Fa Mcqs (Icap)

MCQs BANK (kit)
FINANCIAL ACCOUNTING &

CORPORATE REPORTING
ICMAP
Managerial level 2
Courtesy: SYED SHAHBAZ RAZA

ZAIDI
Certificate in Accounting and Finance
CHAPTER
Financial accounting and reporting I
IAS 1: Preparation of financial

statements
Contents
1 Statement of changes in Equity
2 Objective based questions and answers
* The student must refer original handbook of IFRS.
© Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan

Chapter 2: IAS 1: Preparation of financial statements
2 OBJECTIVE BASED QUESTIONS

01. Which TWO of the following are separately identified in statement of changes in equity?
(a) Profit for the year
(b) Transactions with owners
(c) Other comprehensive income
(d) Non-owner changes in equity
02. Which of the following is not considered transaction with owners with reference to statement of
changes in equity?
(a) Share capital
(b) Redemption of equity shares
(c) Profit for the year
(d) Bonus issue of shares (no cash received from owners)
03. The maximum amount of share capital that a company is authorized to raise is called:
(a) Authorized share capital
(b) Issued share capital
(c) Subscribed share capital
(d) Paid up share capital
04. The total value of shares a company offers to subscribe is called:

05. The monetary value of all the shares that the investors have committed to buy is called:
06. The amount of money a company has received from shareholders in exchange for its shares is called:

07. Which of the following issued by an entity is treated as liability?

(a) Ordinary share capital
(b) Redeemable preference share capital
(c) Irredeemable preference share capital
(d) None of above
08. A debit balance on the retained earnings account indicates that:

(a) The company has made more dividend payments than the profit earned.
(b) the company has accumulated losses
(c) the company has redeemed some of its share capital
(d) the company has issued bonus shares
09. A company has profit after tax of Rs. 80 million for the financial year ended on 30 June 2019. It has
share capital of Rs. 500 million. During the year company has declared interim dividend of 10%.
How this dividend shall be presented in financial statements for the year ended 30 June 2019?
(a) Rs. 8 million deducted from retained earnings in statement of changes in equity
(b) Rs. 50 million deducted from retained earnings in statement of changes in equity
(c) Rs. 50 million deducted from profit or loss as finance cost
(d) It shall not be recorded, only disclosure shall be made.
10. A company has profit after tax of Rs. 80 million for the financial year ended on 30 June 2019. It has
share capital of Rs. 500 million. The board of directors proposed a final dividend of 10% just after the
year end, for the year ended 30 June 2019
How this dividend shall be presented in financial statements for the year ended 30 June 2019?
(a) Rs. 8 million deducted from retained earnings in statement of changes in equity
(b) Rs. 50 million deducted from retained earnings in statement of changes in equity
(c) Rs. 50 million deducted from profit or loss as finance cost
(d) It shall not be recorded, only disclosure shall be made.
11. Which TWO of the following are usually shown in statement of changes in equity when right issue of
shares is made?
(a) Increase in share capital
(b) Decrease in share premium
(c) Increase in share premium
(d) Increase in retained earnings
12. Which TWO of the following are usually shown in statement of changes in equity when bonus issue of
shares is made?
(a) Increase in share capital
(b) Decrease in share premium
(c) Increase in share premium
(d) Increase in retained earnings

13. Transaction costs relating to issue of shares are usually debited to:
(a) Profit or loss
(b) Share capital
(c) Share premium
(d) Revaluation surplus
14. If there is no balance in share premium account, transaction costs relating to issue of shares are
usually debited to:
(a) Profit or loss
(b) Share capital
(c) Retained earnings
15. Incremental depreciation has following effects on statement of changes in equity:

(a) Increase in revaluation surplus and decrease in retained earnings
(b) Decrease in revaluation surplus and increase in retained earnings
(c) Decrease in revaluation surplus and decrease in retained earnings
(d) No effect
16. A company has following balances on 1 January 2019:

Rs. m
Share capital (Rs. 100 each) 100
Share premium 30
Revaluation surplus 20
Retained earnings 35
The company made a right issue of 1 for 5 shares already held at Rs. 145 per share.
What amount of share capital shall be presented in statement of changes in equity as at 31 December
2019?
Rs. ___________

Rs. m
Share premium 30
The company made a right issue of 1 for 5 shares already held at Rs. 145 per share.
What amount of share premium shall be presented in statement of changes in equity as at 31
December 2019?
Rs. ___________

Rs. m
Share premium 30
The company made a bonus issue of 2 for 5 shares already held.

What amount of share capital shall be presented in statement of changes in equity as at 31 December
2019?
Rs. ___________

Rs. m
Share premium 30
The company made a bonus issue of 2 for 5 shares already held.

What amount of share premium shall be presented in statement of changes in equity as at 31
December 2019?
Rs. ___________

Rs. m
Share premium 30
On 2 January 2019, all the revalued assets were disposed of for Rs. 90 million.
Profit for the year ended was Rs. 32 million.
Interim dividend of 5% was paid in July 2019 and final dividend of 8% has been proposed by directors.
What amount of retained earnings shall be presented in statement of changes in equity as at 31
December 2019?
Rs. ___________
21. Which of the following does not appear in statement of changes in equity?
(a) Share premium
(b) Retained earning
(c) Goodwill

22. Which of the following statements is likely to be true, for a company making profits?
(a) The operating profit will be less than the profit for the year.
(b) The profit for the year will be greater than the gross profit.
(c) Retained profits at the year-end will be greater than shareholders' equity.
(d) Retained profits at the year-end will be greater than retained profits at the beginning of the
year.
23. Which of the following is NOT a component of the statement of changes in equity?
(a) Total comprehensive income for the period
(b) The revaluation gain
(c) The amount of cash that the company has on hand
(d) Dividends paid to shareholders during the period
24. Which of the following statements is not true about preferred stock?
(a) The rate of dividend is usually fixed
(b) Shareholders always have a voting right
(c) Shareholders' usually have a preference as to assets upon liquidation of the corporation
(d) Shareholders' usually have a preference as to dividends
25. Redeemable preferred shares is required to be reported as:

