FA-FFA Module-3

1. Inventory should be stated at

a. Lower of cost and fair value.
b. Lower of cost and net realizable value.
c. Lower of cost and nominal value.
d. Lower of cost and net selling price.
e. Choices b and d.
f. Choices a and c.
g. Choices a, b, and d.

2. Which of the following cost models is not permitted under IAS 2?

a. First in, First out (‘FIFO’)
b. Last in, Last out (‘LIFO’)
c. Weighted Average
d. Actual cost

3. Inventories are assets

a. Used in the production or supply of goods and services for administrative purposes.
b. Held for sale in the ordinary course of business.
c. Held for long-term capital appreciation.
d. In the process of production for such sale.
e. In the form of materials or supplies to be consumed in the production process or the rendering of services.
f. Choices b and d.
g. Choices b, d, and e.

4. Which of the following items are excluded from the scope of IAS 2 – Inventories?

a. Agricultural produce at the point of harvest
b. Inventories that are stated at Net Realisable Value
c. Assets held for sale in the ordinary course of business
d. Inventories whose fair value is more than the cost

5. Which of the following is allowed as a cost of inventory?

a. Abnormal waste
b. Storage costs
c. Selling costs
d. Variable manufacturing overheads
e. General administration overheads

6. Inventories are stated at:

a. Lower of cost and carrying value
b. Lower of fair value and net realisable value
c. Lower of cost and net realisable value
d. Cost of production

7. Inventory excludes…

a. Goods purchased for resale
b. Finished goods produced
c. Construction works in progress
d. Raw materials

8. When actual production output is abnormally high, the fixed overheads allocated should be reduced.

a. True
b. False

9. The cost of inventory should not include

a. Purchase price.
b. Import duties and other taxes.
c. Abnormal amounts of wasted materials.
d. Administrative overhead.
e. Fixed and variable production overhead.
f. Selling costs.
g. Choices c, d, and f.

10. Which of the following costs must be expensed under IAS 2?

a. Costs of purchase that are paid to the suppliers of raw materials
b. Import duties on raw materials that are paid to the authorities
c. Variable production overheads that are allocated to each unit based on actual usage
d. Selling and distribution overheads incurred in the ordinary course of business

11. Which of the following is not permitted as a cost of inventory?

a. Non-recoverable taxes
b. Shipping
c. Fixed manufacturing overheads
d. Storage costs

12. Inventory should be stated at

a. Lower of cost and fair value.
b. Lower of cost and net realizable value.
c. Lower of cost and nominal value.
d. Lower of cost and net selling price.
e. Choices b and d.
f. Choices a and c.
g. Choices a, b, and d.

13. Which of the following costs of conversion cannot be included in cost of inventory?

a. Cost of direct labor.
b. Factory rent and utilities.
c. Salaries of sales staff (sales department shares the building with factory supervisor).
d. Factory overheads based on normal capacity.

14. Inventories are assets

a. Used in the production or supply of goods and services for administrative purposes.
b. Held for sale in the ordinary course of business.
c. Held for long-term capital appreciation.
d. In the process of production for such sale.
e. In the form of materials or supplies to be consumed in the production process or the rendering of services.
f. Choices b and d.
g. Choices b, d, and e.

15. The cost of inventory should not include

a. Purchase price.
b. Import duties and other taxes.
c. Abnormal amounts of wasted materials.
d. Administrative overhead.
e. Fixed and variable production overhead.
f. Selling costs.
g. Choices c, d, and f.

16. Inventories, are defined as:

a. Assets being held for sale, being prepared for sale or materials to be used in the production process or provision of services
b. Tangible goods lying in the store, which are not being sold
c. Only tangible products being held for sale, being prepared for sale or materials to be used in the production process

17. Net realisable value is defined as:

a. The estimated selling price, in the ordinary course of business, plus costs of completion, and less selling costs
b. The estimated selling price, in the ordinary course of business, less costs of completion, and less selling costs

18. The difference between Net Realisable Value and Fair Value is that:

a. Fair value relies on the specific business of the firm that is the subject of the financial statements. Net Realisable value relates to the market, rather than to individual contracts
b. Net realisable value relies on the specific business of the firm that is the subject of the financial statements. Fair value relates to the market, rather than to individual contracts

19. The cost of inventories:

a. Comprises only the costs of production, and no costs of conversion or other costs incurred in bringing the inventories to their present location and condition
b. Comprises all costs of production, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition

