to be carried out. Local stock exchange
regulations will usually require an annual audit.
Answers 303
Marking scheme
Marks
(a) (i) Calculation of income tax charge 3
(ii) Explanation of effect 1

Calculation of effect 1
Total 5
(i) In the statement of profit or loss and other comprehensive income for the year ended 31 March
2012 PV will report an income tax charge of $1,975,000. This is calculated as follows:
$000
Overprovision for the year to 31 March 2011
(1,820 1,795) (25)
Income tax charge for the year 1,980
Taxation charge for the year 1,975
(ii) If the likely future rate of tax is known, then this can be used in calculating the deferred tax
provision; if not the current rate is used. Using a rate of 30% gives an increase in deferred tax to
672 (560/0.25 0.30) so we would need to increase the deferred tax provision by $112,000.
Marking scheme
Marks
(b) 2 marks per well made point, up to a maximum of 5
Total 5
Double tax relief can be provided by one of the following methods:

Exemption an agreement between two countries that income will be exempt in one country and taxable
in another.
Deduction foreign tax is deducted from foreign income and the remaining income it taxed in the country
of residence.
Tax credit tax paid in one country is treated as a tax credit at the lower tax rate of the other country.
Marking scheme
Marks
(c) Correct treatment of expenses and depreciation 2
Correct treatment of disposal and new vehicle 2
Calculation of tax 1
Total 5
304 Answers
$
Profit for the year before tax 43,000
Add back: Entertaining expense 6,300
Loss on disposal 1,000
Depreciation charge on property 16,500
Depreciation charge on new vehicle 4,000
Deduct: Allowable tax depreciation (19,300)
Tax depreciation on new vehicle (16,000)
Adjusted profit chargeable to tax 35,500
Tax charge @ 25% 8,875
Marking scheme
Marks
(d) Amounts to be included in statement of profit or loss and other comprehensive income 3
Amount to be included in statement of financial position 2
Total 5
$000
Revenue 9,000
Total cost 10,000
Predicted loss (1,000)
Year to 31 March 2012:

Revenue (9000 35%) 3,150
Cost of sales in year (10000 35%) 3,500
Loss in year (350)
Additional expected loss (650)
(1,000):
Amount due to client
Cost to date (WIP) 4,000
Total loss (1,000)
Less cash received (3,250)
Due to client (250)
TY should include the following in its statement of profit or loss and other comprehensive income for the year to
31 March 2012:
Revenue (9000 35%) 3,150
Cost of sales
Cost to date (10000 35%) 3,500
Additional expected loss 650
4,150
TY should include the following in its statement of financial position as at 31 March 2012:
Under current liabilities:
Amount due to client (250)
Marking scheme
Marks
5
(e) 1 mark per step, up to a maximum of
Total 5
Answers 305
The IASB standard setting process can involve the following steps:
The IASB establishes an advisory committee to advise on the issues arising from the project. The IASB
consults with this committee and the IFRS advisory council throughout the development process.
IASB develops and publishes a Discussion Paper for public comment.
The IASB reviews the comments on the Discussion Paper and prepares and publishes an Exposure Draft
for public comment.
The comments on the Exposure Draft are reviewed by the IASB and if necessary the Exposure Draft is
amended before being issued as a final standard.
On occasion where there are significant changes to the exposure draft it may be reissued for further public
comment before being issued as a final standard.
Marking scheme
Marks
(f) (i) 1 mark per point on the impact, up to a maximum of 2
3
(ii) 1 mark per point on the report, up to a maximum of
5
Total
(i) Impact on the audit report

The inventory value is material, 30% of profit and 4.5% of revenue and there is a lack of evidence to
support the inventory valuation it will impact on the audit report opinion.
As the auditors have agreed with VBs directors on the treatment of the court case it will not affect the
audit report opinion.
(ii) Modification of audit report
The auditors will have to issue a modified report for the inventory valuation as it is due to a material
misstatement caused by insufficient appropriate evidence. The modification required is a qualified opinion
expressed as showing a true and fair view except for the inventory valuation.
The auditors can issue an unqualified opinion for the court case. However there is material inherent
uncertainty over the outcome of the court case so the unqualified report would have to include a
fundamental uncertainty emphasis of matter.

(a) Tax authorities have the following powers to enforce compliance with tax rules:
Power to review and query filed returns (in order to resolve queries)
Power to request special reports, forms or returns (if they believe that full information has not been
provided)
Power to examine records (generally going back some years)
Powers of entry and search (especially where fraud is suspected)
Exchange of information with tax authorities in other jurisdictions
306 Answers
(b) The tax payable by KQ for the year to 30 September 2012 is $37,250
$ $
Add back expenses that are not tax deductible:
Political donations 9,000
Entertaining 6,000
15,000
Add back accounting depreciation:
Plant (180,000 15%) 27,000
Machinery (50,000 15%) 7,500
34,500
196,500
Less: tax allowances:
Plant (W1) 22,500
Machinery (50,000 50%) 25,000
(47,500)
Tax at 25% 37,250

W1 Plant
$
Cost 1 Oct 2010 180,000
Tax depreciation y/e 30 Sep 2011 @ 50% (90,000)
90,000
Tax depreciation y/e 30 Sep 2012 @ 25% 90,000 (22,500)
(c) According to IFRS 8 an operating segment is a component of an entity:

That engages in business activities from which it may earn revenues and incur expenses
Whose operating results are regularly reviewed by the entitys chief operating decision maker to
make decisions about resources to be allocated to the segment and assess its performance, and
For which discrete financial information is available.
An entity must report separate information about each operating segment that:
Has been identified as meeting the definition of an operating segment; and
Exceeds any of the following thresholds:
- segment revenue (internal and external) is 10% or more of total revenue, or
- segment profit or loss is 10% or more of all segments in profit (or all segments in loss if
greater)
- segment assets are 10% or more of total assets
At least 75% of total external revenue must be reported by operating segments.
(d) (i) Once an entity is registered for VAT, it must:
Charge VAT on all its sales
Reclaim VAT on its purchases
Keep records relating to VAT
Complete a quarterly VAT return and pay any VAT owed to the tax authorities.
(ii) VAT balance due to the tax authorities is $36,000

$
VAT due to tax authorities (W1) 108,000
VAT reclaimed (W2) 90,000 80% (72,000)
Net VAT balance 36,000
Answers 307
W1
VAT due on sale of standard rated goods is 720,000 15% = 108,000
W2
VAT to reclaim
Total VAT suffered 690,000 / 115 15 = 90,000
Total sales = 1,025,000 (720,000 + 100,000 + 205,000) of which 20% (205,000 /
1,025,000) relate to exempt goods, so only 80% of the VAT suffered can be reclaimed.
(e) (i) Total foreign tax suffered on the dividend is $77,165

$ $
HC gross dividend 200,000
WHT @ 12% 24,000
Underlying tax (200,000/474,000 126,000) 53,165
Total foreign tax 77,165
(ii) Tax HC is liable to pay is nil.

$
HC gross dividend received 200,000
Add on ULT 53,165
Total: 253,165
Tax @ 25% 63,291
The $63,291 is less than the $77,165 foreign tax therefore no tax due in Country X
W1
Underlying tax = gross dividend tax paid by foreign company
foreign company PAT
Double tax relief is awarded applying the tax credit method so HC can receive full relief for
the tax paid by OC. However it cannot receive a refund where the tax paid by OC is greater
than the tax due by HC
(f) The IFRS Interpretations Committee has two main responsibilities:
Review, on a timely basis, newly identified financial reporting issues not specifically addressed in
IFRSs
Clarify issues where unsatisfactory or conflicting interpretations have developed, or seem likely to
develop in the absence of authoritative guidance, with a view to reaching a consensus on the
appropriate treatment
The IFRS Interpretations Committee also helps the IASB move towards international harmonisation by
working with its equivalent national level bodies.
The IFRS Advisory Council is essentially a forum used by the IASB to consult with the outside world; it
consults with national standard setters, academics, user groups and a host of other interested parties and
informs the IASB of their views on a range of issues.
The IASB consults the IFRS Advisory Council on:
Its technical agenda
Its project priorities
Project issues related to application and implementation of IFRSs
Possible benefits and costs of particular proposals
308 Answers

(a)
(i) Corporate income tax
VAT or sales tax
PAYE or similar employee tax
Capital gains tax
(ii) An entity would normally be required to keep the following records to support its VAT or sales tax
returns:
Orders and delivery notes
Purchase and sales invoices
Credit and debit notes
Purchase and sales books
Cashbooks and receipts
Bank statements
Import and export documents
VAT account
(b)
$
Add disallowed expenses (4,000+5,000) 9,000
Less non-taxable income (12,000)
Add depreciation 11,600
Less tax depreciation (10,250)
Taxable profit for year 165,350
Less brought forward losses (49,000)
116,350
Tax due at 25% 29,088
Depreciation:
50,000 + 8,000 = 58,000 1/5 = 11,600
Tax depreciation:
1/1/11 1/1/12
Cost 50,000
First year allowance 2011 25,000
25,000 8,000
Allowances 2012
First year allowance 4,000
Annual allowance 6,250
Total allowance 10,250
(c)
A single figure should be shown on the statement of comprehensive income, comprising the loss after tax
and loss incurred on the disposal of assets. Therefore a separate section Discontinued operations will be
shown after the section of the statement of comprehensive income headed Continuing operations. The
heading will be loss for the period from discontinued operations and the amount shown will be
($42,000). The notes to the statement of comprehensive income will need to disclose each of the
amounts included in the loss after tax, i.e.
$000
Revenue 95
Operating expenses (110)
Operating loss (15)
Loss on disposal of assets (30)
Tax refund 3
Loss (42)
Answers 309
Comparative information for prior periods must be restated using the current classification, that is division
C results for prior periods will be shown as discontinued operations.
The restructuring expense is not included in discontinued operations as according to IFRS 5 Non-current
assets held for sale and discontinued operations this is an expense that relates to ongoing operations and
should be included under continuing operations. As the $75,000 restructuring is a material item in the
context of continuing operations, it will need to be shown as a separate item on the statement of
comprehensive income as required by IAS 1 Presentation of financial statements.
(d)
An excise duty may be imposed on certain types of goods by a government:
to discourage over-consumption of products which may harm the consumer or others for example
alcohol;
to alter the distribution of income by taxing luxuries, for example, in the USA there are excise
duties on fishing equipment, firearms and airplane tickets;
to seek to allow for externalities and to place the burden of paying the tax on the consumer of the
product/service. For example the social and environmental cost of consuming the product is paid
for by the consumer of products such as tobacco to help pay for the increased cost of healthcare of
smokers.
to improve infrastructure and other facilities. For example excise duty on petrol and diesel is used
by some governments to build and maintain roads, bridges and mass transit systems.
to protect or promote growth of home industries by increasing the price of imports with taxes, for
example car manufacturing.
to raise revenue for government by taxing goods with inelastic demand, thus enabling revenue to
be raised without distorting consumption, for example luxury goods .
(e)
(i) OWs production facility and head office are located in Country X and all the directors board
meetings are held in Country X so OWs effective management is in Country X.
Both countries have double tax treaties with each other based on the OECD model tax convention
so the OECD model tax convention will apply to OW. Where an entity is deemed to be taxable in
several countries, the OECD model suggests that the entity is resident in the country of its effective
management. OW will therefore be regarded as resident in Country X for tax purposes and will be
taxable in Country X.
(ii) The OECD model tax convention states that an entitys profits will only be taxed in a country if the
entity has a permanent establishment in the country.
OW has a number of branch offices in Country Z, each office provides services to customers and
sells OWs products. The OECD model tax convention states that a branch office is a permanent
establishment, so OW will have a permanent establishment in Country Z. Profits made by OWs
branch offices in Country Z will be taxable in Country Z.
As OW is resident in Country X its worldwide profits will be taxed in Country X, irrespective of where they
arise.
As both countries have double tax treaties with each other based on the OECD model tax convention any
tax paid in Country Z will be able to be relieved under the double taxation agreement.
(f)
According to the Framework, its purpose is to:
assist the IASB in the development of future IFRSs and in its review of existing IFRSs;
assist the IASB in promoting harmonisation of regulations, accounting standards and procedures
by providing a basis for reducing the number of alternative treatments permitted by IFRSs;
assist national standard-setting bodies in developing national standards;
310 Answers
assist preparers of financial statements in applying IFRSs and in dealing with topics that have yet
to be covered in an IFRS;
assist auditors in forming an opinion as to whether financial statements comply with IFRSs;
assist users in interpreting the information contained in a set of financial statements that are
prepared using IFRSs;
provide information about how the IASB has formulated its approach to the development of IFRSs.
(Any 5 of the above)