(a) Liability
(b) Equity
(c) Asset
(d) None of the above
26. Any unpaid dividend is carried forward to the future periods for which type of stock?
(a) Ordinary shares
(b) Cumulative preferred shares
(c) Non-cumulative preferred shares
(d) All of the above
27. What is the impact of dividend payments to shareholders on the statement of changes in equity?
(a) It increases the retained earnings balance
(b) It decreases the retained earnings balance
(c) It increases the share capital balance
(d) It decreases the share capital balance
28. What is the impact of an additional share issue on the statement of changes in equity?
(a) It increases the share capital balance
(b) It increases the retained earnings balance

(c) It decreases the share capital balance

(d) It decreases the retained earnings balance
29. Xavier Limited issued 5,000 shares of its Rs.10 par value to its shareholder. These shares were issued
at a premium at a price of Rs.25 per share.
The correct journal entry to record this transaction is:
(a) Cash Rs.125,000 (Debit); Share capital Rs.125,000 (Credit)
(b) Cash Rs.50,000 (Debit); Share capital Rs.50,000 (Credit)
(c) Share capital Rs.50,000 (Debit); Share premium Rs.75,000 (Debit); Cash Rs.125,000 (Credit)
(d) Cash Rs.125,000 (Debit); Share capital Rs.50,000 (Credit); Share premium Rs.75,000
(Credit)
30. Dynasty Limited issues 1 million, Rs.10 shares at Rs.50 for each share. Which of the following
statements is true?
(a) Ordinary share capital will increase by Rs.10 million and share premium will increase by Rs.50
million.
(b) Ordinary share capital will increase by Rs.10 million and share premium will increase by Rs.40
million.
(c) Ordinary share capital will increase by Rs.20 million and share premium will increase by Rs.50
million.
(d) Ordinary share capital will increase by Rs.10 million and share premium will increase by Rs.30
million.
31. Handsome Limited statement of financial position shows ordinary share capital of Rs.150 million and
share premium of Rs.50 million at the beginning of a financial year. If the ordinary share capital is
Rs.250 million and share premium is Rs.120 million at the end of the financial year, how much did the
ordinary share with share premium issue raise?
(a) Rs.100 million
(b) Rs.150 million
(c) Rs.160 million
(d) Rs.170 million
32. Gigantic Limited opening retained earning balance was Rs.150 million. It made a net profit for the year
ended 31 March 2020 of Rs.30 million. During that year, an ordinary dividend of Rs.50 paisa per share
was paid on 40 million ordinary shares. What was the retained profit for the year ended 31 March
2020?
(a) Rs.150 million
(b) Rs.160 million
(c) Rs.165 million
(d) Rs.170 million

33. SK Limited paid Rs.10 million in debenture interest and an ordinary dividend of 10 paisa per share on
Rs.50 million ordinary shares. The retained profit was Rs.120 million. What was SK Limited profit for
the year?
(a) Rs. 125 million
(b) Rs.135 million
(c) Rs. 130 million
(d) Rs.140 million
34. Which of the following would be an entry in the statement of changes in equity?
(a) Taxation
(b) Long term loans
(c) Revaluation gain
(d) Revaluation reserve
35. During the year ended 30 June 2021, a company's revaluation reserve increased from Rs. 300,000 to
Rs. 380,000 as a result of a property (land) revaluation. At the start of that financial year, the company's
property had been valued at Rs. 810,000. Assuming that no property was disposed of during the year,
which of the following statements is true?
(a) The property's revalued amount was Rs.890, 000.
(b) The property's revalued amount was Rs.1, 190,000.
(c) The property's revalued amount was Rs.380, 000.
(d) The property's revalued amount was Rs.1,310,000

2 OBJECTIVE BASED ANSWERS

01. (b) & (d)
02. (c)
03. (a)
04. (b)
05. (c)
06. (d)
07. (b)
08. (b)
09. (b) Rs. 500 million x 10% = Rs. 50 million to be recognized in statement of changes in
equity.
10. (d) This dividend shall be recognized next year. This year the proposed dividend shall
be disclosed only.
11. (a) & (c)
12. (a) & (b)
13. (c)
14. (c)
15. (b)
16. Rs. 120 million Rs. 100 million +

Rs. 100 million / Rs. 100 x 1/5 x Rs. 100] = Rs. 120 million


19. Rs. Nil Rs. 100 million / Rs. 100 x 2/5 x Rs. 100] = Rs. 40 million shares issued
Rs. 30 million from share premium and remaining Rs. 10 million from retained
earnings.
20. Rs. 82 million Rs. 35 million + Rs. 20 million from revaluation surplus + Profit of Rs. 32 million –
Rs. 5 million dividends = Rs. 82 million
Proposed dividend shall be disclosed only.
21. (c)
22. (d)

23. (c)
24. (b)
25. (a)
26. (b)
27. (b)
28. (a)
29. (d)
30. (b)
31. (d)
32. (b)
33. (a)
34. (c)
35. (a)

CHAPTER
IAS 7: Statement of cash flows
Contents
1 Introduction
2 Cash flows from operating activities: The indirect method
3 Cash flows from operating activities: The direct method
4 Cash flows from investing activities
5 Cash flows from financing activities


01. Faria Limited is involved in the business of furniture. At 1 January 2018 the company’s issued share
capital consists of 50,000 Rs. 1 shares. During the year 2018 company has made a bonus issue of 1
for 5 shares.
What is impact of bonus issue on cash flows of the business?
(a) Decrease in cash flows from operating activities
(b) Increase in cash flows from financing activities
(c) No impact
(d) Increase in cash generated from operations
02. A company has incurred a loss of Rs. 40,000 during the year 2018; however, the balance in the bank
account at end of the year is more than the balance at start of the year.
What does this mean?
(a) Company has allowed a longer credit period to the credit customers
(b) Company has purchased more stock
(c) Company has made a right issue during the year
(d) Company has purchased fixed assets during the year
03. A company has provided the following information:

2018 2017
Rs. Rs.
Share capital 110,000 100,000
Share premium 30,000 40,000
A bonus issue of 1 for every 10 shares held has been made during the year.
What is the amount to be reported in cash flow from financing activities for the year 2018?
(a) Rs. 10,000 Inflow
(b) 0
(c) Rs. 10,000 outflow
(d) Cannot be determined
04. A company has provided following balances

Rs.
Non–current asset – 31 December 2018 125,000
Accumulated depreciation 1 January 2018 25,000
Accumulated depreciation 31 December 2018 38,000
During the year an asset having cost Rs. 10,000 was sold for Rs. 6,000 and gain on disposal was Rs.
3,000.
What is the charge for depreciation for the year to be adjusted in statement of cash flows?
(a) Rs. 13,000
(b) Rs. 19,000
(c) Rs. 20,000
(d) Rs. 38,000

Chapter 3: IAS 7: Statement of cash flows
05. A company has provided following information as at 31 March 2019:

2019 2018
Rs. Rs.
Retained earnings 50,000 38,000
Following adjustments were made during the year 2019:
Dividends paid Rs. 5,000
Transfer to general reserves Rs. 12,000
Tax charge Rs. 4,000
What is the amount of profit before tax for the year 2019 for the purposes of preparing statement of
cash flows?
(a) Rs. 29,000
(b) Rs. 33,000
(c) Rs. 24,000
(d) Rs. 25,000
06. A company has provided the following data:

Rs.
Receivables at 1 April 2018 12,000
Receivables at 31 March 2019 25,000
Credit sales during the year 75,000
Discount allowed during the year 3,000
What is the amount to be shown as cash received from customers in statement of cash flows using
direct method?
(a) Rs. 62,000
(b) Rs. 75,000
(c) Rs. 59,000
(d) Rs. 65,000
07. Which TWO of the following are considered as inflows in a company’s statement of cash flows?
(a) Bonus shares issued
(b) Decrease in accounts receivables
(c) Increase in inventory
(d) Increase in accounts payables
08. Which of the following item will appear in cash flows from financing activities section of statement of
cash flows?
(a) Cash paid to acquire non-current assets
(b) Dividends paid
(c) Bonus shares issued
(d) Depreciation for the year

09. Following data is available for a company for the year ended 31 December 2018:
Rs.
Operating profit before working capital changes 30,000
Increase in accounts receivables 5,000
Increase in inventory 3,000
Increase in accounts payable 2,000
Interest paid 500
What is the net cash generated from cash flows from operating activities for the year ended 31
December 2018?
(a) Rs. 23,500
(b) Rs. 24,500
(c) Rs. 29,500
(d) Rs. 19,500
10. Which of the following is an advantage of statement of cash flows?

(a) It determines the profitability of a business
(b) It helps users to estimate the future expected cash flows of the business
(c) It determines the ratio of business debts and equity
(d) It helps in determining the net assets of a business
11. A company has made following investments during the year:

Rs.
6 months Advance rent paid to landlord 30,000
Short term investments bond (highly liquid) 25,000
Debentures purchased- redeemable after 7 years 50,000
Non–current assets purchased 45,000
What is the amount to be shown in investing activities for the year?
(a) Rs. 45,000
(b) Rs. 150,000
(c) Rs. 95,000
(d) Rs. 100,000
12. A company has provided following data at the end of year 2017:
2017
Rs.
Share capital Rs. 1 each 100,000
Share premium 3,000
The company has made a right issue of 1 for 5 shares during the year 2018 at Rs. 1.2 per share.
What is the amount to be shown in the cash flows from financing activities?
(a) Rs. 24,000 outflow

(b) Rs. 24,000 inflow

(c) Rs. 20,000 inflow
(d) Rs. 4000 inflow
13. How should gain on sale of used equipment be reported in a cash flow statement, using indirect
approach?
(a) In operating activities as deduction from Profit before tax
(b) In investing activities as a reduction in cash inflow
(c) In investing activities as an increase in cash inflows
(d) In operating activities as addition to profit before tax
14. Which TWO of the following are added as non-cash adjustments to the profit before tax in the cash
flow from operating activities section of statement of cash flows?
(a) Interest expense
(b) Interest income
(c) Loss on sale of non–current assets
(d) Tax charge for the year
15. Where, in a company are financial statements complying with international accounting standards,
should you find the proceeds of non-current assets sold during the period?
(a) Statement of cash flows and statement of financial position
(b) Statement of changes in equity and statement of financial position
(c) Statement of profit or loss and statement of cash flows
(d) Statement of cash flows only
16. Zahid & Co. reported a profit Rs. 40,000 for the year, after charging the following:
Rs.
Depreciation 4,000
Loss on sale of assets 3,000
During the year there was a decrease in accounts receivables of Rs. 1,000.
What was the net cash flow generated from operations based on above data?
Rs. ___________
17. Asmat Limited made a profit for the year of Rs. 320,500, after accounting for depreciation Rs. 32,500.
During the year following transactions took place:
Rs.
Purchase of machinery 125,000
Increase in accounts receivables 45,000
Increase in inventory 28,000
What is the net increase in cash and bank balance during the year?
Rs. ___________