20. The purchase price, transport and handling costs. Taxes and import duties are all examples of:

a. Costs of conversion
b. Neither
c. Cost of purchase and costs of conversion, both
d. Costs of purchase

21. Variable Production overheads are:

a. Those direct and indirect costs that vary directly with different levels of production, such as direct and indirect labour
b. Variable production overheads are those indirect costs that vary directly with different levels of production, such as indirect labour and indirect materials

22. How would unallocated overheads be recognised?

a. Unallocated overheads are recognised as income in the income statement, in the period that they are incurred
b. Unallocated overheads are recognised as an expense in the income statement, in the period that they are incurred

23. As opposed to fixed production overheads, variable production overheads are:

a. Allocated to each unit of production, based on the actual usage of facilities
b. Allocated to all the units of production, as one whole

24. The definition of “inventories” given by international standard IAS2 states that items qualify as inventories only if they are assets held for sale in the ordinary course of business or assets in the process of production for such sale. True or False?

a. True
b. False

25. Which of the following items cannot be included in the cost of inventories?

a. Fixed production overheads
b. The cost of abnormal wastage of materials and labour
c. Variable production overheads
d. Irrecoverable import duties payable on the acquisition of inventories

26. Which of the following items should be included in the cost of inventories?

a. Conversion costs
b. The cost of storing finished goods
c. The cost of abnormal wastage of materials and labour
d. Selling costs

27. The cost formulas permitted by IAS2 are:

a. FIFO, LIFO and AVCO
b. FIFO and AVCO
c. LIFO and AVCO
d. FIFO and LIFO

28. The FIFO cost formula assumes that:

a. The inventory items which are sold or consumed are those acquired longest ago
b. The inventory items which are sold or consumed are a mixture of those acquired previously
c. Newer inventory items are sold or consumed before older inventory items
d. The inventory items which are sold or consumed are those acquired most recently

29. The net realisable value of inventories is defined by IAS2 as:

a. Selling price less costs of completion
b. Selling price
c. Selling price less costs of completion and selling costs
d. Cost price

30. On 31 December 2015, a company has partly-completed inventory with a cost to date of £26,300. It is expected that further costs of £8,900 will be incurred in order to complete the inventory. It will then be sold for £47,500. Selling costs will be £2,000.

The cost and the net realisable value of this inventory at 31 December 2015 are:

a. £35,200 and £47,500
b. £35,200 and £45,500
c. £26,300 and £38,600
d. £26,300 and £36,600

31. IAS2 states that inventories should be measured at:

a. The lower of cost and net realisable value
b. Cost
c. Net realisable value
d. The higher of cost and net realisable value

32. If production is abnormally low, the amount of fixed overheads allocated to each unit of production should be calculated by dividing total fixed overheads by the number of units produced.

a. True
b. False

33. At the end of an accounting period, the cost of a company’s inventory is £450,000. This includes damaged items with a cost of £25,000 which are expected to be sold for only £10,000 (less selling expenses of 5%). All other items of inventory have a net realisable value which exceeds cost.

The amount at which the company’s inventory should be recognised at the end of the period is:

a. £450,000
b. £425,000
c. £434,500
d. £435,000

34. A company’s inventories should be measured at the lower of total cost and total net realisable value. True or False?

a. True
b. False

35. A company which makes only one type of product incurs fixed production overheads of £180,000 for an accounting year. Actual production during the year was 30,000 units. Normal production is 24,000 units per annum.

The amount of fixed production overheads that should be allocated to each unit of production is:

a. £nil
b. £30
c. £6
d. £7.50

38. In relation to accounting for income taxes, which one of the following statements is correct?

a. Current tax expense is the sum of tax expense plus deferred tax expense.
b. Tax expense is the sum of current tax expense plus deferred tax expense.
c. Deferred tax liabilities are determined from deductible temporary differences.
d. All movements in deferred tax assets and liabilities are recognized in the statement of profit or loss and other comprehensive income.

39. To calculate the tax base of a liability for employee benefits, which one of the following formulas would be used?

a. Carrying amount + Future assessable amounts
b. Carrying amount − Future non-assessable amounts of revenue
c. Carrying amount + Future deductible amounts − Future assessable amounts
d. Carrying amount − Future deductible amounts + Future assessable amounts

41. For the year ended 30 June 20X7, Pringle Ltd (Pringle) had an accounting profit of $200 000 and a taxable profit of $170 000. The tax expense of Pringle for the year ended 30 June 20X7 was $60 000. At 30 June 20X7 it was determined that the company had a deferred tax liability of $27 Assume that there was no deferred tax asset at the beginning or end of the period. The tax rate is 30 per cent.