(a)
Workings
$million
Sold in year (60)
Annual depreciation (120)
465
Purchased 170
Non-current asset investments
Revaluation loss (21)
86
Purchased 7
Deferred development expenditure
Amortisation (8)
16
Purchased 13
CFQ Statement of Cash Flows for year ended 31 March 2013 (Extract)
$million
Cash flows from Investing Activities:
Purchase of Property, plant and equipment (170)
Purchase of Non-current asset investments (7)
Purchase of Deferred development expenditure (13)
Proceeds from disposal of property, plant and equipment 45
Net cash outflow from investing activities (145)
(b)
He should start by gathering all relevant information so that he can be sure of the facts and decide if there
really is an ethical problem. All steps taken should be fully documented.
Initially he should raise his concern internally, possibly with the teams manager or a trusted colleague.
If this is not a realistic option, for example because of the relationship of the manager and the team
member that Ace is concerned about, he may have to consider escalating the issue and speak to the
managers boss, a board member or a non-executive director. If there is an internal whistle blowing
procedure or internal grievance procedure he should use that.
If after raising the matter internally nothing is done and he still has concerns he should take it further, for
example if the other team member is an accountant Ace could consider reporting the team member to his
professional body.
Ace could also distance himself from the problem and ask to be moved to a different department or to a
different team.
Answers 311
(c)
(i) IAS 32 Financial Instruments: Presentation requires shares to be classified as debt (financial
liability) or equity according to their substance rather than legal form.
A financial liability is defined as a contractual obligation to deliver cash or other financial asset to
another entity.
Cumulative redeemable preferred shares meet the definition of financial liability and therefore must
be classified as debt and included in the statement of financial position under non-current
liabilities.
(ii) IAS 39 Financial Instruments: Recognition and Measurement: The cumulative redeemable
preferred shares will initially be measured at the fair value of the consideration received. That is
issue price less issue costs, ($500,000-$20,000 = $480,000).
The charge to profit or loss will be based on the effective interest rate which includes any issue
costs, dividends paid and redemption costs.
(d)
(i) The tax base of an asset is the tax written down value of the asset. i.e. its cost less accumulated
tax depreciation. Deferred tax arises as a result of temporary differences caused by a difference
between an assets tax base and its accounting carrying value.
(ii) Accounting carrying value:
$000
Cost 260
Less residual value (26)
234
Annual depreciation 1/6 (39)
Cost 260
Depreciation 2011/12 (39)
Depreciation 2012/13 (39)
Carrying value 31 March 2013 182
Tax Base:
Cost 260
First year allowance (50%) (130)
Second year allowance (25%) (32.5)
97.5
Difference 182 97.5 = 84.5
Deferred tax = $84,500 25% = $21,125
(e)
MT Taxable profits:
$
Add back donations 5,000
Add back depreciation 39,000
81,000
Less tax depreciation allowances:
First year allowance (30000 50%) (15,000)
Annual writing down allowance
(120000 25%) (30,000)
Taxable profits for year 36,000
Less loss b/f (12,000)
Tax due @ 25% 6,000
312 Answers
(f)
(i) Cascade tax tax is taken at each stage of production and is treated as a business cost. No
refunds are provided by local government.
VAT charged each time a component or product is sold but government allows businesses to
claim back all the tax they have paid. The entire tax burden is passed to the final consumer.
(ii)
$000 $000
Sales at standard rate 828 VAT
Less VAT (828x15/115) (108) 108
720
Zero rated sales 150
870
Purchases (620) (60)
250 48
Profit for period $250,000
VAT due for period $48,000
313
MOCK EXAMS
314
315
CIMA
Financial Pillar
F1 Financial Operations
Mock Exam 1
Question Paper
You are allowed three hours to answer this question paper.
You are allowed 20 minutes reading time before the examination begins during which you
should read the question paper and, if you wish, highlight and/or make notes on the question
paper.
You are strongly advised to carefully read ALL the question requirements before attempting
the question concerned (that is all parts and/or sub-questions).
You should show all working as marks are available for the method you use.
ALL QUESTIONS ARE COMPULSORY
Section A comprises of 10 sub-questions.
Section B comprises of 6 sub-questions.
Section C comprises of 2 questions.
The country 'Tax Regime' for the paper is provided on the next page.
DO NOT OPEN THIS PAPER UNTIL YOU ARE READY TO START UNDER
EXAMINATION CONDITIONS
315
316
Mock exam 1: questions 317
COUNTRY X TAX REGIME FOR USE THROUGHOUT THE EXAMINATION

PAPER
Relevant tax rules

Corporate Profits
can be ignored:
recorded
25% per year of the written-down value (i.e. cost minus previous allowances) in subsequent
Value Added Tax
Country X has a VAT system which allows entities to reclaim input tax paid. In country X the VAT rates are:
Zero rated 0%
Standard rated 15%
318 Mock exam 1: questions
SECTION A 20 marks
Answer ALL sub-questions in this section
Question 1
1 A has a taxable profit of $100,000. The book depreciation was $10,000 and the tax allowable
depreciation was $25,000. What was the accounting profit? (2 marks)
2 Company W is resident in country X and makes an accounting profit of $300,000 during the year. This
includes non-taxable income of $10,000 and depreciation of $35,000. In addition, $5,000 of the
expenses are for entertaining. If the tax allowable depreciation totals $30,000, what is the taxable profit?
A $290,000
B $295,000
C $300,000
D $310,000 (2 marks)
3 The directors of an entity are refusing to amend the financial statements to take account of a customer
who went bankrupt after the year-end and who owed the entity $10,000 at the year-end. This amount is
material. What type of audit opinion should be issued as a result?
A Qualified opinion
B Adverse opinion
C Unmodified opinion with emphasis of matter paragraph
D Disclaimer of opinion (2 marks)
4 Company E is resident in Country X and has sales of $230,000, excluding sales tax, in a period. Its
purchases total $113,000, including sales tax. Purchases of $10,000 are zero rated. What is the sales
tax payable for the period?
A $14,550
B $17,550
C $19,050
D $21,065 (2 marks)
5 When an entity is resident for tax purposes in more than one country, the OCED model tax convention
states that an entity will be deemed to be resident only in its:
A Place of permanent establishment
B Place of effective management
C Place of incorporation
D Place of main business activity (2 marks)
6 IAS 10 Events after the reporting period distinguishes between adjusting and non-adjusting events.
Which of the following is an adjusting event?
A One month after the year end, a customer lodged a claim for $1,000,000 compensation. The
customer claimed to have suffered permanent mental damage as a result of the fright she had
when one of the entity's products malfunctioned and exploded. The outcome of the court case
cannot be predicted at this stage.
B There was a dispute with the workers and all production ceased one week after the year end.
C A fire destroyed all of the entity's inventory in its furnished goods warehouse two weeks after the
year end.
D Inventory valued at the year end at $20,000 was sold one month later for $15,000. (2 marks)
7 X signed a finance lease agreement on 1 October 20X2. The lease provided for five annual payments, in
arrears, of $20,000. The fair value of the asset was agreed at $80,000.
Using the sum of digits method, how much should be charged to the statement of profit or loss and other
comprehensive income for the finance cost in the year to 30 September 20X3?
A $4,000
B $6,667
C $8,000
D $20,000 (2 marks)
8 D purchased an item of plant on 1 April 20X0 for $200,000. The plant attracted writing down tax
allowances and depreciation was 10% on the straight-line basis.
The deferred tax balance for this item of plant at 31 March 20X3 is:
A $7,500
B $20,938
C $22,500
D $83,750 (2 marks)
9 C started work on a contract to build a dam for a hydro-electric scheme. The work commenced on 24
October 20X1 and is scheduled to take four years to complete. C recognises profit on the basis of the
certified percentage of work completed. The contract price is $10 million.
An analysis of C's records provided the following information:
Year to 30 September 20X2 20X3
Percentage of work completed and certified in year 30% 55%
$000 $000
Total cost incurred during the year 2,900 1,700
Estimated cost of remaining work to complete contract 6,000 3,900
Total payments made for the cost incurred during the year 2,500 2,000
How much profit should C recognise in its statement of profit or loss and other comprehensive income for
the years ended:
30 September 20X2 30 September 20X3
$000 $000
A 100 375
B 330 375
C 330 495
D 500 825
(2 marks)
10 S announced a rights issue of 1 for every 5 shares currently held, at a price of $2 each. S currently has
2,000,000 $1 ordinary shares with a quoted market price of $2.50 each. Directly attributable issue
costs amounted to $25,000.
Assuming all rights are taken up and all money paid in full, how much will be credited to the share
premium account for the rights issue?
A $200,000
B $308,333
C $375,000
D $400,000 (2 marks)
(Total for Section A = 20 marks)

SECTION B 30 marks
Answer ALL six sub-questions
Question 2
(a) At the beginning of the accounting period, D had a credit balance of $40,000 on its current tax account,
which was paid during the period. The opening balance on the deferred tax account was $250,000 credit.
The provision for tax for the current period is $50,000 and the balance on the deferred tax account is to
be reduced to $225,000.
Required
Prepare extracts from the statement of profit or loss and other comprehensive income, statement of
financial position and notes to the accounts showing these tax related items. (Total = 5 marks)
(b) IAS 12 Income taxes requires entities to publish an explanation of the relationship between taxable
income and accounting profit. This can take the form of a numerical reconciliation between the tax
expense and the product of the accounting profit and the applicable tax rate.
Required
Explain why this explanation is helpful to the readers of financial statements (Total = 5 marks)
(c) Jedders Co has three long leasehold properties in different parts of the region each of which had an
original life of 50 years. As at 1 January 20X0, their original cost, accumulated depreciation to date and
carrying (book) values were as follows.
Carrying value
Cost Depreciation 1.1.20X0
$000 $000 $000
Property in North 3,000 1,800 1,200
Property in Central 6,000 1,200 4,800
Property in South 3,750 1,500 2,250
On 1 January an independent surveyor provided valuation information to suggest that the value of the
South property was the same as book value, the North property had fallen against carrying value by 20%
and the Central property had risen by 40% in value against the carrying value.
The directors wish to show all their properties at a revalued amount in the accounts as at 31 December
20X0.
Required
Calculate the charges to the statement of profit or loss and other comprehensive income and the non-
current asset extracts in the statement of financial position for all the properties for the year ended 31
December 20X0. You should follow the requirements of IAS 16 Property, plant and equipment. (Total =
5 marks)
The following data are to be used to answer questions (d) and (e)
The financial statements of GK for the year to 31 October 20X8 were as follows:
STATEMENT OF FINANCIAL POSITION AT 31 October 20X8 31 October 20X7
$000 $000 $000 $000
Assets
Non-current tangible assets 10,000 10,500
Property 5,000 15,000 4,550 15,050
Plant and equipment
Current assets
Inventory 1,750 1,500
Trade receivables 1,050 900
3,110 2,550
Ordinary shares @ $.050 each 6,000 3,000
Share premium 2,500 1,000
Revaluation reserve 3,000 3,000
13,201 8,000
Interest-bearing borrowings 2,400 7,000
Deferred tax 540 2,940 450 7,450
Current liabilities
Trade and other payables 1,060 1,400
Tax payable 909 750
1,969 2,150
18,110 17,600
FOR THE YEAR 31 OCTOBER 20X8

$000 $000
Revenue 16,000
Cost of sales 10,000
Gross profit 6,000
2,800
Finance cost (600)
Profit 2,200
Profit for the year (1,201)
1 Trade and other payables comprise:
31 October 20X8 31 October 20X7
$000 $000
1,060 1,400
2 Plant disposed of in the year had a net book value of $35,000; cash received on disposal was $60,000.
3 GKs statement of profit or loss and other comprehensive income includes depreciation for the year of
$1,110,000 for properties and $882,000 for plant and equipment.
4 Dividends paid during the year were $500,000.
(d) Required
Using the data relating to GK above, calculate the cash generated from operations that would appear in
GKs statement of cash flows, using the indirect method, for the year ended 31 October 20X8, in
accordance with IAS 7 Statement of cash flows. (Total = 5 marks)
(e) Required
Using the data relating to GK above, calculate the cash flow from investing activities and cash flows from
financing activities sections of GKs statement of cash flows for the year ended 31 October 20X8, in
accordance with IAS 7 Statement of cash flows. (Total = 5 marks)
(f) The definition of a liability forms an important element of the International Accounting Standards Board's
Conceptual Framework for Financial Reporting which, in turn, forms the basis for IAS 37 Provisions,
Contingent Liabilities and Contingent Assets.
Required
Define a liability and describe the circumstances under which provisions should be recognised. Give two
examples of how the definition of liabilities enhances the reliability of financial statements.
(Total = 5 marks)
(Total for Section B = 30 marks)

SECTION C 50 marks
Answer BOTH of these questions
Question 3
HI, listed on its local stock exchange, is a retail organisation operating several retail outlets. A reorganisation of
the entity was started in 20X2 because of a significant reduction in profits. This reorganisation was completed
during the current financial year.
The trial balance for HI at 30 September 20X3 was as follows:
$000 $000
Retained earnings at 30 September 20X2 1,890
Bank and cash 1,409
Buildings 11,200
Cash received on disposal of equipment 11
Cost of goods sold 3,591
Equipment and fixtures 2,625
Interim ordinary dividend paid 800
Inventory at 30 September 20X3 822
Investment income received 37
Available-for-sale investments at market value 30 September 20X2 492
Ordinary shares of $1 each, fully paid 5,000
Provision for deferred tax 256
Provision for reorganisation expenses at 30 September 20X2 1,010
Allowances for depreciation at 30 September 20X2
Buildings 1,404
Equipment and fixtures 1,741
Reorganisation expenses 900
Revaluation surplus 172
Sales revenue 9,415
Share premium 2,388
Trade payables 396
23,720 23,720
Additional information provided
(a) The reorganisation expenses relate to a comprehensive restructuring and reorganisation of the entity that
began in 20X2. HI's financial statements for 20X2 included a provision for reorganisation expenses of
$1,010,000. All costs had been incurred by the year end, but an invoice for $65,000, received on 2
October 20X3, remained unpaid and is not included in the trial balance figures. No further restructuring
and reorganisation costs are expected to occur and the provision is no longer required.
(b) Available-for-sale investments are carried in the financial statements at market value. The market value of
the available-for-sale investments at 30 September 20X3 was $522,000. There were no movements in
the investments held during the year.
(c) On 1 November 20X3, HI was informed that one of its customers, X, had ceased trading. The liquidators
advised HI that it was very unlikely to receive payment of any of the $45,000 due from X at 30
September 20X3.
(d) Another customer is suing for damages as a consequence of a faulty product. Legal advisers are currently
advising that the probability of HI being found liable is 75%. The amount payable is estimated to be the
full amount claimed of $100,000.
(e) The income tax due for the year ended 30 September 20X3 is estimated at $1,180,000 and the deferred
tax provision needs to be increased to $281,000.
(f) During the year, HI disposed of old equipment for $11,000. The original cost of this equipment was
$210,000 and accumulated depreciation at 30 September 20X2 was $205,000. HI's accounting policy
is to charge no depreciation in the year of the disposal.
(g) Depreciation is charged using the straight-line basis on non-current assets as follows.
Buildings 3%
Equipment and fixtures 20%
Depreciation is regarded as a cost of sales.
Required
Prepare the statement of profit or loss and other comprehensive income for HI for the year to 30 September
20X3 and a statement of financial position at that date, in a form suitable for presentation to the shareholders,
in accordance with the requirements of IFRS.
Notes to the financial statements are not required. (25 marks)
Question 4
The following are the financial statements relating to ST, a limited liability company, and its subsidiary company
BE.