18. A company has provided following information:

Rs.
4% Loan notes 1,000,000
Interest payable 1 January 2018 10,000
Interest payable 31 December 2018 20,000
What is the amount to be reported as interest paid during the year 2018 in the Statement of Cash
Flows?
Rs. ___________
19. Furqan Limited has provided following information about non–current assets:
Rs.
Cost as at 1 January 2018 350,000
Cost as at 31 December 2018 450,000
During the year an asset costing Rs. 100,000 and having net book value of Rs. 40,000 was sold at a
profit of Rs. 30,000.
What is the net to be shown as outflow in the “Cash flow from investing activities” section in Statement
of Cash Flows?
Rs. ___________
20. The following amounts have been calculated for inclusion in the statement of cash flow of House
Limited:
Rs.
Net cash inflow from financing activities 145,000
Net cash outflow from investing activities 160,000
Increase in cash and cash equivalents 24,000
Income taxes paid 65,000
Interest paid 12,000
How much cash has been generated from operations?
Rs. ___________
21. A cash flow statement provides information that enables users to evaluate the changes in:
(a) Solvency
(b) Net assets
(c) Its financial structure
(d) Its liquidity
22. Daily sales and purchases and employee costs comprise:

(a) Operating activities
(b) Investing activities
(c) Financing activity
(d) Component of cash and cash equivalent

23. Which of the following involves a movement of cash?

(a) A rights issue
(b) Depreciation of fixed assets
(c) Creation of a provision for doubtful debts
(d) A bonus issue
24. Activities that result in changes in the size and composition of the equity capital and borrowings of an
entity are called:
(a) Operating activities
(b) Investing activities
(c) Financing activity
(d) None of these
25. Which of the following are not the operating activities?

(a) Interest paid
(b) Cash payments of income taxes
(c) Collections from customers
(d) Payment of dividends
26. Amplifier Limited had sales of Rs.120 million during the year. Trade and other receivables increased
from Rs.12 million to Rs.16 million, an increase of Rs. 4 million. What amount of cash was received
from customers during the year?
(a) Rs.124 million
(b) Rs.116 million
(c) Rs.120 million
(d) None of these
27. Cost of sales for Shah Textile Limited during the year was Rs.100 million. Opening inventory was
Rs.20 million and closing inventory was Rs. 28 million. Opening trade payables were Rs.5 million and
closing trade payables were Rs.9 million. What amount of cash was paid to suppliers?
(a) Rs.102 million
(b) Rs.104 million
(c) Rs.108 million
(d) Rs.110 million
28. Zaman Limited extracted general ledger from which it shows salaries and wages expense of Rs.50
million during the year. Its cash flow statement reported cash paid to employees of Rs.42 million. The
opening balance of accrued salaries and wages was Rs.3.6 million. What was the closing balance for
accrued salaries and wages?
(a) Rs.11.6 million
(b) Rs.11.8 million
(c) Rs.4.4 million
(d) Rs.3.8 million

29. Sale proceeds from disposal of property, plant and equipment are classified as:
(a) Financing activities
(b) Operating activities
(c) Investing activities
(d) Either financing or operating activities, depending on which method (direct or indirect) is used
to determine cash flows from operating activities
30. Which one of the following events will increase the cash balances of a business?
(a) Loan repayment to banks
(b) Bank granting it an overdraft facility
(c) Debtors paying amounts owed
(d) Sale of stock on credit
31. A company with healthy profits is facing a cash shortage. Which of the following events could account
for this?
(a) Delaying payments to creditors
(b) The shortening of the credit period granted to debtors
(c) The recent acquisition of machinery
(d) An increase in dividend proposed by the directors
32. Which one of the following companies is most likely to run into cash flow problems?
(a) A loss making company making components of vital strategic importance to the government
(b) A profitable new retailer about to embark on ambitious expansion plans
(c) A company which has recently sold part of its operations so as to concentrate on its core
areas
(d) Reasonably profitable, long established company with no expansion plans
33. What is the immediate effect of making a capital repayment on a loan on cash flow and profits?
(a) On profit - None; On cash – Decrease
(b) On profit - Increase; On cash – Decrease
(c) On profit - Decrease; On cash – Decrease
(d) On profit - Decrease; On cash – None
34. A company has a negative cash flow from operating activities. What could explain this negative cash
flow?
(a) High levels of dividend payments
(b) A substantial investment in new fixed assets
(c) A sudden increase in credit sales
(d) The repayment of a loan

35. Which of the following is NOT a cash outflow for the firm?
(a) Dividends
(b) Interest payments.
(c) Taxes
(d) Bad debts


01. (c) Bonus issue of shares involves transfer from Reserves to share capital of the company.
There is no cash flow involved.
02. (c) The statement indicates that the company had net cash receipts (inflows) despite the
losses, which is indicative of receipts of cash by issuing right shares.
03. (b) No cash is paid or received for bonus issue of share capital.
Entry to record bonus issue
Dr CR
Rs. Rs.
Share premium 10,000
Share capital 10,000
Share Capital + Share premium

b/d 100,000+40,000 140,000
c/d
110,000 + 30,000 140,000
140,0000 140,000
04. (c)
Accumulated depreciation
Particulars Rs... Particulars Rs.
Disposal (see below) 7,000 b/f 25,000
c/f 38,000 Depreciation 20,000
45,000 45,000
Disposal
Asset 10,000 Provision for dep. (bal) 7,000
Gain on disposal 3,000 Cash 6,000
13,000 13,000
05. (b)
Retained earnings
Dividends paid 5,000 b/f 38,000
Transfer to reserves 12,000 Profit for the year 29,000
c/f 50,000
67,000 67,000
Profit after tax 29,000 + Tax 4,000 = Rs. 33,000 profit before tax