Which one of the following statements is correct?

a. The deferred tax liability as at 30 June 20X6 was $0.
b. The deferred tax liability as at 30 June 20X6 was $18 000.
c. The current tax expense for the year ended 30 June 20X7 was $33 000.
d. The deferred tax expense for the year ended 30 June 20X7 was $27 000

42. At 30 June 20X3, the gross amount of the accounts receivable of Atom Ltd (Atom) was $10 000. At the same date, there was a related allowance for doubtful debts of $500. Revenue from sales is included in the statement of profit or loss and other comprehensive income in the same period as it is included in taxable profit. The tax rate is 30 per cent.

At 30 June 20X3, Atom would recognise which one of the following items in its statement of financial position?

a. deferred tax asset of $150
b. deferred tax liability of $150
c. deferred tax asset of $2850
d. deferred tax liability of $2850

43. At 31 December 20X6, the statement of financial position of Multi Manufacturing Ltd (MM) contained a liability for employee benefits of $1 200 000. For tax purposes, a deduction for employee benefits is allowed in the reporting period in which they are In addition, during the year ended 31 December 20X6, MM obtained a foreign currency loan of FC100 000 repayable in three years. During the year ended 31 December 20X6, the AUD equivalent of the foreign currency loan decreased from $200 000 on initial recognition to $180 000. Gains or losses on foreign currency loans are included in the determination of taxable profit in the period when the loan is settled. The tax rate is 30 per cent. Assume that for the purposes of statement of financial position presentation, deferred tax assets and deferred tax liabilities are netted off against each other.

At 31 December 20X6, in relation to the above liabilities, MM would recognize which one of the following items in its statement of financial position?

a. net deferred tax asset of $354 000
b. net deferred tax asset of $366 000
c. net deferred tax liability of $354 000
d. net deferred tax liability of $366 000

44. The following information is available for Alpha Ltd (Alpha).

The taxable profit for the year ended 30 June 20X8 was $100 000.
Deductible temporary differences were:

20X7 20X8

$ $

Accounts receivable 10 000 15 000

Provision for employee benefits 65 000 80 000

Taxable temporary differences were:

20X7 20X8

Prepaid insurance 20 000 30 000

Assume that the tax rate is 30 per cent. What was the amount of the tax expense of Alpha for the year ended 30 June 20X8?

a. $24 000
b. $27 000
c. $30 000
d. $33 000

47. IAS 12 prescribes the accounting treatment for income taxes, and the tax consequences of: 1. Transactions of the current period that are recorded in an undertaking’s financial statements 2. The future liquidation of the of assets and liabilities that are recorded in an undertaking’s statement of financial position 3. Tax planning opportunities

a. 1, 2 and 3 all
b. 1 and 2 only
c. 1 only

48. If liquidation of carrying amounts will make future tax payments larger or smaller, IAS 12 generally requires an undertaking to record a:

a. Provision
b. Contingent liability
c. Deferred tax liability (or deferred tax asset)

49. Permanent differences require:

a. Provision
b. None of these
c. Contingent liability
d. Deferred tax liability (or deferred tax asset)

50. Permanent differences require adjustments in the:

a. Periods following the transaction
b. The periods relating to the transaction and periods following the transaction
c. Periods prior to the transaction
d. The periods relating to the transaction

51. Deferred tax assets are the taxes recoverable, in future periods, in respect of: 1. Deductible temporary differences 2. Unused tax losses 3. Unused tax credits 4. Taxable temporary differences

a. 1 to 4 all
b. 1 only
c. 1 and 2 only
d. 1, 2and 3 only

52. Deferred tax relates to: 1. Deductible temporary differences 2. Unused tax losses 3. Unused tax credits 4. Taxable temporary differences 5. Permanent differences

a. 1 to 5 all
b. 1, 2, 3 and 4 only
c. 1, 2 and 3 only
d. 1 and 2 only

53. If revenue is taxed in the period received, the tax base:

a. is the amount received
b. is only nil if the revenue is recognized in the same period
c. is only nil if the revenue is recognised in the following period
d. is nil