ST BE
$000 $000
Sales revenue 235,000 85,000
Cost of sales (140,000) (52,000)
Gross profit 95,000 33,000
Administrative expenses (45,000) (8,000)
Dividend income from BE 5,000
Profit before tax 43,000 20,000
Tax (13,250) (5,000)
Profit for the year 29,750 15,000
STATEMENTS OF FINANCIAL POSITION AS AT 31 DECEMBER 20X5

ST BE
$000 $000 $000 $000
Assets
Non-current assets
Investments
30,000,000 $1 ordinary shares in BE at cost 34,000
134,000 40,000
Current assets
Inventory, at cost 13,360 3,890
Trade receivables and dividend receivable 14,640 6,280
Bank 3,500 2,570
165,500 52,740

Equity
$1 Ordinary shares 100,000 30,000
General reserve 9,200 1,000
136,500 40,280
Current liabilities
Trade payables 9,000 2,460
Dividend payable 20,000 10,000
165,500 52,740
(a) ST purchased its $1 ordinary shares in BE on 1 January 20X1. At that date the balance on BE's general
reserve was $0.5 million and the balance of retained earnings was $1.5 million.
(b) At 1 January 20X5 the total goodwill arising from the acquisition of BE was valued at $960,000. ST's
impairment review of this goodwill at 31 December 20X5 valued it at $800,000.
(c) During the year ended 31 December 20X5 ST sold goods which originally cost $12 million to BE. ST
invoiced BE at cost plus 40%. BE still has 30% of these goods in inventory at 31 December 20X5.
(d) BE owed ST $1.5 million at 31 December 20X5 for some of the goods ST supplied during the year.
Required
(a) Calculate the goodwill arising on the acquisition of BE. (2 marks)
(b) Prepare the following financial statements for ST.
(i) The consolidated statement of profit or loss and other comprehensive income for the year ended
31 December 20X5.
(8 marks)
(ii) The consolidated statement of financial position as at 31 December 20X5. (15 marks)
Disclosure notes are not required. (Total = 25 marks)
(Total for Section C = 50 marks)

12/12/2013 327
Answers
DO NOT TURN THIS PAGE UNTIL YOU HAVE

COMPLETED MOCK EXAM 1
328
Mock exam 1: answers 329
A plan of attack
As you turned the page to start this exam any one of a number of things could have been going through your
mind. Some of them may have been quite sensible, some of them may not.
The main thing to do is take a deep breath and do not panic. It's best to sort out a plan of attack before the
actual exam so that when the invigilator tells you that you can begin and the adrenaline kicks in you are using
every minute of the three hours wisely.
Your approach
This paper has three sections. The first section contains 10 multiple choice questions which are compulsory. The
second has six short compulsory questions. The third has two compulsory questions totalling 50 marks.
OTs first again

However you find the paper, chances are you should start with the objective test questions. You should be able
to do at least a few and answering them will give you a boost. Don't even look at the other questions before
doing Section A. Remember how long to allocate to the OTs? That's right, 36 minutes.
You then have a choice.
Read through and answer Section B before moving on to Section C
Read the questions in Section C, answer them and then go back to Section B
Time spent at the start of each Section B and the Section C questions confirming the requirements and
producing a plan for the answers is time well spent.
Doing the exam

Actually doing the exam is a personal experience. There is not a single right way. As long as you submit
complete answers to the MCQs in Section A, the six Section B questions and the questions in Section C, your
approach obviously works.
One approach
Having done or guessed at the MCQs, work straight through Section B. The possible pitfall would be getting
sucked too deeply into Section B and leaving insufficient time for Section C.
So lets look at the Section B questions in the paper:
Question (a) is a straightforward calculation of income tax liability. It would be a good idea to begin by
putting the information into T-accounts. Then the information just needs to be correctly presented. This
can easily be done in 9 minutes.
Question (b) is a discussion question on the relationship of accounting profit to taxable profit. Make a few
notes before you start.
Question (c) is more straightforward than it looks, but you must read it carefully so that you know exactly
what to do. Then write your answer out methodically.
Questions (d) and (e) are on statements of cash flows. Don't waste time digesting the whole of the
financial statements. Look at the question to see what information you need to extract and get on with it.
A methodical approach is really needed here.
Question (f) requires you to know the definition of a liability and of a provision and then provide two
examples of how the definitions improve reliability in the accounts. You might have found hard to think of
the examples, but dont spend more than the allocated time here.
Having hacked your way through Section B, taking no more than 9 minutes per question, you should now be left
with 90 minutes to do your Section C questions. These are worth 50 marks and you must aim to secure as many
of them as possible. Read the questions twice if you need to.
330 Mock exam 1: answers
For the Section C Questions you must proceed in a methodical way. Set out your formats and then work through
the question requirements, doing neat, readable calculations and fill out the figures. Even if you do not finish,
you will get marks for what you have done, so do the easy bits first.
Time allocation
Be disciplined. Allocate your time according to the marks available but never go over the time allocation. The last
few marks in a question are the hardest to earn.
Be sure to follow the requirements. If four advantages are required, give four. No extra credit will be given for
five. Two advantages will only get you half marks.
Answer all of the question. Having a go at every part of all the Section B questions you are required to do will put
you in a better position to pass than, say, only doing five questions. However difficult that sixth question seems
at first, there are marks to be earned.
If you have time left at the end of the exam ensure that you have attempted every part of every question. If you
have, then scan through and ensure you complete any part of an answer you left earlier. Use the full three hours
working towards a pass.
Marking the exam

When you mark your exam, be honest. Don't be too harsh though. Give yourself credit for the things you did
well, but don't kid yourself with 'I would have done that in the real exam'. It may be worth your while making two
lists; strengths and weaknesses.
Strengths will be areas of the syllabus you are confident with and also good exam technique. (Maybe you
produced correct financial statement formats.)
Weaknesses will be holes in your knowledge and poor exam technique (maybe you ran out of time and couldn't
answer all the requirements of the last question).
Making this list will help you focus your last days of revision on the areas which require attention whilst
reminding you of the areas you excel in.
SECTION A
Question 1
1 $
Less: depreciation 10,000
90,000
Add: tax allowable depreciation 25,000

2 The correct answer is C.

$ $
disallowed expenses (entertaining) 5,000
40,000
340,000
tax allowable depreciation 30,000 40,000
3 A A qualified opinion should be issued as the amount is material but not pervasive to the financial
statements.
4 The correct answer is D.
$
Output tax (230,000 15%) 34,500
Input tax ((113,000 10,000)/115 15) 13,435
Payable 21,065
5 The correct answer is B.

In the case where an entity is resident in more than one country, the OECD Model Tax Convention states
that the entity will be deemed to be resident only in the country of its effective management.
6 D The subsequent sale provides evidence of the net realisable value of the inventory as at the year
end.
5 5
7 B $(100,000 80,000) = $20,000
5 4 3 2 1 15
= $6,667
8 B $20,938
TWDV Carrying amount
$000 $000
01.04.20X0 200 200
Tax dep'n/Dep'n (100) (20)
31.03.20X1 100 180
Tax dep'n/Dep'n (25) (20)
31.03.20X2 75 160
Tax dep'n/Dep'n (18.75) (20)
31.3.20X3 56.25 140
Temporary difference 140,000 56,250 = 83,750

Deferred tax balance = 83,750 25% = $20,938
9 C 20X2 20X3
$000 $000
Costs to date 2,900 4,600
Costs to complete 6,000 3,900
Estimated total cost 8,900 8,500
Projected profit 1,100 1,500
Contract price 10,000 10,000
Completed 30% 55%
Cumulative profit 330 825
Profit recognised 330 495
10 C Number of shares issued:

2,000,000
= 400,000 shares
5
$
Issue price 2
Nominal value 1
Premium 1
$
Total premium 400,000
Less issue costs 25,000
Net to share premium 375,000
SECTION B
Question 2
Marking scheme
Marks
(a) Tax expense 1
Tax payable 1
Deferred tax balance 1
Notes 1
Presentation 1
5
$
Statement of profit or loss and other comprehensive income (extract)
Tax expense (Note 1) 25,000
Statement of financial position (extract)
Current liabilities
Tax payable 50,000
Deferred tax (Note 2) 225,000
Notes to the financial statements
1 Tax expense $
Provision for the current period 50,000
Decrease in deferred tax provision (25,000)
25,000
2 Deferred tax $
Balance brought forward 250,000
Decrease in provision (25,000)
Balance carried forward 225,000
Marking scheme
Marks
(b) 1 mark per well-presented point 5
In many sets of financial statements, there may appear to be little relationship between the figure
reported as the profit before tax and the actual tax charge that appears in the statement of profit or loss
and other comprehensive income. In a simple tax system, the tax charge would be the reported profit
multiplied by the tax rate. However this will not normally be the case in real life, due to the complexities
of the tax system and the estimates and subjective decisions that the directors must make in estimating
the tax charge for the year.
The purpose of the reconciliation between the actual tax charge and the reported profit multiplied by the
standard rate of tax is to highlight to the users of the financial statements these estimates and
judgements. This reconciliation should clarify the effect of adjustments such as changes in tax rates,
estimated tax charges differing from final agreed tax liabilities and other factors that have affected the
amount that appears as the tax charge in the statement of profit or loss and other comprehensive income.
Another factor which may affect the tax charge is deferred tax. The reconciliation will therefore draw
attention to factors which may lead to an increased tax charge in the future.
Marking scheme
Marks
(c) Depreciation charges 2
Revaluation loss 1
5
STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME (EXTRACTS)

$000
Depreciation charge
North (($1.2m 80%)/20 years) 48
Central (($4.8m 140%)/40 years) 168
South ($2.25m/30 years) 75
291
Loss on revaluation of North property (20% $1.2m)* 240

Gain on revaluation of Central property ($4.8m 40%) 1,920
STATEMENT OF FINANCIAL POSITION (EXTRACTS)

Cost/ Carrying
revaluation Depreciation value
$000 $000 $000
North 960 48 912
Central 6,720 168 6,552
South 2,250 75 2,175
9,930 291 9,639
It is assumed that the properties are depreciated on a straight-line basis. At 1 January 20X0 the
accumulated depreciation of the Central property is $1.2m, which represents 10 years' worth of
depreciation, leaving 40 years remaining life. For the South and North properties, the respective lives in
these calculations are 30 and 20 years.
* It is assumed that there is no previous revaluation surplus on the North property, so the loss in the
current year is classed as an impairment, and is taken to profit or loss.
Marking scheme
Marks
(d) Net profit before taxation
Depreciation 1
Finance cost
Working capital adjustments 1
Cash generated from operations
5
$000
Net profit before taxation 2,200
Depreciation (1,110 + 882) 1,992
Profit on disposal of plant (60 35) (25)
Finance cost 600
Increase in trade receivables (W) (150)
Increase in inventories (W) (250)
Decrease in trade payables (W) (70)
Working
Inventories, trade receivables and trade payables
Trade Trade
Inventories
receivables payables
$000 $000 $000
Balance b/d 1,500 900 800
Increase/(decrease) (balancing figure) 250 150 (70)
Balance c/d 1,750 1,050 730
Marking scheme
Marks
(e) Cash flows from investing activities
Purchase of property, plant and equipment 1
Proceeds from sale of plant 1
2
Proceeds from share issues 1
Dividends paid
Borrowings repaid 1
3
5

$000
Purchase of property, plant and equipment (W) (1,977)
Proceeds from sale of plant 60
Net cash used in investing activities (1,917)

$000
Proceeds from issue of share capital (6,000 3,000 + 2,500 1,000) 4,500
Dividends paid (500)
Borrowings repaid (7,000 2,400) (4,600)
Working
$000
Balance b/d 15,050
Disposals (35)
Depreciation (1,110 + 882) (1,992)
13,023
Cash paid for additions (balancing figure) 1,977
Balance c/d 15,000
Marking scheme
Marks
(f) 1 mark per well presented point 5
The Conceptual Framework defines a liability as a present obligation of an entity arising from past events, the
settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.
The obligation can be legal or constructive.
A provision is a liability of uncertain timing or amount.
Because it is regarded as a liability, a provision must meet the definition of a liability, as well as the recognition
criteria in IAS 37, before it can be recognised in the financial statements.
The definition of a liability helps to improve the reliability of an entitys financial statements because it:
(a) prevents entities from recognising liabilities that are not true liabilities of the entity. For instance, the
definition of a liability prevents entities from smoothing profits by making provisions for future losses in
years when profits are high in order to release those provisions in years when profits are lower. This is no
longer possible because future losses are not a present obligation of the entity arising from past events
and so cannot be provided for.
(b) helps to ensure that all liabilities of the entity are recognised, even if they are long term. For example, an
entity which has an obligation to make good environmental damage because of past polluting activities is
required to make a provision for the full amount as soon as the liability becomes apparent, rather than
waiting until nearer the time.
SECTION C
Question 3
Text references. Provisions are dealt with in Chapter 9: Miscellaneous standards.
Top tips. As with all Section C questions, read the requirements carefully. Notes to the accounts are not
required, so you should not have wasted time preparing them. However workings need to be clear and almost a
substitute for notes, for example non-current assets.
Easy marks. Property, plant and equipment workings are important as they affect both the statement of profit or
loss and other comprehensive income and statement of financial position, so do these carefully. You may have
had trouble with the reorganisation costs and the tax but, once you had handled property, plant and equipment,
the rest of the statement of profit or loss and other comprehensive income and statement of financial position
would give you plenty of easy marks.
Marking scheme
Marks