06. (c)
Accounts receivables
b/f 12,000 Cash (bal.) 59,000
Sales 75,000 Discount allowed 3,000
c/f 25,000
87,000 87,000
07. (b) & (d) Decrease in accounts receivables indicates that they have paid the debt, hence, inflow for
us.
Increase in accounts payable indicates that we have not paid them, thus reducing outflows
(or increasing cash flows)
Bonus shares issued do not affect cash flows.
Increase in inventory is cash outflows.
08. (b) Dividend is paid to shareholders who provide finance to the business; therefore, it is treated
as financing activity.
Cash paid to acquire non-current assets is shown in investing activities.
Bonus issues have no impact on cash flows of the business.
Depreciation is non-cash item and is adjusted in operating activities.
09. (a)
Rs.
Increase in accounts receivables (5,000)
Increase in inventory (3,000)
Interest paid (500)
23,500
10. (b) Users of financial statements may predict future cash flows from past data of how the entity
generates and uses its cash.
Profitability is reflected in statement of comprehensive income.
Debt/Equity and net assets are reflected in statement of financial position.
11. (c) Only debentures and non – current assets purchased are included in investing activities;
Rs. 50,000+45,000= Rs. 95,000
Investment in short term bonds will be considered cash equivalent and advance rent would
affect operating activities cash flows.
12. (b) Shares issued = 100,000/5 = 20,000
Cash received = 20,000xRs.1.2= Rs. 24,000
13. (a) The gain on disposal in included in profit before tax as other income. This is deducted back
in order to determine the cash figure.
14. (a & c) Interest expense is added back as interest paid is separately reported.
Loss on disposal is added back as this is included in profit before tax as an expense.
Interest income is deducted back.
Tax charge need not be added back as already the amount taken is profit before tax.
15. (d)

16. Rs.
48,000
Rs.
Profit before tax 40,000
Adjustments for non-cash items
Depreciation 4,000
Loss on sale of fixed assets 3,000
Decrease in accounts receivables 1,000
Cash generated from operations 48,000
17. Rs.
167,600
Cash flows from operating activities Rs.
Profit before tax 320,500
Depreciation 32,500
Increase in accounts receivables (45,000)
Increase in inventory (28,000)
292,600
Cash flow from investing activities

Purchase of machinery (125,000)
167,600
18. Rs.
30,000
Interest payable
Particulars Rs. Particulars Rs.
Cash 30,000 b/f 10,000
c/f 20,000 Interest expense 40,000
50,000 50,000
Interest expense = Rs. 1,000,000x4%= Rs. 40,000
19. Rs.
130,000 Amounts to be shown in Cash flows from investing activities are;
Cash flows from investing activities Rs.
Cash paid to acquire assets (200,000)
Cash received on disposal 70,000
130,000

Non-current assets
b/f 350,000 Disposal 100,000
Cash 200,000 c/d 450,000
550,000 550,000
Disposal
Asset 100,000 Acc. Dep [10,000 – 4,000] 60,000
Gain on disposal 30,000 Cash 70,000
130,000 130,000
20. Rs.
116,000
Rs.
Cash generated from operations (β) 116,000
Interest paid (12,000)
Income taxes paid (65,000)
Net cash from operating activities (β) 39,000
Net cash outflow from investing activities (160,000)
Net cash inflow from financing activities 145,000
Increase in cash and cash equivalents 24,000
21. (d)
22. (a)
23. (a)
24. (c)
25. (d)
26. (b)
27. (b)
28. (a)
29. (c)
30. (c)
31. (c)
32. (b)
33. (a)
34. (c)
35. (d)

7
CHAPTER
IAS 16: Property, plant

and equipment
Contents
1 Revaluation
2 Disclosure requirements of IAS 16


01. An entity purchased a property 15 years ago at a cost of Rs. 100,000 and have been depreciating it at
a rate of 2% per annum, on the straight-line basis. The entity has had the property professionally
revalued at Rs. 500,000.
What is the revaluation surplus that will be recorded in the financial statements in respect of this
property?
(a) Rs. 400,000
(b) Rs. 500,000
(c) Rs. 530,000
(d) Rs. 430,000
02. An entity owns two buildings, A and B, which are currently recorded in the books at carrying amounts
of Rs. 170,000 and Rs. 330,000 respectively. Both buildings have recently been valued as follows:
Building A Rs. 400,000
Building B Rs. 250,000
The entity currently has a balance on the revaluation surplus of Rs. 50,000 which arose when building
A was revalued several years ago. Building B has not previously been revalued.
What double entry will need to be made to record the revaluations of buildings A and B?
(a) Dr Non-current assets Rs. 150,000

Dr Statement of profit or loss Rs. 80,000
Cr Other comprehensive income (revaluation surplus) Rs. 230,000
(b) Dr Non-current assets Rs. 150,000

(c) Dr Non-current assets Rs. 150,000

(d) Dr Non-current assets Rs. 150,000

03. An entity purchased property for Rs. 6 million on 1 July 2013. The land element of the purchase was
Rs. 1 million. The expected life of the building was 50 years and its residual value nil. On 30 June 2015
the property was revalued to Rs. 7 million, of which the land element was Rs. 1.24 million and the
buildings Rs. 5.76 million. On 30 June 2017, the property was sold for Rs. 6.8 million.
What is the gain on disposal of the property that would be reported in the statement of profit or loss for
the year to 30 June 2017?
(a) Gain Rs. 40,000
(b) Loss Rs. 200,000
(c) Gain Rs. 1,000,000
(d) Gain Rs. 1,240,000

Chapter 7: IAS 16: Property, plant and equipment
04. Which of the following statements are correct?

1. If the revaluation model is used for property, plant and equipment, revaluations must
subsequently be made with sufficient regularity to ensure that the carrying amount does not
differ materially from the fair value at each reporting date.
2. When an item of property, plant and equipment is revalued, there is no requirement that the
entire class of assets to which the item belongs must be revalued.
(a) Only statement 1 is correct
(b) Only statement 2 is correct
(c) Both statements are correct
(d) None of the statement is correct
05. The following trial balance extract relates to a property which is owned by Maira Limited as at 1 April
2014.
Dr Cr
Rs. 000 Rs. 000
Property at cost (20 year original life) 12,000
Accumulated depreciation as at 1 April 2014 3,600
On 1 October 2014, following a sustained increase in property prices, Maira Limited revalued its
property to Rs. 10.8 million.
What will be the depreciation charge in Maira Limited’s statement of comprehensive income for the year
ended 31 March 2015?
(a) Rs. 540,000
(b) Rs. 570,000
(c) Rs. 700,000
(d) Rs. 800,000
06. A company purchased a building on 1 April 2007 for Rs. 10,000,000. The asset had a useful economic
life at that date of 40 years. On 1 April 2009 the company revalued the building to its current fair value
of Rs. 12,000,000.
What is the double entry to record the revaluation?
(a) Dr. Building 1,500,000