54. Research and development costs may be expensed in the current period, but deductible for tax purposes over subsequent periods. The tax base:

a. is the amount expensed
b. is nil
c. is the amount of the deduction that can be claimed in future periods

55. Temporary differences arise:

a. When deferred tax differs from current tax
b. When deferred tax is applied
c. When the carrying amount of an asset or liability differs from its tax base

56. A taxable temporary difference gives rise to:

a. Deferred tax Liability
b. Either deferred tax liability or deferred tax asset
c. Deferred tax Asset

57. Taxable temporary differences occur when tax is charged in a period:

a. After the accounting period benefits from the income is recognised in the financial accounts
b. Before the accounting period benefits from the income is recognized in the financial accounts
c. Either before or after the accounting period benefits from the income is recognized in the financial accounts

58. Deductible temporary differences occur when tax is charged in a period:

a. After the accounting period benefits from the income is recognised in the financial accounts
b. Before the accounting period benefits from the income is recognised in the financial accounts
c. Either before or after the accounting period benefits from the income is recognised in the financial accounts

59. Differences arising from fair value adjustments are treated:

a. The same as any other taxable and deductible differences
b. Separately for deferred tax
c. Differently depending on whether they arise on acquisition or otherwise

60. Not all temporary differences are recognised as deferred tax balances. The exceptions are: 1. Goodwill 2. Initial recognition of certain assets and liabilities 3. Certain investments 4. Property revaluations

a. 1, 2 and 3 only
b. 1 to 4 all
c. 1 and 2 only
d. 1 only

61. The realisation of deferred tax assets depends on:

a. Accounting profits being available in the future
b. No increase in the rate of income tax
c. Taxable profits being available in the future

62. When different rates of tax apply to different types and amounts of taxable income:

a. Each item must be listed
b. An average rate is used
c. No deferred tax is charged

63. An undertaking should review unrecorded deferred tax assets to determine whether new conditions will permit the recovery of the asset:

a. At each statement of financial position date
b. Every 5 years
c. Every 3 years

64. The carrying amount of a deferred tax asset should be reviewed for: 1. Changes in tax rates 2. Changes in the expected manner of recovery of an asset 3. Changes in future profits

a. 1 and 2 only
b. 1 only
c. 1, 2 and 3 all

65. The difference between the carrying amount of a revalued asset and its tax base is a:

a. It can either be temporary difference or a permanent difference
b. Temporary difference
c. Permanent difference

66. In relation to provisions, for a present obligation to exist, which one of the following factors must be present?

a. The obligation must be capable of being reliably measured.
b. The entity must have a legal obligation that can be enforced by law.
c. The entity must have no realistic alternative to settling the obligation.
d. It must be more likely than less likely that there will be a future flow of economic benefits.

67. In accordance with the requirements of IAS 37 Provisions, Contingent Liabilities and Contingent Assets, where measurement uncertainty exists, which one of the following methods is not an appropriate valuation for a provision based on accounting standards?

a. the mid-point of a range of equally likely outcomes of expenditure
b. no provision should be recognised where measurement uncertainty exists
c. the minimum amount expected to represent a best estimate, where the other option is omission
d. the most likely amount expected to represent a best estimate, where there is a single obligation

68. A manufacturer provides warranties at the time of sale to purchasers of its product lines.

Under the terms of the warranty, the manufacturer undertakes to repair or replace items that fail to perform satisfactorily within a period of two years from the date of sale. When should the manufacturer recognise the provision? Select which one of the following is correct.

a. At the time of sale.
b. At the end of the warranty period.
c. When the company is notified of a claim.
d. Never. A provision should not be recognised; rather the costs associated with the warranty should be expensed as incurred.

69. Which of the following does define the term “provision”?

a. A deferred liability
b. A liability of uncertain timing or amount
c. A contingent liability
d. A contractual liability

70. An onerous contract is a contract in which __________ of meeting the obligations under the contract __________ the economic benefits expected to be received under it.

a. Sunk costs; exceed
b. Unavoidable costs; exceed
c. Opportunity costs; are less than
d. Avoidable costs; are less than

71. Which of the following statements does more likely define the term “restructuring”?

a. Significant change in the scope of a business undertaken by an entity
b. Significant change in the manner in which that business is conducted
c. Significant change in political and legal environment that regulates reporting matters of an entity
d. A or B
e. All of the above

72. An entity shall not recognise a contingent liability __________.

a. Unless an entity has a present liability as a result of a past event
b. Unless it is probable that an outflow of resources embodying economic benefits will be required to settle this liability
c. Unless a reliable estimate can be made of the amount of this liability
d. None of the above

73. Zulu Ltd (Zulu) enters into a contract with a customer to deliver a phone package to the customer in return for an upfront payment of $1000. Under the terms of the contract the customer will receive a ‘free’ phone upon signing the contract, and phone service for two years. Zulu also sells phones and phone services separately.