Revenue
Cost of sales 1
Distribution costs
Overprovision 2
Investment income
Other comprehensive income 2
11
Available for sales investments 1
Receivables 1
Revaluation surplus 1
Retained earnings 1
Deferred tax 1
Other provisions 1
Taxation 1
Restructuring accrual 1
13
Presentation
25
HI
FOR THE YEAR ENDED 30 SEPTEMBER 20X3
$000
Revenue 9,415
Gross profit 5,005
Reorganisation costs overprovision (W4) 45
Profit on disposal of asset (W1) 6
Investment income 37
Income tax expense (W5) (1,205)
Gain on available-for-sale investments 30
HI
STATEMENT OF FINANCIAL POSITION AS AT 30 SEPTEMBER 20X3
$000 $000
Assets
Non current assets
Available-for-sale investments (W6) 522
10,378
Current assets
Inventory 822
Receivables (852 45) 807
Cash at bank and in hand 1,409
3,038
13,416
Equity
Ordinary shares of $1 each 5,000
Share premium 2,388
Revaluation surplus (W6) 202
Retained earnings (1,890 + 2,714 800) 3,804
11,394
Non current liabilities
Deferred tax 281
Other provisions (W3) 100
381
Current liabilities
Trade payables 396
Taxation 1,180
Accruals: restructuring (W4) 65
1,641
13,416
Workings
Equipment
Buildings and fixtures Total
$000 $000 $000
Cost
Opening balance 11,200 2,625 13,825
Additions
Disposals (210) (210)
11,200 2,415 13,615
Accumulated depreciation
Opening balance 1,404 1,741 3,145
On disposals (205) (205)
Charge for year
$11,200 3% 336
$2,415 20% 483 819
Closing balance 1,740 2,019 3,759
Carrying value 9,460 396 9,856
Profit on disposal:
$000 $000
Sale proceeds 11
Carrying value
Cost 210
Accumulated depreciation (205)
5
Profit 6
2 Cost of sales
$000
Per trial balance 3,591
Depreciation (W1) 819
4,410
3 Administrative expenses
$000
Bad debt written off (Note 1) 45
Provision for legal claim re faulty product (Note 2) 100
860
Notes
1 Although the customer went into liquidation after the year end, this provides additional evidence of
conditions existing at the year end. It is thus an adjusting event under IAS 10.
2 The obligation is probable, therefore a provision must be made.
4 Reorganisation costs
$000 $000
Provision in 20X2 accounts 1,010
Reorganisation expenses 900
Invoice received after y/e 65
965
Provision surplus 45
5 Taxation
$000 $000
Income tax payable 1,180
Deferred tax
Provision b/fwd 256
Provision required 281
Increase required 25
Charge to statement of profit or loss and other comprehensive 1,205
income
6 Investments and revaluation surplus

Revaluation
Investments surplus
$000 $000
Revaluation of investments to market value 30 30
522 202
Question 4
Marking scheme
Marks
(a) Goodwill calculation 2
(b) (i) Consolidated statement of profit or loss and other comprehensive income
Revenue 1
Cost of sales 2
Tax 1
8
(ii) Consolidated statement of financial position
Goodwill 1
Inventory 1
Trade receivables 1
Bank 1
Share capital 1
Retained earnings 2
General revenue 1
Trade payables 1
Dividend payable 1
Presentation 1
15
Total 25
(a) Calculation of goodwill

$ $
Net assets acquired

Share premium 500
32,000
Goodwill 2,000
(b) (i) ST GROUP

CONSOLIDATED STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
$000
Revenue (235 + 85 16.8 (W1)) 303,200
Cost of sales (140 + 52 16.8 + 1.44 (W1)) (176,640)
Distribution costs (12 + 5) (17,000)
Tax (13,250 + 5,000) (18,250)
(ii) ST GROUP
$000 $000
Assets
Goodwill 800
Property, plant and equipment (100 + 40) 140,000
140,800
Current assets
Inventory (W4) 15,810
Trade receivables (W5) 9,420
Bank (3,500 + 2,570) 6,070
31,300

General reserve (W7) 9,700
142,140
Current liabilities
Trade payables (W6) 9,960
Dividends 20,000
29,960
Workings
1 Intragroup sale
Sale price to be eliminated from consolidated revenue:

$000
Cost to ST 12,000
40% mark up 4,800
Cost to BE 16,800
Unrealised profit in inventory: $4,800,000 30% = $1,440,000

Gross profit = $95,000,000 + $33,000,000 $1,440,000
= $126,560,000
2 Administrative expenses
$000
ST 45,000
BE 8,000
Impairment of goodwill (W3) 160
53,160
3 Impairment of goodwill
$000
Impairment at 1.11.20X4 (2,000 960) 1,040
Impairment during year (bal. fig.) 160
Impairment at 31.12.X5 (2,000 800) 1,200
4 Inventory
$000
ST 13,360
BE 3,890
Less unrealised profit (W1) (1,440)
15,810
5 Trade receivables
$000 $000
ST 14,640
Less dividend receivable (10,000)
4,640
BE 6,280
Less intragroup (1,500)
9,420
6 Trade payables
ST $000
BE 9,000
Less intragroup 2,460
(1,500)
9,960
7 General reserve
ST BE
$000 $000
Less pre-acquisition general reserve (500)
500
Share of BE 500 100% 500
9,700
8 Retained earnings
ST BE
$000 $000
Less PUP (1,440)
25,860
Less pre-acqn retained earnings (1,500)
7,780
Share of BE: 100% 7,780
Impairment of goodwill (2,000 800) (1,200)
32,440
343
CIMA
Financial Pillar
Mock Exam 2
Question Paper
paper.
344
COUNTRY X TAX REGIME FOR USE THROUGHOUT THE EXAMINATION

PAPER
Relevant Tax Rules for Years Ended 31 March 2007 to 2013

Corporate Profits
Unless otherwise specified, only the following rules for tax of corporate profits will be relevant, other taxes can be
ignored:
Accounting rules on recognition and measurement are followed for tax purposes.
All expenses other than depreciation, amortisation, entertaining, taxes paid to other public bodies
and donations to political parties are tax deductible.
Tax depreciation is deductible as follows:
o 50% of additions to property, plant and equipment in the accounting period in which they
are recorded;
o 25% per year of the written-down value (i.e. cost minus previous allowances) in subsequent
accounting periods except that in which the asset is disposed of;
o No tax depreciation is allowed on land.
The corporate tax on profits is at a rate of 25%.
No indexation is allowable on the sale of land.
Tax losses can be carried forward to offset against future taxable profits from the same business.
Value Added Tax
Country X has a VAT system which allows entities to reclaim input tax paid.
In country X the VAT rates are:
Zero rated 0%
Standard rated 15%
Exempt goods 0%
SECTION A 20 marks
Answer ALL ten sub-questions in this section
Question 1
1 An entity makes a taxable profit of $600,000 and pays corporate income tax at 25%. The entity pays a
dividend to its shareholders. A shareholder, who pays personal tax at 40% receives a $6,000 dividend
and then pays an additional $2,400 tax on the dividend.
The tax system could be said to be:
A A classical system
B An imputation system
C A split rate system
D A partial imputation system (2 marks)
2 Define the term tax avoidance (2 marks)
3 RS purchased an asset on 1 April 2010 for $375,000, incurring legal fees of $12,000. RS is resident in
Country X. There was no indexation allowed on the asset.
RS sold the asset on 31 March 2013 for $450,000 incurring transaction charges of $15,000.
Calculate the capital gains tax due from RS on disposal of the asset. (2 marks)
4 State the significance to an entity of having a permanent establishment in a country. (2 marks)
5 Which ONE of the following would normally be subject to a withholding tax when paid to an entity in
another country?
A Consultancy fees
B Payment for materials purchased
C Dividends paid
D Payments for plant and equipment imported from another country (2 marks)
6 Identify one benefit of regulating published accounts for users of accounts and one benefit for preparers of
accounts. (2 marks)
7 The following are possible methods of measuring assets and liabilities other than historical cost:
(i) Current cost
(ii) Realisable value
(iii) Present value
(iv) Replacement cost
According to the IASBs Conceptual Framework for Financial Reporting (2010) (Framework) which of the
measurement bases above can be used by an entity for measuring assets and liabilities shown in its
statement of financial position?
A (i) and (ii)
B (i), (ii) and (iii)
C (ii) and (iii)
D (i), (ii) (iii) and (iv) (2 marks)
8 Which one of the following bodies is responsible for the approval of interpretations of international
financial reporting standards before they are issued?
A IASB
B IFRS Advisory Council
C IFRS Foundation
D IFRS Interpretations Committee (2 marks)
9 The IASBs Framework identifies qualitative characteristics of financial statements.

Characteristics
(i) Relevance
(ii) Reliability
(iii) Faithful representation
(iv) Comparability
Which of the above characteristics are not fundamental qualitative characteristics according to the IASBs
Framework?
A (i) and (ii)
B (i) and (iii)
C (iii) and (iv)
10 An external audit of XCDs financial statements has discovered that due to flooding of its administration
offices a large proportion of XCDs financial records were destroyed. XCDs accountants have
reconstructed the data to enable them to prepare the financial statements but there is insufficient
evidence to enable the auditors to verify most of the sales and purchase transactions during the year.
State the appropriate type of audit report that the auditors should issue for XCDs financial statements.
(2 marks)
(Total = 20 marks)
SECTION B 30 marks
Question 2
(a) Extracts from SFs statement of financial position at 31 March 2013, with comparatives, are shown
below:
2013 2012
$000 $000
Equity
Ordinary shares 460 400
Share premium 82 70
Finance lease payables 98 60
Current liabilities
Finance lease payables 10 6
Extracts from SFs statement of changes in equity for the year ended 31 March 2013:
$000
Retained earnings:
Dividends paid (19)
During the year ended 31 March 2013 SFs transactions included the following:
(i) Acquired property plant and equipment on a finance lease, debiting $55,000 to property, plant
and equipment.
(ii) Repaid $25,000 of its long term borrowings during the year.
(iii) Issued some ordinary shares at a 20% premium.
(iv) Charged finance costs for the finance lease of $16,000 for the year.
Required
Prepare the cash flows from financing activities section of SFs statement of cash flows for the year
ended 31 March 2013. (Total = 5 marks)
(b) XY has recently begun to lease an expensive machine. The lease agreement effectively means that XY
takes on substantially the risk and rewards associated with owning the asset.
The managing director has instructed XYs finance director to treat the lease as an operating lease in order
to show a better financial position.
Required
Explain any ethical issues that this may cause for the finance director. (Total = 5 marks)
(c) CD had 5,000,000 $1 ordinary shares in issue.
Subsequently, CD made a rights issue of 1 new ordinary share at $3.50 per share for every 5 ordinary
shares currently held. At the same date CDs ordinary shares were trading at $4.75.
Required
(i) Explain the difference between a bonus issue and a rights issue of shares.
(ii) Prepare the journal entries required to record CDs rights issue in its financial records, assuming
that all rights were taken up. (Total = 5 marks)
(d) PU purchased machinery on 1 April 2011 for $350,000.

PU depreciates machinery over 10 years, using the straight line method assuming no residual value.
Required
(i) Explain the meaning of temporary difference according to IAS 12 Income Taxes. Include an
example to illustrate your answer. (2 marks)
(ii) Calculate the amount of deferred tax provision that PU should include in its statement of financial
position as at 31 March 2013. (3 marks)
(Total = 5 marks)
(e) BZ received a salary of $34,000 for the year ended 31 March 2013. BZ also received a bonus of $1,700
and benefits in kind valued at $2,150.
BZ was entitled to a personal tax allowance of $5,750 for the year.
Personal taxation rates that apply to BZ are 20% for the first $20,000 of taxable earnings and 40% on
the balance.
Required
(i) Explain the meaning of benefits in kind for taxation purposes. (2 marks)
(ii) Prepare an income tax computation for BZ for the year ended 31 March 2013. (3 marks)
(Total = 5 marks)
(f) YN is an importer and imports goods in bulk. YN repackages the products and sells them to retailers. YN
is registered for Value Added Tax (VAT) in Country X.
YN imports a consignment of goods costing $90,000 and pays excise duty of 10% and VAT at standard
rate on the total (including duty).
YN pays $19,435 repackaging costs, including VAT at standard rate and then sells all the goods to
retailers for $218,500 including VAT at 15%.
Required
(i) Calculate YNs net profit on the goods consignment.
(ii) Calculate the net VAT payable by YN on the goods consignment. (Total = 5 marks)
(Total = 30 marks)
SECTION C 50 marks
Question 3
BVQs trial balance at 31 March 2013 is shown below:
Notes $000 $000
6% Loan notes (issued 2010, redeemable at par 2020) 600
Leased delivery vehicles (vi) 324
Cost of sales 1,873
Equity dividend paid 1 December 2012 70
Income tax (i), (iii) 27
Land and buildings at cost (vii) 2,553
Ordinary Shares $1 each, fully paid at 31 March 2013 1,400
Finance lease liability at 31 March 2012 268
Finance lease payment on 1 April 2012 74
Plant and machinery at cost (iv) 3,888
Provision for deferred tax at 31 March 2012 (iii) 362
Provision for buildings depreciation at 31 March 2012 (v) 190
Provision for delivery vehicle depreciation at 31 March 2012 (v) 65
Provision for plant and machinery depreciation at 31 March 2012 (v) 2,489
Sales revenue 4,364
Trade payables 176
10,642 10,642
(i) The income tax balance in the trial balance is a result of the under provision of tax for the year ended 31
March 2012.
(ii) There were no sales of non-current assets during the year ended 31 March 2013.
should be increased by $31,000
(iv) Due to a general downturn in the economic environment property prices in Country X reduced during the
year to 31 March 2013. BVQ also suffered a reduction in sales demand and decided to sell one of its
specialist machines on 31 March 2013. The machine had cost $180,000 on 1 April 2011. The market
value of the machine at 31 March 2013 was $73,000. BVQs management was confident that they have
a buyer ready to buy the machine at that price, but at 31 March 2013 the sale had not been agreed. It
will cost BVQ $800 to get the machine ready to sell.
(v) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land
included in land and buildings is $1,653,000. Plant and equipment is depreciated using the reducing
balance method at a rate of 30% per year. All property, plant and equipment depreciation is treated as an
administrative expense. Vehicles are depreciated using the straight line method.
(vi) BVQ leased its fleet of delivery vehicles through a finance lease on 1 April 2011. The fair value of the
vehicles at that date was $324,000. The lease is for 5 years and payments of $74,000 are made every
April in advance. The interest rate implicit in the lease is 7.12%.
(vii) BVQ carried out an impairment review of its land and buildings on 31 March 2013 and calculated that
they had suffered impairment of $103,000.
Required
(a) Explain why BVQ might have carried out an impairment review of its land and buildings on 31 March
2013. (3 marks)
(b) Prepare the statement of profit or loss and a statement of changes in equity for BVQ for the year to 31
March 2013 and a statement of financial position at that date, in accordance with the requirements of
International Financial Reporting Standards. (22 marks)
(Total = 25 marks)
Question 4
The draft statements of financial position at 31 March 2013 and statements of comprehensive income for the
year ended 31 March 2013 for three entities, are given below:
Statements of financial position as at 31 March 2013:
Notes Road Street Drive
$000 $000 $000
Non-current Assets
Property, plant and equipment (ii); (vi) 1,840 1,060 930
Investments (i) 1,923
Current Assets
Inventory (v) 310 236 287
Cash and cash equivalents (vii) 71 27 63
Total Assets 4,284 1,442 1,495