Dr. Accumulated depreciation 500,000
Cr. Other comprehensive income 2,000,000
(b) Dr. Building 2,000,000

Cr. Profit or loss 2,500,000
(c) Dr. Building 2,000,000

Cr. Other comprehensive income 2,500,000

(d) Dr. Building 1,500,000

Cr. Profit or loss 2,000,000
07. The carrying value of property at the end of the year amounted to Rs. 108 million. On this date the
property was revalued and was deemed to have a fair value of Rs. 95 million. The balance on the
revaluation reserve relating to the original gain of the property was Rs. 10 million.
What is the double entry to record the revaluation?
(a) Dr. Profit or loss 3 million

Dr. Other comprehensive income 10 million
Cr. Property 13 million
(b) Dr. Profit or loss 10 million

(c) Dr. Profit or loss 13 million

(d) Dr. Profit or loss 13 million

08. A company revalued its property on 1 April 2009 to Rs. 20m (Rs. 8m for the land). The property originally
cost Rs. 10m (Rs. 2m for the land) 10 years ago. The original useful economic life of 40 years is
unchanged. The company’s policy is to make a transfer to realized profits in respect of excess
depreciation.
At which amount the property be presented at as at 31 March 2010?
(a) Rs. 20 million
(b) Rs. 19.6 million
(c) Rs. 12 million
(d) Rs. 11.6 million
09. A company revalued its property on 1 April 2009 to Rs. 20m (Rs. 8m for the land). The property originally
cost Rs. 10m (Rs. 2m for the land) 10 years ago. The original useful economic life of 40 years is
unchanged. The company’s policy is to make a transfer to realized profits in respect of excess
depreciation.
What is amount of balance in revaluation surplus account as at 31 March 2010?
(a) Rs. 12 million
(b) Rs. 10 million
(c) Rs. 9.8 million

10. Which of the following is an optional disclosure requirement of IAS 16?
(a) Measurement bases for determining gross carrying amount
(b) Depreciation method
(c) Useful lives or depreciation rates
(d) The carrying amount of temporarily idle PPE
11. Following information is available for equipment account of a business on 1st January 2018:
Opening balance of equipment, a/c (Revalued amount) Rs. 7,500,000
Surplus on revaluation of equipment a/c Rs. 2,000,000
At start of year company sold equipment for Rs. 90,000,000.
Company has a policy of charging 20% depreciation on straight line basis.
What will be treatment of revaluation surplus at disposal of asset?
(a) Dr Surplus on revaluation Rs. 2,000,000

Cr Retained earnings Rs. 2,000,000
(b) Dr Retained earnings Rs. 2,000,000,

Cr Surplus on revaluation Rs. 2,000,000
(c) Dr Surplus on revaluation Rs. 3,500,000

Cr Retained earnings Rs. 3,500,000
(d) Dr Surplus on revaluation Rs. 2,0000,000

Cr Equipment account Rs. 2,000,000
12. A non–current asset costing Rs. 216,000 and carrying value Rs. 145,000 is revalued to Rs. 291,000.
How should revaluation be recorded?
(a) Dr Asset a/c Rs. 75,000,

Cr Surplus on revaluation Rs. 75,000
(b) Dr Asset a/c Rs. 75,000,

Dr Accumulated Depreciation Rs. 71,000,
(c) Dr Surplus on revaluation Rs. 146,000,

Cr Asset a/c Rs. 75,000,
Cr Accumulated Depreciation Rs. 71,000
(d) Dr Accumulated depreciation Rs. 146,000,

13. When items of property, plant and equipment are stated at revalued amounts the following must be
disclosed:
(i) the effective date of the revaluation
(ii) whether an independent valuer was involved

(iii) the methods and significant assumptions applied in estimating the items’ fair values
(iv) the extent to which the items’ fair values were determined directly by reference to observable
prices in an active market or recent market transactions on arm’s length terms or were
estimated using other valuation techniques
(v) for each revalued class of property, plant and equipment, the carrying amount that would
have been recognised had the assets been carried under the cost model;
(vi) the revaluation surplus, indicating the change for the period and any restrictions on the
distribution of the balance to shareholders.
(a) (i), (ii) and (vi) only
(b) (i), (ii), (v) and (vi) only
(c) (i), (ii), (iii) and (iv) only
(d) (i) to (vi) all
14. IAS 16 encourages disclosure of the following information as users of financial statements might find it
to be useful.
(i) the carrying amount of temporarily idle property, plant and equipment
(ii) the gross carrying amount of any fully depreciated property, plant and equipment that is still
in use
(iii) the carrying amount of property, plant and equipment retired from active use and held for
disposal
(iv) when the cost model is used, the fair value of property, plant and equipment when this is
materially different from the carrying amount
(a) (i), (ii) and (iii) only
(b) (i), (ii) and (iv) only
(c) (i), (iii) and (iv) only
(d) (i) to (iv) all
15. Which of the following statements is correct?
(a) An entity may present PPE at gross carrying amount or net carrying amount under IAS 16
(b) Either useful lives or depreciation rates are to be disclosed, both are not required.
(c) Under revaluation model, PPE are revalued at end of each year
(d) If an entity chooses revaluation model, it must apply revaluation model to all of its PPE.
16. Waqas Limited purchased a machine for Rs. 30,000 on 1 January 2015 and assigned it a useful life of
12 years. On 31 March 2017 it was revalued to Rs. 32,000 with no change in useful life.
What will be depreciation charge in relation to this machine in the financial statements for the year
ending 31 December 2017?
Rs. ___________