Which one of the following statements is correct?

a. At contract inception, Zulu recognises revenue of $1000.
b. At contract inception, Zulu recognises a contract liability of $1000.
c. Zulu identifies one performance obligation in the phone package.
d. Zulu identifies two performance obligations in the phone package.

74. Which one of the following is included in the scope of IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

a. provisions related to employee benefits
b. all financial instruments within the scope of IFRS 9
c. all provisions related to owned long-lived assets, such as oil rigs
d. all provisions related to insurance contracts within the scope of IFRS 4

75. The Acme Building Company Ltd is aware of draft legislation that, when enacted, will require the company to refund certain amounts previously charged to its customers. The company intends to lobby against the legislation. At the reporting date, the planned legislative changes have been approved and are now effective.

Which one of the following treatments would be required at the reporting date?

a. Recognise a provision as the legislation has been enacted.
b. Make no disclosure as the company has not yet started refunding the amounts.
c. Make no disclosure if the company does not intend to comply with the legislation.
d. Disclose a contingent liability as the company intends to lobby against the legislation.

76. Which of the following circumstances would result in a disclosure of a contingent liability? Select which two options are correct.

a. An event has caused the possibility of a sacrifice of future economic benefits, but the likelihood is remote.
b. A present obligation has been determined and the future sacrifice of economic benefits is probable and may be reliably measured.
c. The occurrence of an event has resulted in a probable sacrifice of future economic benefits, but the amount cannot be reliably measured.
d. As a consequence of an event, the existence of a present obligation is not clear and the future sacrifice of economic benefits cannot be reliably measured.

77. Which one of the following is a correct statement in relation to provisions and contingencies?

:

a. An item of a contingent nature may be recognised, but not disclosed, in the body of the financial statements.
b. IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies to provisions to perform land rehabilitation activity.
c. IAS 37 Provisions, Contingent Liabilities and Contingent Assets applies to contingent liabilities and contingent assets of insurers that result from insurance contracts.
d. A present obligation exists in all circumstances where a company may have some choice in whether or not to make a future sacrifice of economic benefits in settlement of an obligation.

78. Which one of the following represents an appropriate discount rate for measuring a provision based on IAS 37 Provisions, Contingent Liabilities and Contingent Assets?

a. market yields on national government bonds
b. market yields on high-quality corporate bonds
c. pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the liability
d. pre-tax rate that reflects current market assessment of the time value of money and the risks specific to the entity

79. Beta Ltd (Beta) enters into a contract with a customer to provide 100 widgets at a price of $50 per widget. Under the contract terms, unused widgets may be returned within 30 days of sale for a full refund. Based on past experience, Beta attaches the following probabilities to the estimated number of widgets the customer will return:

Widgets returned 0	Probability of outcome 10%	Probability-weighted consideration $500
10	10%	$450
15	60%	$2550
20	15%	$600
30	5%	$175

Which two of the following statements are correct?

a. Under the ‘expected value’ method, the transaction price is $2550.
b. Under the ‘expected value’ method, the transaction price is $4275.
c. Under the ‘most likely amount’ method, the transaction price is $2550.
d. Under the ‘most likely amount’ method, the transaction price is $4250.

80. As at 30 June 20X8 (reporting date), STU Ltd (STU) is involved in a legal dispute with a supplier in relation to the early termination of the exclusive licence agreement between the two entities.

The supplier is seeking damages of $40 million. The directors of STU believe they will be successful in defending the claim. STU’s lawyers have advised that it is 90 per cent probable the entity would not be found liable.

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which one of the following is the most appropriate option for STU when preparing its financial report for 30 June 20X8?

a. Do nothing.
b. Disclose information about the possible liability as a contingent liability.
c. Recognise a provision for the best estimate of the obligation to the supplier.
d. Recognise a contingent liability for the best estimate of the obligation to the supplier.