3,314 1,039 1,358
Borrowings 700 250 0
Current liabilities
Loan interest payable (viii) 0 25 0
270 153 137
(i) Roads investments comprise the following:
Road acquired 100% of Streets equity shares on 1 April 2010 paying $1,350,000. At this date
Streets retained earnings were $122,000.
On 1 April 2011 Road advanced Street a 10 year loan of $250,000.
Road purchased its shareholding of 175,000 shares in Drive on 1 April 2012 for $323,000 when
Drives retained earnings were $350,000. Road exercises significant influence over all aspects of
Drives financial and operating policies.
(ii) The fair value of Streets property, plant and equipment on 1 April 2010 exceeded its carrying value by
$320,000. The excess of fair value over carrying value was attributed to buildings owned by Street. At
the date of acquisition these buildings had a remaining useful life of 20 years. Roads accounting policy is
to depreciate buildings using the straight line basis with no residual value.
(iii) Road carried out an impairment review of the goodwill arising on the acquisition of Street and found that
as at 31 March 2013 the goodwill had been impaired by $38,000.
(iv) Road carried out an impairment review of its investment in Drive and found that as at 31 March 2013 its
investment in Drive had been impaired by $20,000.
(v) Road occasionally trades with Street. During February 2013 Street sold Road goods for $220,000. Street
uses a mark-up of 25% on cost. At 31 March 2013 Road had sold 40% of the goods.
(vi) Road sold a piece of machinery to Street on 1 April 2012 for $95,000. The machinery had previously
been used in Roads business and had been included in Roads property, plant and equipment at a
carrying value of $65,000. The machinery had a remaining useful life of 5 years at that date.
(vii) Road had previously paid Street for half of the goods purchased and on 30 March 2013 Road transferred
the balance of the amount due to Street for the goods purchased, $110,000. This was not recorded by
Street until 3 April 2013.
(viii) At 31 March 2013 $25,000 loan interest due to Road in respect of its loan to Street was due and had
not been paid. Street had accrued the loan interest due at the year end but Road had not accrued any
interest income.
Required
(a) Define what is meant by control and explain how this is determined according to IFRS 10 Consolidated
Financial Statements. (5 marks)
(b) Prepare the consolidated statement of financial position for Road as at 31 March 2013, in accordance
with the requirements of International Financial Reporting Standards. (20 marks)
(Total = 25 marks)
355
Answers

356
A plan of attack
This is the second mock exam, so you will now have some feel of what you have to get done in the exam.
Your approach
As before, this paper has three sections. All sections, and all questions, are compulsory.
Question by question
Section A has ten questions of two marks each. The questions include tax calculations, MCQs and narrative
questions.
Lets look at the Section B questions in the paper:
Question (a) is on the preparation of cash flows from financing activities (IAS 7).
Question (b) relates to ethical issues facing a finance director.
Question (c) is concerned with different types of shares and the journal entries to record a rights issue.
Question (d) is on deferred tax (IAS 12).
Question (e) deals with benefits in kind and income tax computation.
Question (f) requires the calculation of profit and VAT payable.
The section C questions follow the pattern in recent exams of having one question on single entity financial
statements and one on group financial statements.
Marking the exam

Marking the MCQs is not too difficult. You only have 2 marks to award. In the longer questions, give yourself
credit where you used the correct method, even if your answer was wrong.
Most important, list out all the items you did not know or got wrong, and make sure you revise them.
Remember
Always allocate your time according to the marks for the question in total and then according to the parts of the
question. And always, always follow the requirements exactly.
You've got spare time at the end of the exam ?

If you have allocated your time properly then you shouldn't have time on your hands at the end of the exam. But
if you find yourself with five or ten minutes to spare, go back to the questions that you couldn't do or to any
parts of questions that you didn't finish because you ran out of time.
Forget about it!

And don't worry if you found the paper difficult. More than likely other candidates will too. If this were the real
thing you would need to forget the exam the minute you leave the exam hall and think about the next one. Or, if
it's the last one, celebrate!
SECTION A
Question 1
1 A
2 Tax avoidance is tax planning to arrange affairs, within the scope of the law, to minimise the tax
liability.
3
$000
Sale:
Selling price 450
Charges 15
435
Less Purchase:
Cost 375
Fees 12
387
Profit 48
Tax (48 25%) 12
4 The OECD model tax convention states that business profits will only be taxable in a state if an entity has
a permanent establishment in that country.
5 C
6 Any one benefit of regulating published accounts for users of accounts:
Enable them to be relied upon by users
Promote consistency to help interpretation
Promotes comparability between entities
AND
Any one benefit for preparers of accounts.
Helps to ensure principles are interpreted the same way every time
Helps preparers format accounts in a consistent way
Helps preparers provide relevant information
Financial statements easier to prepare
7 D
8 A
9 D
10 A modified report, based on insufficient appropriate evidence, with a disclaimer of opinion.
SECTION B
Question 2
(a)
Marking scheme
Marks
Share issue 1.0
Long-term borrowings increase/redemption 1.5
Lease payments 2.0
Dividends 0.5
Maximum for question 5.0
All figures in $000

Proceeds from issue of shares: (460+82) (400+70) = 72
Proceeds from long term borrowing: 129 - (105-25) =49
Finance lease:
Balance b/fwd non-current 60
Current 6
66
New leases 55
121
Interest charges for year 16
137
Balance c/fwd non-current 98
Current 10
108
Repaid 29
SF Statement of cash flows (extract) for year ended 31 March 2013:

Cash flows from financing activities:
Proceeds from share issue 72
Proceeds from increase in long term borrowings 49
Redemption of long term borrowings (25)
Dividends paid (19)
Payments on finance leases (29)
Net cash inflow from financing activities 48
(b)
Marking scheme
Marks
Four main ethical issues 5
Maximum for question 5
As XY takes on substantially the risk and rewards associated with owning the machine, the lease should
be treated as a finance lease.
The ethical issues that may arise as a result of the managing directors instruction include:
Objectivity the finance director would be allowing other people to influence his professional
judgement if the lease was treated incorrectly in the financial statements.
Professional behaviour the finance director should follow relevant laws and regulations. That
would include following the requirements of IFRSs including IAS 17 Leases, not to do so could
cause a negative impact on his reputation.
Integrity he should not be associated with any information that contains materially false or
misleading information. Incorrectly classifying the lease could be misleading to users of the
Professional competence and due care the finance director needs to ensure that he keeps up to
date and follows relevant professional and technical standards. He will therefore need to follow IAS
17 Leases and treat the lease appropriately.
(c)
Marking scheme
Marks
Explain the difference between a bonus issue and a rights issue of shares 2
Prepare the accounting entries to record CDs rights issue 3
(i) Bonus issue of shares is an issue of shares to existing shareholders for free. A bonus issue is used
to capitalise reserves, it does not raise new capital.
A rights issue is an issue of shares below full market price to existing shareholders. A rights issue
is made to raise new capital from existing shareholders. They are issued at a discount to current
market price to encourage the shareholders to subscribe for the rights issue.
(ii) Number of shares issued: 5,000,000/5 = 1,000,000
Transaction value: 1,000,000 shares at $3.50 = $3,500,000
Accounting entries required:
Debit Credit
Cash $3,500,000
Share capital $1,000,000
Share premium $2,500,000
(d)
Marking scheme
Marks
Define temporary differences and give an example 2
Calculate deferred tax 3
(i) Temporary differences are differences between the carrying amount of an asset or liability in the
statement of financial position and the balance calculated according to the tax regulations, its tax
base. This is caused by the timing difference in treatment between the accounting rules and the
tax rules.
An asset is charged against the income statement by way of a depreciation policy which is
adjusted at the end of its useful life by a gain or loss on its sale. This depreciation policy may not
agree with the tax rules and although over the life of the asset the total allowance will be the same
there may be differences in timing. The difference will be greater where a country has a high level
of first year allowances that reduce the tax bill in the first year of an assets life.
(ii)
$ $
Accounting Tax base
Cost 1 April 2011 350,000 350,000
Balance 31 March 2012 315,000 175,000
Balance 31 March 2013 280,000 131,250
Temporary difference 148,750
Deferred tax 148,750 25% = 37,187.5
(e)
Marking scheme
Marks
Define benefits in kind and give examples 2
Calculate tax due for the year ended 31 March 2013 3
(i) Benefits in kind are non-cash benefits given to an employee as part of the remuneration package
often in lieu of further cash payments.
A benefit in kind can include any of the following:
Company cars
Private medical insurance
Free loans or loans at very low rates of interest
Living accommodation
(ii) BZ income tax for the year ended 31 March 2013

$
Salary 34,000
Bonus 1,700
Benefits in kind 2,150
37,850
Personal tax allowance 5,750
32,100
Tax due (20,000 20%) + (12,100 40%) = $8,840

(f)
Marking scheme
Marks
Calculate VAT arising on sales and net VAT due to be paid 3
Calculate the profit on the consignment excluding VAT 2
$ $ $
Cost/sales VAT Total
Cost of goods 90,000
Excise duty @ 10% 9,000
99,000 14,850 113,850
Repackaging cost 16,900 2,535 19,435
Total cost 115,900 17,385 133,285
Sales 190,000 28,500 218,500
74,100 11,115 85,215
(i) YNs net profit on the consignment is $74,100
(ii) The net VAT due to be paid on the consignment is $11,115
SECTION C
Question 3
Marking scheme
Marks
Explain why BVQ carried out an impairment review 3.0
Prepare the statement of profit or loss Revenue; Cost of sales; Admin & Distribution 4.0
Prepare the statement of profit or loss Loss on assets held for sale; finance and tax 4.0
Prepare the statement of financial position assets 5.0
Prepare the statement of financial position equity and liabilities 5.0
Prepare the statement of changes in equity 1.5
Formats and presentation 2.5
(a) IAS 36 Impairment of Assets requires BVQ to assess at each reporting date whether there is any
indication that any assets may be impaired. If any indication exists, the recoverable amount must be
estimated, that is, an impairment review must be carried out.
Due to the general economic downturn property prices have reduced during the year. This could suggest
that BVQs property has suffered an impairment.
BVQ has experienced a reduction in sales demand and is reducing its asset base by selling a specialised
machine. This suggests that an impairment may have occurred to its plant and machinery.
Therefore BVQ needed to carry out an impairment review.
(b) BVQ - STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH 2013
$000 $000
Revenue 4,364
Gross profit 2,491
Distribution costs W3 (291) (1,198)
Loss on non-current assets held for sale W6 (16)
BVQ STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 31 MARCH 2013
Equity Shares Retained earnings Total
$000 $000 $000
Balance at 31 March 2012 1,400 728 2,128
Balance at 31 March 2013 1,400 1,647 3,047
BVQ STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2013

$000 $000
Non-current assets
Current Assets
Inventory 198
Cash and cash equivalents 118 1,232
Non-current assets held for sale (W6) 72
Total Assets 4,622
Equity
Share capital 1,400
Total equity 3,047
Loan notes 600
Current liabilities
Trade payables 176
Tax payable (W5) 180
Interest payable 18

(W1) Tangible Non-current Assets
Plant & Leased
Cost/Valuation Land Buildings Mach. Vehicles Total
$000 $000 $000 $000 $000
Balance 31/3/12 1,653 900 3,888 324 6,765
Asset held for sale (180) (180)
3,708 6,585
Depreciation:
Balance 31/3/12 190 2,489 65 2,744
Charge for year 27 420 65 512
217 2,909 130 3,256
Asset held for sale (W6) (92) (92)
2,817 3,164
Carrying amount at 31/3/13 1,653 683 891 194 3,421
Impairment (103) (103)

2,233 891 194 3,318
Depreciation
Buildings 900 3% = 27
Plant and machinery
Reducing balance = 3,888 2,489 = 1,399 30% = 420
Vehicle 324 20% = 65
(W2) Lease
Opening Interest @ Closing
balance Paid Sub-total 7.12% balance
Year to 31/3/13 268 74 194 14 208
Year to 31/3/14 208 74 134
Current liability = 74
Non-current liability = 134
(W3)
Vehicle depreciation (W1) 65
Plant & machinery depreciation (W1) 420
Land & buildings depreciation (W1) 27
Land & buildings impairment 103
907 291
(W4) Finance charge

Years loan interest 36
50
(W5) Tax
Last year b/f 27
Current year 180
207
238
Deferred tax
Increase in year 31
393
(W6) Non-current asset held for sale

As per IFRS 5 Non-current assets held for sale and discontinued operations the proposed sale of
the machine will be classified as held for sale.
Cost 180 two years ago
Depreciation (180 30%) + (180 70% 30%) = 54 + 37.8 = 91.8
Carrying value = 180 - 91.8 = 88.2
Fair value less cost to sell = 73 0.8 = 72.2
Impairment = 88.2 72.2 = 16
Asset held for sale (SOFP) = 72.2 approx 72
Question 4
Marking scheme
Marks
Explain the meaning of control 5.0
Calculate goodwill arising on acquisition of Street 3.0
Calculate investment in associated entity 2.0
Prepare workings for consolidated property, plant and equipment 2.5
Calculate consolidated retained earnings balance at 31 March 2013 6.5
Prepare consolidated statement of financial position 6.0
(a) According to IFRS 10 Consolidated Financial Statements control is the power to govern the financial and
operating policies of an entity so as to obtain benefit from its activities.
There is a presumption that control exists where the investor entity owns over half of the voting power of
the other entity. Where control over another entity exists that entity is regarded as a subsidiary.
IFRS 10 also sets out circumstances where control can be established with less than 50% of the equity
votes, in each case where control exists the entity will be regarded as a subsidiary, even if less than 50%
of the equity voting shares are held.
IFRS 10 provides the following instances where control can be achieved with less than 50% of equity
shares:
Power over more than 50% of voting rights by virtue of an agreement with other investors
Power to govern the financial and operating policies of the entity under a statute or agreement
Power to appoint or remove the majority of the members of the board of directors or equivalent
governing body and control of the entity is by that board or body
Power to cast the majority of votes at meetings of the board of directors or equivalent governing
body and control of the entity is by that board or body
(b) Workings (All workings in $000)
(i) Fair value of net assets of Street at acquisition
Equity Shares 550
Share premium 150
1,142
(ii) Goodwill - Street