17. A business purchased building costing Rs. 7,500,000 on 1 January 2018.

The policy of business is to charge straight line depreciation over its useful life of 20 years.
On 31 December 2020, building was revalued to Rs. 7,650,000.
What is the amount of incremental depreciation to be transferred to retained earnings at year ending 31
December 2021?
Rs. ___________
18. A business purchased an asset on 1 January 2016 costing Rs. 5,000,000 having a useful life of 10
years with nil residual value. On 1 January 2018 balance of accumulated depreciation was Rs.
1,000,000. Asset is revalued to Rs. 4,500,000 on 1 January 2018 (start of the year).
Business has a policy to charge straight line depreciation.
What is the depreciation charge for the year ended 31 December 2018?
Rs. ___________
What is the amount of revaluation surplus at the date of revaluation?
Rs. ___________
What is the amount of incremental depreciation for the year ended 31 December 2018?
Rs. ___________
21. A revaluation gain is credited into?
(a) Revaluation reserve
(b) Capital reserve
(c) Profit and loss
(d) Any of the above
22. After initial recognition, an entity has a choice to choose cost and?
(a) Realizable model
(b) Replacement model
(c) Revaluation model
(d) Carrying value model

23. When an item of property, plant and equipment is revalued, what should be revalued?
(a) A selection of assets decided by management
(b) The whole class of assets to which it belongs
(c) The individual asset
(d) A selection of assets picked at random
24. If an asset increases in value, the increase is noted as?
(a) An increase in net profit in the SOCI
(b) An increase in retained earnings in SOFP
(c) An increase in revaluation surplus in the SOFP and other comprehensive income in the SOCI
(d) An increase in “other profit” in SOCI
25. Which of the following is not a valid reason for reporting non-current assets at revaluation amount rather
than cost?
(a) To prevent long life assets from being reported at out of date historical costs
(b) To keep owners of the business better informed of their equity in the business.
(c) To report performance correctly by matching earnings with the proper costs of assets used.
(d) To avoid having to pay higher taxes
26. An entity has a policy of revaluing its PPE. An asset cost Rs.5m on 1 January 2020 and has a useful
life of five years and is depreciated on a straight-line basis to a zero residual value. The value of the
asset at 31 December 2020 was Rs.3.8m. The fall in value will be accounted for as follows?
(a) Depreciation Rs.1m and fall in value of Rs.200,000 both to the reserves
(b) Depreciation Rs.1m to the income statement and fall in value of Rs.200,000 ignored until there
is a revaluation surplus
(c) Depreciation Rs.1m to income statement and fall in value of Rs.200,000 to the reserves
(d) Depreciation Rs.1m and fall in value of Rs.200,000 both to the income statement
27. During the financial year, Akmal Ltd had the following increases in reserves:
i. Rs. 5 million from a revaluation of freehold premises
ii. Rs.10 million in share premium
iii. Rs.25 million from trading profit retained
Which of these are increases in capital reserves?
(a) i only
(b) ii only
(c) i. and ii. Only
(d) iii. only

28. The following gains may legally be withdrawn from the company by shareholders:
i. gains that arise from the upward revaluation of non-current assets
ii. gains that arise from the sale of non-current assets
What is the validity of each statement?
(a) Both i. and ii are true
(b) i. is true and ii. is false
(c) Both i. and ii are false
(d) ii. is true and i. is false
29. The financial statements of Saadi Limited for the most recent year indicated the following:
i. a bonus issue of shares
ii. a transfer of profit retained to retained earnings
iii. an increase in the revaluation reserve due non-current assets
iv. a rights issue of shares
Which of the above involved a movement of cash?
(a) i. and ii
(b) ii. and iii.
(c) iii only
(d) iv only
30. An apartment is revalued upwards by Rs. 1 million. It was acquired 5 years ago for Rs. 5 million. Its
useful life remains same as 10 years.
What is the revised depreciation charge for the year after revaluation?
(a) Rs. 500,000
(b) Rs. 600,000
(c) Rs. 700,000
(d) Rs. 800,000
31. A building is revalued upwards by Rs. 2 million. It was acquired five years ago for Rs.10 million. Its
useful life remains same as 20 years. What is the incremental depreciation charge for the year?
(a) Rs.100,000
(b) Rs.133,333
(c) Rs.166,667
(d) Rs.200,000

32. An IT equipment being carried at revaluation model has revaluation reserve balance of Rs. 50,000.
During the year, it reduces its value due to technological obsolescence. It has Rs. 70,000 decrease in
value. What would be the impact of this revaluation decrease?
(a) The decrease of Rs.50,000 is debited to revaluation reserve and Rs.20,000 to profit or loss for
the year
(b) The decrease of Rs.50,000 is debited to profit and loss account and Rs.20,000 to revaluation
reserve for the year
(c) The whole decrease is debited to revaluation reserve
(d) The whole decrease is debited to profit or loss for the year


01. (d) Rs.
Current value 500,000
Carrying amount
(100,000 – (100,000 × 2% × 15 yrs)) (70,000)
Revaluation gain 430,000
02. (a)
Building A Building B
Current value 400,000 250,000
Carrying amount (170,000) (330,000)
Revaluation gain/(loss) 230,000 (80,000)
The gain on Building A will be credited to other comprehensive income and the
revaluation surplus.
The loss on Building B will be debited to the statement of profit or loss expenses
because we do not have a balance on the revaluation surplus in respect of
building B to offset the loss.
We make an overall debit to non-current assets of Rs. 230,000 – Rs. 80,000 =
Rs. 150,000
03. (a) Land Buildings Total
Rs. Rs. m Rs. m
Cost 1 July 2013 1.00 5.00 6.00
Building depreciation
Rs. 5 million/50 years x 2 years (0.2) (0.2)
Carrying amount 30 June 2015 1.00 4.80 5.80
Revaluation gain 0.24 1.96 1.20
Revalued amount 1.24 5.76 7.00
Building depreciation
Rs. 5.76m/48 years x 2 years (0.24) (0.24)
Carrying amount 30 June 2017 1.24 5.52 6.76
Disposal proceeds 6.80
Gain on disposal 0.04
The gain on disposal is Rs. 40,000. The Rs. 1.2 million balance on the revaluation
reserve is transferred from the revaluation reserve to another reserve account
(probably retained earnings) but is not reported through the statement of profit or
loss for the year.
04. (a) IAS 16 (para 31) states that when the revaluation model is used, revaluations
should be made with sufficient regularity to ensure that the carrying value of the
assets remains close to fair value. IAS 16 also states (para 36) that, if one item
in a class of assets is revalued, all the assets in that class must be revalued.