81. International standard IAS37 defines a provision as:

a. A liability which is not legally enforceable
b. A liability which is legally enforceable
c. A liability of uncertain timing or amount
d. A reduction in the carrying amount of an asset

82. In general, contract costs incurred in relation to a contract with a customer must be:

a. Recognised as an asset if they relate to a performance obligation which has been satisfied
b. Recognised as an asset if they are not expected to be recovered
c. Recognised as an expense when incurred
d. Recognised as an asset if they relate to a performance obligation which has not yet been satisfied

82. In order that a provision should be recognised in an entity’s financial statements, it is necessary that:

a. The entity has a legally enforceable obligation
b. The entity has a constructive obligation
c. The entity has a present obligation
d. It is possible that an outflow of economic benefits will be required

83. A past event is an obligating event only if it gives rise to a legally enforceable obligation. True or False?

a. True
b. False

84. The amount of a provision should be the “best estimate” of the expenditure required to settle the obligation concerned. This estimate:

a. Should be the amount that would rationally be paid to settle or transfer the obligation
b. Should not be adjusted to reflect future events that may affect the amount of the required expenditure, whether or not those events are likely to occur
c. Must always be made on the basis of advice from independent experts
d. Should always be discounted to present value

85. If a provision relates to a large population of items, the amount of the provision should be calculated as:

a. The present value of the maximum expenditure that could possibly be required to settle the obligation
b. The expected value of the expenditure that will be required to settle the obligation
c. The maximum expenditure that could possibly be required to settle the obligation
d. The minimum expenditure that could possibly be required to settle the obligation

86. Should a provision be recognised in relation to:

(a) future operating losses?

(b) onerous contracts?

a. (a) No (b) No
b. (a) Yes (b) No
c. (a) Yes (b) Yes
d. (a) No (b) Yes

87. In general terms, a contingent liability is a possible obligation that depends upon the outcome of a future event that is within the control of the entity. True or False?

a. True
b. False

88. Contingent liabilities are:

a. Always recognised in the statement of financial position
b. Disclosed in the notes unless the possibility of an outflow of economic benefits is remote
c. Always disclosed in the notes to the financial statements
d. Recognised in the statement of financial position unless the possibility of an outflow of economic benefits is remote

89. Contingent assets are:

a. Disclosed in the notes unless an inflow of economic benefits is only remotely possible
b. Disclosed in the notes if an inflow of economic benefits is probable
c. Always disclosed in the notes to the financial statements
d. Always recognised in the statement of financial position

90. International standard IAS10 requires that financial statements should be adjusted to take account of any events occurring between the end of the reporting period and the date when the financial statements are authorised for issue. True or False?

a. True
b. False

91. A company is preparing its financial statements for the year to 31 March 2016. Assuming that each of the following events occurs after 31 March 2016 but before the financial statements are authorised for issue, which one of them should be classified as a NON-ADJUSTING event?

a. The sale of inventories which were held on 31 March 2016
b. The discovery of a major fraud that had occurred in January 2016
c. A change in tax rates that is announced in April 2016 and which has a material impact on the tax liability for the year to 31 March 2016
d. The bankruptcy of a customer who owed a substantial amount to the company at 31 March 2016

92. Although the accounting treatment of inventories is prescribed by IAS2 Inventories, a company may also need to apply IAS10 Events After the Reporting Period when determining the inventories figure which should be shown in its financial statements. True or False?

a. True
b. False

93. The following two issues relate to Spiko Co’s mining activities:

Issue 1: Spiko Co began operating a new mine in January 20X3 under a five-year government licence which required Spiko Co to landscape the area after mining ceased at an estimated cost of $100,000.
Issue 2: During 20X4, Spiko Co’s mining activities caused environmental pollution on an adjoining piece of government land. There is no legislation which requires Spiko Co to rectify this damage, however, Spiko Co does have a published environmental policy which includes assurances that it will do so. The estimated cost of the rectification is $1,000,000.

In accordance with IAS 37 Provisions, Contingent Liabilities and Contingent Assets, which of the following statements is correct in respect of Spiko Co’s financial statements for the year ended 31 December 20X4?

a. A provision is required for the cost of both issues 1 and 2
b. Both issues 1 and 2 require disclosure only
c. A provision is required for the cost of issue 1 but issue 2 requires disclosure only
d. Issue 1 requires disclosure only and issue 2 should be ignored

94. On 1 October 20X4, Kalatra Co commenced drilling for oil from an undersea oilfield. Kalatra Co is required to dismantle the drilling equipment at the end of its five-year licence. This has an estimated cost of $30m on 30 September 20X9. Kalatra Co’s cost of capital is 8% per annum and $1 in five years’ time has a present value of 68 cents.