Cost 1,350
Goodwill 208
Impairment 38
(iii) Investment in associate

Cost 323
(458 350) = 108 25% = 27
350
Impairment (20)
Investment at 31 March 2013 330

Sale of goods from 100% owned subsidiary to parent
Mark up on cost 25% = 25/125 or 20% margin on selling price.
Selling price 220 ; unrealised profit = 44
Of which 40% is realised. Unrealised = 44 60% = 26.4 approx 26
Dr. Cr.
Consolidated retained earnings 26
Consolidated Trade Receivables
Road 140
Street 119
Less cheque in transit (110)
149
Consolidated Trade Payables

Road 270
Street 128
398
(v) Excess depreciation on fair value adjustment

Excess depreciation = 320/20 = 16 per year
Three years = 16 3 = 48
(vi) Sale of machine
Unrealised profit on sale of machine to Street (95-65) = 30
Excess depreciation one year 30/5 = 6
(vii) Consolidated Retained Earnings
Road 814
Loan interest receivable 25
Street (339 - 122) 217
Drive (458 350) = 108 25% = 27
Goodwill impairment Street (38)
Drive (20)
Unrealised profit (26)
Profit on sale of machine (30)
One years depreciation of excess 6
Excess depreciation on fair value adj. (48)
Balance 31 March 2013 927
(viii) Consolidated Property, plant and equipment

Road 1,840
Street 1,060
Profit on sale of machine (30)
Add back machine excess depreciation 6
3,148
ROAD - CONSOLIDATED STATEMENT OF FINANCIAL POSITION AS AT 31 MARCH 2013

$000 $000
Non-current assets
Property, plant and equipment (viii) 3,148
Goodwill (ii) 170
Investment in associate (iii) 330
3,648
Current assets
Inventory (310+236-26) 520
Trade receivables (iv) 149
Cash and cash equivalents (71+27+110) 208
877
Total assets 4,525
Equity shares 2,000
Share premium 500
Retained earnings (vii) 927
3,427
Borrowings 700
Current liabilities
Trade payables (iv) 398
4,525
369
CIMA
Financial Pillar
Mock Exam 3
Question Paper
paper.
369
370
COUNTRY X - TAX REGIME FOR USE THROUGHOUT THE EXAMINATION

PAPER
Relevant Tax Rules for Years Ended 31 March 2007 to 2014

Corporate Profits
can be ignored:
Accounting rules on recognition and measurement are followed for tax purposes.
All expenses other than depreciation, amortisation, entertaining, taxes paid to other public bodies
and donations to political parties are tax deductible.
Tax depreciation is deductible as follows:
o 50% of additions to property, plant and equipment in the accounting period in which they
are recorded;
o 25% per year of the written-down value (i.e. cost minus previous allowances) in subsequent
accounting periods except that in which the asset is disposed of;
o No tax depreciation is allowed on land.
The corporate tax on profits is at a rate of 25%.
No indexation is allowable on the sale of land.
Tax losses can be carried forward to offset against future taxable profits from the same business.
Value Added Tax
Country X has a VAT system which allows entities to reclaim input tax paid.
In country X the VAT rates are:
Zero rated 0%
Standard rated 15%
Exempt goods 0%
SECTION A 20 marks
Answer ALL ten sub-questions in this section
Question 1
1 Which one of the following is regarded as a direct tax?
A Value added tax
B Capital gains tax
C Excise duties
D Property tax (2 marks)
2 In many countries employees earnings have tax deducted by their employers before being paid to them.
This is sometimes referred to as Pay-as-you-earn.
Identify two advantages of Pay-as-you-earn to employees. (2 marks)
3 UI has the following details:

(i) Incorporated in Country A.
(ii) Senior management hold regular board meetings in Country B and exercise control from there, but
there are no sales or purchases made in Country B.
(iii) Carries out its main business activities in Country C.
Assume all three countries have double taxation treaties with each other, based on the OECD model tax
convention.
In which country/countries will UI be deemed to be resident for tax purposes?
A Country A
B Country B
C Country C
D Countries B and C (2 marks)
4 DF, a small entity resident in Country X, purchased its only item of plant on 1 October 2011 for
$200,000.
DF charges depreciation on a straight line basis over 5 years.
DFs deferred tax balance as at 30 September 2013, in accordance with IAS 12 Income Taxes is:
A $3,750
B $11,250
C $18,750
D $45,000 (2 marks)
5 GH is registered for VAT in Country X and is partially exempt for VAT purposes.
GHs sales for the last VAT period, excluding VAT, were:
$
Goods at standard rate 15,000
Goods exempt from VAT 10,000
During the period GH purchased materials and services costing a total of $12,075, including VAT at
standard rate. These materials and services were used to produce standard rated goods and exempt
goods.
Assume that GH had no other VAT related transactions in the period.
Calculate the net VAT due to/from GH for the VAT period. (2 marks)
6 Identify two advantages of having an ethical code for accountants. (2 marks)
7 Identify any two responsibilities of the IFRS Foundation. (2 marks)
8 The IASBs Conceptual Framework for Financial Reporting (2010) (Framework) identifies faithful
representation as a fundamental qualitative characteristic of financial information.
Which one of the following is not a characteristic of faithful representation?
A Free from error
B Verifiable
C Neutral
D Complete (2 marks)
9 Identify two actions required under IAS 1 (Revised) Presentation of Financial Statements to ensure that
Financial statements shall present fairly the financial position, financial performance and cash flows of
an entity. (2 marks)
10 The IASBs Framework states that materiality is an entity-specific aspect of relevance.

Describe the term materiality as used in the Framework. (2 marks)
(Total = 20 marks)
SECTION B 30 marks
Question 2
(a) An investment in another entitys equity is classified as an investment in a subsidiary, if the investor can
exercise control over the investee.
AB acquired 4,000 of the 10,000 equity voting shares and 8,000 of the 10,000 non-voting preference
shares of CD.
AB acquired 4,000 of the 10,000 equity voting shares of EF and had a signed agreement giving it
the power to appoint or remove all of the directors of EF.
Required
Explain whether CD and/or EF should be classified as subsidiaries/a subsidiary of AB. You should refer to
the provisions of IFRS 10 Consolidated Financial Statements in your answer. (Total = 5 marks)
(b) YZ purchased 100% of the equity shares in WX on 1 October 2012.
YZ and WX trade with each other. During the year ended 30 September 2013 YZ sold WX inventory at a
sales price of $28,000. YZ applied a mark up on cost of 331/3%.
At 30 September 2013 WX still owed YZ $10,000 of the cost and had remaining in inventory $6,000 of
the goods purchased from YZ.
Required
Prepare the journal entries to make the required adjustment in YZs consolidated financial statements for
the year ended 30 September 2013 for the above. (Total = 5 marks)
(c) UV purchased an asset for $50,000 on 1 October 2009, incurring import duties of $8,000. UV
depreciated the asset at 10% per year on a straight line basis.
UV sold the asset for $80,000 on 30 September 2013, incurring costs of $2,000. The asset was subject
to capital gains tax of 25% and the indexation factor from 1 October 2009 to 30 September 2013 was
14%.
Required
(i) Explain the purpose of indexation when used in the calculation of capital gains tax. (2 marks)
(ii) Calculate the capital gains tax arising on the disposal of UVs asset. (3 marks)
(Total = 5 marks)
(d) TY is resident in Country X.
TYs statement of profit or loss for year ended 30 September 2013 was as follows:
$
Revenue 950,000
Taxes paid to other public bodies (1,900)
Entertaining expenses (1,200)
Depreciation of plant and equipment (47,500)
175,400
TY has accumulated tax losses of $125,000 brought forward from 2011/12.

TY owns plant and equipment purchased on 1 October 2010 at a cost of $385,000 and plant purchased
on 1 October 2012 at a cost of $90,000. TY charges depreciation at 10% per year on a straight line
basis on all non-current assets.
Required
Calculate the tax payable by TY for the year ended 30 September 2013. (Total = 5 marks)
(e) You are a trainee accountant working for JHG, which owns a number of subsidiary entities.
A new Chief Executive has recently been appointed and has raised the following queries:
JHG is a member of a tax group. What is a tax group?
What are the benefits to JHG and its subsidiaries of being in a tax group?
Required
Prepare a short briefing note that answers the Chief Executives questions. (Total = 5 marks)
(f)
Required
Explain the typical duties of an external auditor of an entity. (Total = 5 marks)
(Total = 30 marks)
SECTION C 50 marks
Question 3
RDXS TRIAL BALANCE AT 30 SEPTEMBER 2013 IS SHOWN BELOW:
Notes $000 $000
5% Loan notes (issued 2010, redeemable 2020) (ix) 1,480
Cash received on sale of equipment (v) 23
Cost of sales 4,080
Equity dividend paid 1 February 2013 (vii) 335
Income tax (ii) 24
Inventory at 30 September 2013 (i) 1,055
Land and buildings at cost at 1 October 2012 5,180
Equity shares $1 each, fully paid at 1 October 2012 5,650
RDX ordinary shares purchased (viii) 135
Plant and equipment at cost at 1 October 2012 (v) 4,520
Provision for deferred tax at 1 October 2012 (iii) 282
Provision for buildings depreciation at 1 October 2012 (iv) 262
Provision for plant and equipment depreciation at 1 (vi) 2,260
October 2012
Retained earnings at 1 October 2012 1,990
Sales revenue 6,780
Share premium 565
Trade payables 300
Trade receivables (x) 2,590
19,592 19,592
Notes.
(i) RDX has always valued its inventories using a manual system. On 1 October 2012 RDX purchased and
installed a computerised inventory system and changed its inventory valuation method to the industry
standard method.
The impact on inventory valuation due to the change in policy was calculated as:
Inventory value increase at 30 September 2012 by $148,000.
Inventory value increase up to 30 September 2013 by $210,000.
(ii) The income tax balance in the trial balance is a result of the under provision for the year ended 30
September 2012.
(iii) The tax due for the year ended 30 September 2013 is estimated at $160,000 and the deferred tax
provision should be decreased by $30,000.
(iv) Depreciation is charged on buildings using the straight line method at 3% per annum. The cost of land
included in land and buildings is $3,000,000. Buildings depreciation is treated as an administrative
expense.
(v) During the year RDX disposed of old equipment for $23,000. The original cost of the equipment sold was
$57,000 and its book value at 30 September 2012 was $6,000.
(vi) Plant and equipment is depreciated at 20% per annum using the reducing balance method. Depreciation
of plant and equipment is considered to be part of cost of sales. RDXs policy is to charge a full years
(vii) During the year RDX paid a dividend of $335,000 for the year ended 30 September 2012.
(viii) RDX purchased and cancelled 100,000 of its own equity shares on 30 September 2013 for $135,000.
These shares had originally been issued at a 10% premium.
(ix) Long term borrowings consist of loan notes issued on 1 April 2010 at 5% interest per annum.
(x) On 22 October 2013 RDX discovered that ZZZ, one of its customers, had gone into liquidation. RDX has
been informed that it will receive none of the outstanding balance of $230,000 at 30 September 2013.
Required
(a) Explain how the change in inventory accounting policy should be recorded in RDXs financial statements
for the year ended 30 September 2013, in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors. (3 marks)
(b) Prepare RDXs statement of profit or loss and statement of changes in equity for the year to 30
September 2013 AND the statement of financial position at that date, in accordance with the
Notes to the financial statements are not required, but all workings must be clearly shown. Do NOT prepare a
statement of accounting policies. (22 marks)
(Total = 25 marks)
Question 4
The financial statements of AWX for the year ended 31 March 2012 and 31 March 2013 are given below:
AWX STATEMENT OF FINANCIAL POSITION AS AT
31 March 2013 31 March 2012
Notes $000 $000 $000 $000
Non-current Assets
Property, plant and equipment (i) (ii) 4,191 4,500
Intangible assets (iv) 156 315
4,347 4,815
Current Assets
Inventories 738 805
1,817 1,550
Total Assets 6,164 6,365
Equity shares of $1 each 2,180 2,180
Preference shares (v) 700
Retained earnings (vii) 901 727
5,218 4,228
9% loan notes (vi) 1,100
225 1,320
Current liabilities
Tax payable 84 218
Provisions 90
721 817
Total Equity and Liabilities 6,164 6,365
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 MARCH 2013

Notes $000
Revenue 6,858
Cost of sales (iii) (3,552)
Gross profit 3,306
Administrative expenses (viii) (2,042)
448
Finance cost (40)
408
Notes.
(i) Property, plant and equipment includes properties which were revalued upwards during the year.
(ii) Property, plant and equipment disposed of in the year had a net book value of $70,000; cash received on
their disposal was $92,000.
(iii) Depreciation charged for the year was $675,000.
(iv) There were no additions or disposals of intangible assets during the year.
(v) On 1 April 2012, AWX issued 700,000 5% cumulative $1 preference shares at par, redeemable at 10%
premium on 1 April 2022. Issue costs of $50,000 have been paid by AWX and included in
administrative expenses. The effective rate of interest is 674%. The cash received for the issue of the
preference shares has been debited to cash and credited to equity.
(vi) On 1 May 2012, AWX purchased and cancelled all its 9% loan notes at par plus accrued interest
(included in finance costs).
(vii) Equity dividends paid during the year were $75,000 and preference share dividends paid were $35,000.
(viii) AWX has been advised that it is probably going to lose a court case and at 31 March 2013 has provided
$90,000 for the estimated cost of this case.
Required
(a) (i) Explain how AWX should treat its preference shares in its financial statements for the year ended
31 March 2013 according to IAS 32 Financial Instruments: Presentation AND,
(ii) Calculate AWXs revised profit before tax for the year ended 31 March 2013 in accordance with
IAS 39 Financial Instruments: Recognition and Measurement. (6 marks)
(b) Prepare AWXs Statement of cash flows, using the indirect method, for the year ended 31 March 2013 in
accordance with IAS 7 Statement of Cash Flows. (19 marks)
(Total = 25 marks)
(Total = 50 marks)
381
Answers

382
383
A plan of attack
This is the third mock exam, so you will now have some feel of what you have to get done in the exam.
Your approach
As before, this paper has three sections. All sections, and all questions, are compulsory.
Question by question
Section A has ten questions of two marks each. These include narrative and calculation questions on tax, and
questions on regulations and ethics. Four of the questions are multiple choice in format
Lets look at the Section B questions in the paper:
Question (a) is on the classification of subsidiaries (IFRS 10).
Question (b) requires the journal entries to record consolidation.
Question (c) is concerned with indexation and the calculation of capital gains tax.
Question (d) requires the calculation of tax payable.
Question (e) is on tax groups and the benefits of being in a tax group.
Question (f) is on the duties of external auditors.
In section C the first question is relatively straightforward; the preparation of financial statements for a single
entity, with the added complication of the repurchase of the entitys own shares. The second question in section
C requires the preparation of a statement of cash flows, rather than group financial statements as has been the
case in the last few exams. This question also asks the candidate to explain the treatment of preference shares in
the financial statements.
Marking the exam

Marking the MCQs is not too difficult. You only have 2 marks to award. In the longer questions, give yourself
credit where you used the correct method, even if your answer was wrong.
Most important, list out all the items you did not know or got wrong, and make sure you revise them.
Remember
Always allocate your time according to the marks for the question in total and then according to the parts of the
question. And always, always follow the requirements exactly.
You've got spare time at the end of the exam ?