What is the provision which Kalatra Co would report in its statement of financial position as at 30 September 20X5 in respect of its oil operations?

a. $32,400,000
b. $22,032,000
c. $20,400,000
d. $1,632,000

95. When to accrue a provision for Restructuring by closure or re-organization:

a. Accrue a provision only after a detailed formal plan is adopted and announced publicly. A Board decision is not enough
b. No provision
c. Accrue a provision if the company's policy approves so even if there is no legal requirement

96. Which one of the following is a correct statement in relation to IFRS 15 Revenue from Contracts with Customers?

a. The ‘expected value’ method may better predict variable consideration if the contract has only two possible outcomes
b. The ‘expected value’ method requires an entity to identify the probability of each possible outcome of a contract occurring
c. The ‘expected value’ method can be adopted as an entity’s accounting policy to estimate variable consideration for every contract.
d. The transaction price determined at the start of a contract is not updated for any changes in an entity’s assessment of the amount of consideration to which it expects to be entitled.

97. Zulu Ltd (Zulu) enters into a contract with a customer to deliver a phone package to the customer in return for an upfront payment of $1000. Under the terms of the contract the customer will receive a ‘free’ phone upon signing the contract, and phone service for two years. Zulu also sells phones and phone services separately.

Which one of the following statements is correct?

a. At contract inception, Zulu recognises revenue of $1000.
b. At contract inception, Zulu recognises a contract liability of $1000.
c. Zulu identifies one performance obligation in the phone package
d. Zulu identifies two performance obligations in the phone package.

98. Entity shall recognise revenue to depict the transfer of promised goods or services to customers in the _________ amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

a. Net
b. Residual
c. Gross
d. Cumulative

99. Which of the following is an exception for application of IFRS 15?

a. Lease contracts
b. Insurance contracts
c. Pharmaceutical contracts
d. Financial audit contracts
e. All of the above
f. A and B

100. A contract does not exist if …

a. The contract was not approved in a written form
b. The parties of the contract have reached unanimous consent regarding termination of the contract
c. The contract has no fixed duration and can be terminated or modified by either party at any time
d. Each party to the contract has the unilateral enforceable right to terminate a wholly unperformed contract without compensating the other party

101. A contract is wholly unperformed if …

a. The entity has not yet transferred any promised goods or services to the customer
b. The entity has not yet received any consideration in exchange for promised goods or services
c. The entity is not yet entitled to receive any consideration in exchange for promised goods or services
d. All of the above
e. A and B

102. With regard to the definition of revenue given by IFRS15, which of the following statements is true?

a. Revenue may arise from either ordinary activities or extraordinary activities
b. Revenue arises from ordinary activities only
c. Revenue includes cash received from borrowings
d. Revenue includes cash received from share issues

103. If the agreed date of payment by a customer is later than the date on which goods or services are transferred to that customer, part of the consideration should always be treated as finance income (not revenue). True or False?

a. True
b. False

104. Step 1 of the “five-step model” states that certain conditions must be satisfied before an entity can account for a contract with a customer. Which of the following is not one of these conditions?

a. It is certain that the entity will collect the consideration to which it is entitled
b. Each party's rights with regard to the goods or services concerned can be identified
c. The payment terms can be identified
d. The entity and the customer have approved the contract and are committed to perform their contractual obligations

105. A contract modification is always treated as a separate contract for the purposes of IFRS15. True or False?

a. True
b. false

106. A single contract with a customer could include more than one performance obligation and it is necessary to identify each performance obligation in the contract. True or False?

a. True
b. False

107. A company enters into a contract to build a factory for a customer. The agreed price is £2m and the specified completion date is 31 October 2016. However, the contract provides that the company should receive an incentive payment of a further £250,000 if the factory is completed by 30 September 2016. Similarly, the price will be reduced by £250,000 if the factory is not completed until after 30 November 2016.

The company estimates that there is a 15% probability that the factory will be completed by 30 September 2016, an 80% probability that it will be completed in October 2016 or November 2016 and a 5% probability that it will not be completed until after 30 November 2016.

What is the expected value of the transaction price for this contract?

a. £1.975m
b. £2m
c. £2.025m
d. £2.125m

108. The accounting principle applied by IFRS15 when determining whether or not revenue should be recognised in respect of a repurchase agreement is:

a. Prudence
b. Relevance
c. Substance over form
d. Verifiability

109. A performance obligation is satisfied over time if:

a. The entity's performance creates an asset which has an alternative use to the entity
b. The entity's performance creates an asset that the customer controls as it is created
c. The entity does not have an enforceable right to payment for the performance that has been completed to date
d. The customer does not receive or consume the benefits provided by the entity's performance until the obligation is completely satisfied

110. A company enters into a contract to supply three distinct products to a customer. The promise to supply each of these products is regarded as a separate performance obligation. The stand-alone prices of the three products (if sold singly) are:

Product X £12,500

Product Y £24,000

Product Z £27,500

The agreed contract price is £57,600. How should this price be allocated to performance obligations?

a. Product X £11,250 Product Y £21,600 Product Z £24,750
b. Product X £10,367 Product Y £21,867 Product Z £25,366
c. Product X £19,200 Product Y £19,200 Product Z £19,200
d. Product X £12,500 Product Y £24,000 Product Z £27,500

111. If a contract with a customer provides a warranty, then the warranty always represents a separate performance obligation and part of the transaction price must be allocated to it. True or False?

a. True
b. False

112. In general, contract costs incurred in relation to a contract with a customer must be:

a. Recognised as an asset if they relate to a performance obligation which has been satisfied
b. Recognised as an asset if they are not expected to be recovered
c. Recognised as an expense when incurred
d. Recognised as an asset if they relate to a performance obligation which has not yet been satisfied

113. The carrying amount of contract costs relating to a performance obligation and recognised as an asset is £120,000. Further costs required in order to satisfy the obligation are estimated to be £30,000. The consideration receivable by the company when the obligation is satisfied is £132,000.

Calculate the amount of the impairment loss (if any) which should be deducted from the contract asset and recognised as an expense

a. £30,000
b. £42,000
c. £nil
d. £18,000

114. The incremental costs of obtaining a contract must be recognised as an asset if the entity expects to recover those costs.

a. True
b. False

115. The asset recognised in respect of the costs to obtain or fulfill a contract is not amortised on a systematic basis that is consistent with the pattern of transfer of the goods or services to which the asset relates.

a. True
b. False

116. In case of option to purchase warranty separately (extended), warranty is distinct and should be recognized as:

a. A provision
b. a separate performance obligation
c. an expense

117. A repurchase agreement is a contract in which an entity sells an asset and also promises or has the option (either in the same contract or in another contract) to repurchase the asset.

a. True
b. False

118. The standard introduces a ______ step model for the recognition of revenue

a. 5 step
b. 6 step
c. 4 step

119. In case of forward and call option, the customer:

a. Obtain control
b. does not obtain control

120. The reason for the bill-and-hold arrangement must be:

a. Substantive
b. Material
c. Immaterial

121. Indicators that an arrangement is a consignment arrangement include, but are not limited to, the following:

The product is controlled by the entity until a specified event occurs, such as the sale of the product to a customer of the dealer or until a specified period expires;
The entity is able to require the return of the product or transfer the product to a third party (such as another dealer); and
The dealer does not have an unconditional obligation to pay for the product (although it might be required to pay a deposit).

a. True
b. False

122. Where a contract has multiple performance obligations, an entity will allocate the transaction price to the performance obligations in the contract by reference to the relative standalone selling prices of the goods or services promised. This allocation is made at:

a. The end of contract
b. The inception of the contract.

123. Step one in the five-step model requires the ——————

a. the identification of the separate performance obligations in the contract.
b. identification of the contract with the customer
c. the entity to determine the transaction price

124. When a contract contains more than one distinct performance obligation, an entity:

a. should allocate the transaction price to each distinct performance obligation on the basis of the standalone selling price.
b. should not allocate the transaction price to each distinct performance obligation

125. A good or service is distinct if the following criteria are met:

The customer can benefit from the good or services on its own or in conjunction with other readily available resources; and
The entity’s promise to transfer the good or service to the customer is separately identifiable from other promises/elements in the contract

a. a only
b. a & b both
c. b only
d. None of the above

FA-FFA Module-3

FA-FFA Module-3

Tishadz December 16, 2020

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