If you have allocated your time properly then you shouldn't have time on your hands at the end of the exam. But
if you find yourself with five or ten minutes to spare, go back to the questions that you couldn't do or to any
parts of questions that you didn't finish because you ran out of time.
Forget about it!

And don't worry if you found the paper difficult. More than likely other candidates will too. If this were the real
thing you would need to forget the exam the minute you leave the exam hall and think about the next one. Or, if
it's the last one, celebrate!
SECTION A
Question 1
1 B
2 The advantages to employees of being on PAYE (any two of the following):
The employer is responsible for calculating the tax due
The employer is responsible for paying the tax due to the tax authorities
The costs of administering the system are borne by the employer
Employees are not faced with large periodic tax bills
Employees are not at risk of late payment or default
3 B
Where an entity is resident in more than one country, the OECD deems it to be resident only in the
country of its effective management.
4 B
Carrying Tax WDV Temporary Deferred tax
amount difference (25%)
$ $ $ $
01.10.11 Purchase 200,000 200,000
30.09.12 Accounting depreciation (40,000)
($200,000 5)
30.09.12 Tax depreciation (100,000)
($200,000 50%)
30.09.13 Accounting depreciation (40,000)
30.09.13 Tax depreciation (25,000)
($200,000 100,000
25%)
120,000 75,000 45,000 11,250
5 $1,305
$
VAT due on standard sales (15,000 15%) 2,250
VAT recoverable from purchases (12,075 15/115) 1,575
Partial exemption (1,575 15,000/25,000) 945
VAT due is $2,250 $945 = $1,305
6 Any two benefits of having an ethical code for accountants from the following:
Helps stakeholders to place reliance on the work carried out by accountants. Without this reliance
financial markets cannot operate effectively.
An ethical code helps maintain the reputation of the accounting profession as all accountants are
obliged to adhere to an ethical code.
Ethical codes are constantly evolving to adapt to changes in the business world and in society
generally.
7 Any two responsibilities of the IFRS Foundation from the following:
Develop a single set of IFRSs through the IASB
Promote the use and rigorous application of those standards
Take account of the financial reporting needs of emerging economies and SMEs
Bring about convergence of national accounting standards and IFRSs
8 B
9 Any two actions required under IAS 1 from the following:
Representing transactions in accordance with the recognition criteria set out in the Conceptual
Framework.
Compliance with IFRSs.
Selection, application and disclosure of accounting policies in accordance with IAS 8.
Presentation of information that is relevant and a faithful representation.
Presentation of additional disclosures where this is necessary to give a full understanding of an event
or transaction.
10 Information is material if its omission or misstatement could influence the economic decisions of users
taken on the basis of the financial statements.
Information may be judged relevant simply because of its nature (eg the remuneration of management). In
other cases both the nature of the information and its amount in the context of the financial statements
will be taken into account.
There is no absolute measure of materiality; its determination is a very subjective exercise.
SECTION B
Question 2
(a) The important point in determining whether an investment is a subsidiary is control. In most cases,
control will involve the holding company or parent owning a majority of the ordinary shares in the
subsidiary (to which normal voting rights are attached). There are circumstances, however, when the
parent may own only a minority of the voting power in the subsidiary, but the parent still has control.
IFRS 10 provides a definition of control and identifies three separate elements of control:
An investor controls an investee if and only if it has all of the following:
1 Power over the investee
2 Exposure to, or rights to, variable returns from its involvement with the investee; and
3 The ability to use its power over the investee to affect the amount of the investors returns
If there are changes to one or more of these three elements of control, then an investor should reassess
whether it controls an investee.
Power can be obtained directly from ownership of the majority of voting rights or can be derived from
other rights, such as:
Rights to appoint, reassign or remove key management personnel who can direct the relevant
activities
Rights to appoint or remove another entity that directs the relevant activities
Rights to direct the investee to enter into, or veto changes to, transactions for the benefit of the
investor
Other rights, such as those specified in a management contract
In the case of CD, AB has 40% of voting rights and 80% of non-voting rights, therefore AB has no control
over CD and CD is not a subsidiary of AB.
For EF, AB has a minority of voting rights (40%) but it has control in that it has the power to appoint and
remove directors; EF is therefore a subsidiary of AB.
(b) The journal entries to make the required adjustments in YZs consolidated financial statements are as
follows:
DR CR
$ $
Group revenue 28,000
Group cost of sales 28,000
Being the removal of intra-group trading
YZ cost of sales 1,500

Group inventories 1,500
Being the provision for unrealised profit
Payables 10,000
Receivables 10,000
Being the cancelling out of intra-group balances
Workings
Profit on intra-group trading = $28,000 x 33/133 = $7,000
Profit on goods held at year end = $6,000 x 33/133 = $1,500
(c) (i) Indexation is an allowance to provide relief for inflation which has occurred between the date of
acquisition of an asset and the date of its disposal. In the UK this is known as the indexation
allowance and it is based on the movement in the Retail Price Index (RPI) between those two
dates. It is calculated as follows:
Indexation allowance = acquisition cost x indexation factor
(ii) Capital gains tax arising from the disposal of UVs asset:
$ $
Proceeds of sale (80,000 2,000) 78,000
Cost (50,000 + 8,000) 58,000
Indexation allowance (58,000 14%) 8,120
Total allowable cost (66,120)
Capital gain 11,880
Tax payable (11,880 25%) 2,970
(d) Calculation of tax payable by TY for the year ended 30 September 2013:
$ $
Add back non-allowable expenses:
Taxes paid to other public bodies 1,900
Entertaining expenses 1,200
Depreciation of plant and equipment 47,500
50,600
Adjusted profit 222,500
Tax depreciation plant and equipment (W1) 36,094
Tax depreciation additions in year (90,000 50%) 45,000
(81,094)
141,406
Less: accumulated tax losses b/fwd (125,000)
16,406
Tax ($16,406 25%) 4,102
Working: tax depreciation

$ $
Cost on 1 October 2010 385,000
Tax depreciation to 30 September 2011 ($385,000 50%) (192,500)
192,500
Tax depreciation to 30 September 2012 ($192,500 25%) (48,125)
144,375
Tax depreciation to 30 September 2013 ($144,375 25%) 36,094
(e) BRIEFING NOTE

To: Chief Executive
From: Trainee Accountant
Date: 21 November 2013
Subject: Tax groups
A tax group is a group of companies that is treated as one entity for tax purposes.
In the UK, for example, losses of one group subsidiary may be set against the profits of another group
subsidiary. When assets are transferred between group companies, capital gains tax is deferred until the
asset is sold outside the group. In effect, UK group relief rules treat the group as one entity for tax
purposes.
This UK treatment is an example of tax consolidation. In general, if a group of enterprises are recognised
as a tax group, it is possible for them to gain relief for trading losses by offsetting the losses of one group
member against the profits of another group member. The rules for group relief will vary from country to
country, as will the rules for recognition of a tax group (which may differ from the rules under which
groups are recognised for financial reporting purposes).
Some countries also have their own regulations for recognising tax groups for capital gains purposes. It is
not usually possible to offset capital losses and gains between the group members. However, there are
usually provisions that allow the transfer of assets between group members without recognising a capital
gain or loss. The calculation of the gain and the payment of the tax are usually deferred until the asset is
sold outside the tax group. Good tax planning is needed to ensure that all asset sales to third parties take
place through just one group member. These provisions can then be used to accumulate all the groups
capital gains and losses in that member, thereby effectively obtaining offset.
Group relief may be used to save tax as the group company surrendering the loss may pay tax at a lower
rate than the company receiving the loss. It also may enable tax relief to be gained earlier as instead of
the company making the loss having to carry that loss forward, it can instead surrender it to a group
company which can utilise it in the current year.
(f) The external auditor of an entity has the following duties (any five duties from the following):
Truth and fairness of the The auditor must give an opinion as to whether the
financial statements statement of financial position shows a true and fair view
of (presents fairly) the company's affairs at the end of the
period and the statement of profit or loss and other
comprehensive income (and a statement of cash flows)
show a true and fair view of (present fairly) the results for
the period.
Compliance with legislation The auditor must give an opinion as to whether the
financial statements have been prepared in accordance
with the relevant legislation and applicable financial
reporting framework.
Returns from branches Report by exception if proper returns from branches not
visited by the auditor have not been received.
Agreement of accounts to Report by exception if the financial statements are not in
records agreement with the accounting records.
Proper accounting records Report by exception if adequate accounting records have
not been kept.
Information and Report by exception if all of the information and
explanations explanations necessary for the audit have not been
received.
Directors disclosures Report by exception if directors disclosures (for example,
emoluments) have not been properly made.
Consistency of other Report by exception if the other information presented
information with the financial statements is inconsistent with the
SECTION C
Question 3
(a) The same accounting policies are usually adopted from period to period, to allow users to analyse trends
over time in profit, cash flows and financial position. Changes in accounting policy will therefore be rare
and should be made only if required by one of three things:
(i) A new statutory requirement
(ii) A new accounting standard
(iii) If the change will result in a more appropriate presentation of events or transactions in the
financial statements of the entity
In the case of RDX the change in the inventory valuation method will result in a more appropriate
presentation as it will comply with the industry standard.
IAS 8 requires retrospective application of a change in accounting policy, unless it is impracticable to
determine the cumulative amount of the adjustment. Retrospective application means that all
comparative information must be restated as if the new policy had always been in force, with amounts
relating to earlier periods reflected in an adjustment to opening reserves of the earliest period presented.
Comparative information should be restated unless it is impracticable to do so.
For RDX the opening inventory will need to be increased by $148,000 and the closing inventory
increased by $210,000. The journal entries to account for these adjustments are as follows:
$000 $000
DR Cost of sales 148
CR Retained earnings 148
Being the increase in opening inventory resulting from the change in accounting policy
$000 $000
DR Closing inventories 210
CR Cost of sales 210
Being the increase in closing inventory resulting from the change in accounting policy
(b)
RDX STATEMENT OF PROFIT OR LOSS AND OTHER COMPREHENSIVE INCOME
FOR THE YEAR ENDED 30 SEPTEMBER 2013
$000
Revenue 6,780
Gross Profit 2,328
Finance cost (W4) (74)
RDX STATEMENT OF CHANGES IN EQUITY FOR THE YEAR ENDED 30 SEPTEMBER 2013
Equity Share Retained Capital
shares premium earnings redemption Total
$000 $000 $000 $000 $000
Balance at 1 October 2012 5,650 565 1,990 0 8,205
Prior year adjustment 148 148
Restated at 1 October 2013 5,650 565 2,138 0 8,353
Repurchase of shares (100) (35) (135)
Maintenance of capital (100) 100 0
Balance at 30 Sept 2013 5,550 565 2,044 100 8,259
RDX STATEMENT OF FINANCIAL POSITION AT 30 SEPTEMBER 2013

$000 $000
Non-current assets
Current assets
Inventories (1055 + 210) 1,265
Trade receivables (2,590 - 230) 2,360
Cash and cash equivalents 207 3,832
Total assets 10,488

Equity
Share capital 5,550
Share premium 565
Capital redemption reserve 100
Total equity 8,259
5% Loan notes 1,480
Current liabilities
Trade payables 300
Tax payable 160

(W1)
Administr Distributi
ative on
Cost of expenses Costs
sales
$000 $000 $000
Trial balance: 4,080 779 650
Adjustment to opening inventory 148
Adjustment to closing inventory (210)
Gain on disposal of plant and equipment (23 6) (17)
Depreciation plant and equipment (W1) 451
4,452 1,074 650
(W2) PPE
Cost Land Buildings P&E Total

$000 $000 $000 $000
Balance b/fwd 3,000 2,180 4,520 9,700
Disposal (note (v)) (57) (57)
Balance c/fwd 3,000 2,180 4,463 9,643
Accumulated depreciation Land Buildings P&E Total

Balance b/fwd 0 262 2,260 2,522
Disposal (note (v)) (51) (51)
2,211
Depreciation buildings (2,180 x 3%) 65 65
Depreciation plant and equipment (4,463 451 451
[2,260 51] x 20%)
Balance c/fwd 0 327 2,660 2,987
Carrying amount 30 Sept 2013 3,000 1,853 1,803 6,656
(W3) Tax
Under provision in respect of prior year 24
Current year 160
154
(W4) Interest
Paid in year 37
Due for year (1,480 5%) 74
Accrued 37
(W5) Deferred Tax

Balance b/f 282
Current year (30)
252
Question 4
(a) (i) According to IAS 32, the issue of preference shares creates an obligation on the part of the issuer
to the holder, so preference shares are classified as a financial liability.
In this question AWX is obligated to pay the 5% dividend on the nominal value of shares each year
and also to redeem the preference shares on 1 April 2022 and pay a premium of 10% of the
nominal value at that time.
The treatment as described in note (v) is therefore incorrect as the net proceeds received on the
issue of the preference shares should have been credited to non-current liabilities not to equity.
In addition, the issue costs should have been deducted from the proceeds received rather than be
charged to administrative expenses. Therefore the preference shares would initially have been
recognised as a non-current liability in the statement of financial position of $650,000 at 1 April
2012.
During the year AWX should recognise the finance charge of the preference shares using the
effective interest rate of 6.74% and would show a finance charge of $44,000 ($650,000 x
6.74%). The actual dividend paid of $35,000 ($700,000 x 5%) would then reduce the liability at
the year end. The year end liability would then be recognised at $659,000 ($650,000 +
$44,000 - $35,000).
(ii) Calculation of revised profit before tax
$000 $000
Profit before tax per SPL 408
Add: issue costs relating to preference shares, included in 50
administrative expenses
Less: finance charge on preference shares (650,000 x 6.74%) (44)
6
Revised profit for the year 414
(b) AWX STATEMENT OF CASH FLOWS FOR THE YEAR ENDED 31 MARCH 2013
$000 $000
Cash flows from operating activities 222222
Finance cost (W5) 84
Depreciation (note (iii)) 675
Amortisation (W2) 159
Profit on disposal of PPE (22)
Decrease in inventory (W3) 67
Increase in provisions 90
$000 $000
Payments to acquire property, plant and equipment (W1) (320)
Proceeds of sale of property, plant and equipment 92
Equity dividend paid (75)
Repayment of long term borrowings (1,100)
Proceeds from issue of shares (700 50) 650
Net increase in cash and cash equivalents 250
Cash and cash equivalents at 31 March 2012 265
Cash and cash equivalents at 31 March 2013 515
Workings
$000
Balance b/d 4,500
Revaluation (469 353) 116
Disposal (70)
Depreciation (675)
3,871
Balance c/d 4,191
$'000 $'000
B/d 4,500 Disposal 70
Additions 320 Depreciation 675
Revaluation in year 116 C/d 4,191
4,936 4,936
2 Intangible assets
$000
Balance b/d 315
Amortisation (balancing figure) 159
Balance c/d 156
Intangible assets
$'000 $'000
B/d 315 Amortisation 159
_ ___ C/d 156
315 315

Trade Trade
$000 $000 $000
Balance b/d 805 480 500
Increase/(decrease) (balancing figure) (67) 84 35
Balance c/d 738 564 535

$000
Tax charge per SPL 124
562
Income tax payable
$'000 $'000
Tax paid 253 B/d: current tax 218
C/d: current tax 84 B/d: deferred tax 220
C/d: deferred tax 225 Charge per SPL 124
562 562
5 Interest paid
$000
Balance b/d 99
Finance costs per original SPL 40
139
Interest paid (balancing figure) (127)
Balance c/d 12
Preference shares:
Finance charge for the year 44
Dividends/ interest paid (35)
Summary:
Finance charge to be added back (40 + 44) 84
Interest paid (127 + 35) (162)
395
MATHEMATICAL TABLES
396
Mathematical tables 397
PRESENT VALUE TABLE

Present value of $1 ie (1+r)-n where r = interest rate, n = number of periods until payment or receipt.
Periods Interest rates (r)
(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 0.980 0.961 0.943 0.925 0.907 0.890 0.873 0.857 0.842 0.826
3 0.971 0.942 0.915 0.889 0.864 0.840 0.816 0.794 0.772 0.751
4 0.961 0.924 0.888 0.855 0.823 0.792 0.763 0.735 0.708 0.683
5 0.951 0.906 0.863 0.822 0.784 0.747 0.713 0.681 0.650 0.621
6 0.942 0.888 0.837 0.790 0.746 0.705 0.666 0.630 0.596 0.564
7 0.933 0.871 0.813 0.760 0.711 0.665 0.623 0.583 0.547 0.513
8 0.923 0.853 0.789 0.731 0.677 0.627 0.582 0.540 0.502 0.467
9 0.914 0.837 0.766 0.703 0.645 0.592 0.544 0.500 0.460 0.424
10 0.905 0.820 0.744 0.676 0.614 0.558 0.508 0.463 0.422 0.386
11 0.896 0.804 0.722 0.650 0.585 0.527 0.475 0.429 0.388 0.350
12 0.887 0.788 0.701 0.625 0.557 0.497 0.444 0.397 0.356 0.319
13 0.879 0.773 0.681 0.601 0.530 0.469 0.415 0.368 0.326 0.290
14 0.870 0.758 0.661 0.577 0.505 0.442 0.388 0.340 0.299 0.263
15 0.861 0.743 0.642 0.555 0.481 0.417 0.362 0.315 0.275 0.239
16 0.853 0.728 0.623 0.534 0.458 0.394 0.339 0.292 0.252 0.218
17 0.844 0.714 0.605 0.513 0.436 0.371 0.317 0.270 0.231 0.198
18 0.836 0.700 0.587 0.494 0.416 0.350 0.296 0.250 0.212 0.180
19 0.828 0.686 0.570 0.475 0.396 0.331 0.277 0.232 0.194 0.164
20 0.820 0.673 0.554 0.456 0.377 0.312 0.258 0.215 0.178 0.149

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 0.812 0.797 0.783 0.769 0.756 0.743 0.731 0.718 0.706 0.694
3 0.731 0.712 0.693 0.675 0.658 0.641 0.624 0.609 0.593 0.579
4 0.659 0.636 0.613 0.592 0.572 0.552 0.534 0.516 0.499 0.482
5 0.593 0.567 0.543 0.519 0.497 0.476 0.456 0.437 0.419 0.402
6 0.535 0.507 0.480 0.456 0.432 0.410 0.390 0.370 0.352 0.335
7 0.482 0.452 0.425 0.400 0.376 0.354 0.333 0.314 0.296 0.279
8 0.434 0.404 0.376 0.351 0.327 0.305 0.285 0.266 0.249 0.233
9 0.391 0.361 0.333 0.308 0.284 0.263 0.243 0.225 0.209 0.194
10 0.352 0.322 0.295 0.270 0.247 0.227 0.208 0.191 0.176 0.162
11 0.317 0.287 0.261 0.237 0.215 0.195 0.178 0.162 0.148 0.135
12 0.286 0.257 0.231 0.208 0.187 0.168 0.152 0.137 0.124 0.112
13 0.258 0.229 0.204 0.182 0.163 0.145 0.130 0.116 0.104 0.093
14 0.232 0.205 0.181 0.160 0.141 0.125 0.111 0.099 0.088 0.078
15 0.209 0.183 0.160 0.140 0.123 0.108 0.095 0.084 0.074 0.065
16 0.188 0.163 0.141 0.123 0.107 0.093 0.081 0.071 0.062 0.054
17 0.170 0.146 0.125 0.108 0.093 0.080 0.069 0.060 0.052 0.045
18 0.153 0.130 0.111 0.095 0.081 0.069 0.059 0.051 0.044 0.038
19 0.138 0.116 0.098 0.083 0.070 0.060 0.051 0.043 0.037 0.031
20 0.124 0.104 0.087 0.073 0.061 0.051 0.043 0.037 0.031 0.026
398 Mathematical tables
CUMULATIVE PRESENT VALUE TABLE

This table shows the present value of $1 per annum, receivable or payable at the end of each year for n years
1 (1 r)n
.
r

(n) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%
1 0.990 0.980 0.971 0.962 0.952 0.943 0.935 0.926 0.917 0.909
2 1.970 1.942 1.913 1.886 1.859 1.833 1.808 1.783 1.759 1.736
3 2.941 2.884 2.829 2.775 2.723 2.673 2.624 2.577 2.531 2.487
4 3.902 3.808 3.717 3.630 3.546 3.465 3.387 3.312 3.240 3.170
5 4.853 4.713 4.580 4.452 4.329 4.212 4.100 3.993 3.890 3.791
6 5.795 5.601 5.417 5.242 5.076 4.917 4.767 4.623 4.486 4.355
7 6.728 6.472 6.230 6.002 5.786 5.582 5.389 5.206 5.033 4.868
8 7.652 7.325 7.020 6.733 6.463 6.210 5.971 5.747 5.535 5.335
9 8.566 8.162 7.786 7.435 7.108 6.802 6.515 6.247 5.995 5.759
10 9.471 8.983 8.530 8.111 7.722 7.360 7.024 6.710 6.418 6.145
11 10.368 9.787 9.253 8.760 8.306 7.887 7.499 7.139 6.805 6.495
12 11.255 10.575 9.954 9.385 8.863 8.384 7.943 7.536 7.161 6.814
13 12.134 11.348 10.635 9.986 9.394 8.853 8.358 7.904 7.487 7.103
14 13.004 12.106 11.296 10.563 9.899 9.295 8.745 8.244 7.786 7.367
15 13.865 12.849 11.938 11.118 10.380 9.712 9.108 8.559 8.061 7.606
16 14.718 13.578 12.561 11.652 10.838 10.106 9.447 8.851 8.313 7.824
17 15.562 14.292 13.166 12.166 11.274 10.477 9.763 9.122 8.544 8.022
18 16.398 14.992 13.754 12.659 11.690 10.828 10.059 9.372 8.756 8.201
19 17.226 15.679 14.324 13.134 12.085 11.158 10.336 9.604 8.950 8.365
20 18.046 16.351 14.878 13.590 12.462 11.470 10.594 9.818 9.129 8.514

(n) 11% 12% 13% 14% 15% 16% 17% 18% 19% 20%
1 0.901 0.893 0.885 0.877 0.870 0.862 0.855 0.847 0.840 0.833
2 1.713 1.690 1.668 1.647 1.626 1.605 1.585 1.566 1.547 1.528
3 2.444 2.402 2.361 2.322 2.283 2.246 2.210 2.174 2.140 2.106
4 3.102 3.037 2.974 2.914 2.855 2.798 2.743 2.690 2.639 2.589
5 3.696 3.605 3.517 3.433 3.352 3.274 3.199 3.127 3.058 2.991
6 4.231 4.111 3.998 3.889 3.784 3.685 3.589 3.498 3.410 3.326
7 4.712 4.564 4.423 4.288 4.160 4.039 3.922 3.812 3.706 3.605
8 5.146 4.968 4.799 4.639 4.487 4.344 4.207 4.078 3.954 3.837
9 5.537 5.328 5.132 4.946 4.772 4.607 4.451 4.303 4.163 4.031
10 5.889 5.650 5.426 5.216 5.019 4.833 4.659 4.494 4.339 4.192
11 6.207 5.938 5.687 5.453 5.234 5.029 4.836 4.656 4.486 4.327
12 6.492 6.194 5.918 5.660 5.421 5.197 4.988 4.793 4.611 4.439
13 6.750 6.424 6.122 5.842 5.583 5.342 5.118 4.910 4.715 4.533
14 6.982 6.628 6.302 6.002 5.724 5.468 5.229 5.008 4.802 4.611
15 7.191 6.811 6.462 6.142 5.847 5.575 5.324 5.092 4.876 4.675
16 7.379 6.974 6.604 6.265 5.954 5.668 5.405 5.162 4.938 4.730
17 7.549 7.120 6.729 6.373 6.047 5.749 5.475 5.222 4.990 4.775
18 7.702 7.250 6.840 6.467 6.128 5.818 5.534 5.273 5.033 4.812
19 7.839 7.366 6.938 6.550 6.198 5.877 5.584 5.316 5.070 4.843
20 7.963 7.469 7.025 6.623 6.259 5.929 5.628 5.353 5.101 4.870
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Notes
Review Form Paper F1 Financial Operations (01/14)
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CIMA

operational paper f1 financial operations

Targeted at CIMAs 2014 exams, it provides:

For exams in 2014

FOR exams in 2014

CMF1RK14 (POL & HO).indd 1-3 13/12/2013 12:05

FOR EXAMS IN 2014

British Library Cataloguing-in-Publication Data

Photocopying our materials is a breach of copyright

Finding questions and using the Practice and Revision Kit

Planning your question practice

Questions and answers

Mathematical tables 397

Part A: Regulation and Ethics of Financial

Part B: Single Company Financial Statements

Time Page number

Part C: Group Financial Statements

Part D: Principles of Business Taxation

Mixed question banks

Mock exam 2 (September 2013 resit exam)

Mock exam 3 (November 2013 exam)

Planning your question practice

Syllabus topic Question numbers

Consolidated financial statements 36-48

Using your BPP Learning Media Practice and Revision Kit

Making the most of question practice

Attempting mock exams

Our other products

You can purchase these products by visiting www.bpp.com/lm

Passing the F1 exam

Using the reading time

Gaining the easy marks

The exam paper

Time allowed: 3 hours plus 20 minutes reading time.

September 2013 (resit exam)

The September 2013 paper is mock exam 2 in this Kit.

September 2012 (resit exam)

September 2011 (resit exam)

What the examiner means

Planning your question practice

BPP's question plan

Attempt Mock exams 1, 2 and 3 under strict exam conditions.

Build your own exams

IMPORTANT NOTE ON TERMINOLOGY

IMPORTANT NOTE ON IASB Conceptual Framework for Financial Reporting

Part A: Regulation and Ethics of Financial Reporting

1 Objective test questions: The regulatory framework 92 mins

2 Which of the following is not an advantage of global harmonisation of accounting standards?

10 The term GAAP is used to mean:

18 Which of the following statements is/are true?

22 Listed below are some characteristics of financial information.

24 Which body issues International Financial Reporting Standards?

2 Objective test questions: External audit 56 mins

2 An external auditor gives a modified audit opinion that is a 'disclaimer of opinion'.

12 Which of the following is the most appropriate definition of an external audit?

14 In no more than 25 words, state the objective of an external audit. (2 marks)

3 Objective test questions: Ethics 40 mins

8 Which of the following is an advantage of a principles-based ethical code?

9 What is meant by the fundamental principle of 'professional behaviour'?

11 Which of these is not a source of ethical codes for accountants?