05. (c) Six months’ depreciation to the date of the revaluation will be Rs. 300,000
(12,000/20 years × 6/12). Six months’ depreciation from the date of revaluation
to 31 March 2015 would be Rs. 400,000 (10,800/13.5 years remaining life × 6/12).
Total depreciation is Rs. 700,000.
06. (c) Building a/c

b/d 10,000,000 Acc. dep 500,000
Surplus 2,500,000 c/d 12,000,000
12,500,000 12,500,000
Building net debited by Rs. 2,000,000 (2,500,000 – 500,000)
07. (a) Total loss Rs. 13 million, Rs. 10 will be charged to revaluation surplus and
remaining to profit or loss.
08. (b) Depreciation (20 – 8) / 30 years = Rs. 0.4 million

Carrying amount Rs. 20 million less 0.4 million = Rs. 19.6 million
09. (c) Depreciation Now (20 – 8) / 30 years = Rs. 0.4 million

Depreciation Cost (10 – 2) / 40 years = Rs. 0.2 million
Revaluation surplus
= Land Rs. 6 million + Building Rs. 4 million - incremental depreciation 0.2 million
= Rs. 9.8 million
10. (d)
11. (a) On disposal of a revalued asset, the full balance of surplus on revaluation is
transferred to retained earnings.
12. (b) Accumulated depreciation = Rs. 216,000-Rs. 145,000=Rs. 71,000

Surplus = Rs. 291,000-Rs. 145,000=Rs. 146,000
Net amount debited to asset = Rs. 146,000-Rs. 71,000=Rs. 75,000
13. (d)
14. (d)
15. (b)
16. Rs. 3,087 The machine has been owned for 2 years 3 months, so the remaining useful life
at 31 March 2017 was 9 years 9 months.
Prior to revaluation it was being depreciated at Rs. 2,500 pa (30,000/12), so the
charge for the first three months of 2017 was Rs. 625.
The machine will now be depreciated over the remaining 9 years 9 months = 117
months. So the charge for the remaining 9 months of 2017 is Rs. 2,462 ((32,000
/ 117) × 9).
So total depreciation for the year ended 31.12.17 is (625 + 2,462) = Rs. 3,087
17. Rs. 75,000 Incremental depreciation = depreciation on revalued amount – depreciation at

cost
Dep. before revaluation = Rs. 7,500,000 / 20 years = Rs. 375,000
Dep. after revaluation = Rs. 7,650,000 / 17 years = Rs. 450,000
Incremental depreciation = Rs. 75,000

18. Rs. 562,500 Depreciation = Rs. 4,500,000/8= Rs. 562,500
19. Rs. 500,000 Revaluation surplus = Rs. 4,000,000 – 4,500,000= Rs. 500,000
20. Rs. 62,500 Incremental depreciation = Dep on revalued amount – Dep on cost
= (4,500,000/8)– (5,000,000/10)
=Rs. 562,500 – 500,000 = 62,500
Alternatively, Rs. 500,000 surplus / 8 years = Rs. 62,500
21. (a)
22. (c)
23. (b)
24. (c)
25. (d)
26. (d)
27. (c)
28. (d)
29. (d)
30. (c)
31. (b)
32. (a)

Certificate in accounting and Finance
8
CHAPTER
Non-current assets: sundry standards
Contents
1 IAS 20: Accounting for government grants and disclosure of
government assistance
2 IAS 23: Borrowing costs
3 IAS 40: Investment property

Chapter 8: Non-current assets: sundry standards

01. On 1 January 2021 Aim Limited (AL) received Rs. 1,000,000 from the local government on the condition
that they employ at least 150 persons each year for the next 4 years.
Due to an economic downturn and reduced consumer demand on 1 January 2022, AL no longer needed
to employ any more staff and the conditions of the grant required full repayment.
What should be recorded in the financial statements on 1 January 2022?
(a) Reduce deferred income balance by Rs. 750,000

(b) Reduce deferred income by Rs. 750,000 and recognize a loss of Rs. 250,000
(c) Reduce deferred income by Rs. 1,000,000
(d) Reduce deferred income by Rs. 1,000,000 and recognize a gain of Rs. 250,000
02. Which of the following are acceptable methods of accounting for a government grant relating to an asset
in accordance with IAS 20 Accounting for Government Grants and Disclosure of Government
Assistance?
(i) Set up the grant as deferred income
(ii) Credit the amount received to profit or loss
(iii) Deduct the grant from the carrying amount of the asset
(iv) Add the grant to the carrying amount of the asset
(a) (i) and (ii)

(b) (ii) and (iv)
(c) (i) and (iii)
(d) (iii) and (iv)
03. On 1 January 2019, Boom Limited (BL) received Rs. 2,000,000 from the local government on the
condition that they employ at least 200 staff each year for the next 4 years. On this date, it was virtually
certain that BL would meet these requirements.
However, on 1 January 2022, due to an economic downturn and reduced consumer demand, BL no
longer needed to employ 100 staff. The conditions of the grant required half repayment.
What should be recorded in the financial statements on 1 January 2022 for repayment of grant?
(a) Debit Deferred grant by Rs. 500,000 and PL by Rs. 500,000

(b) Debit Deferred grant by Rs. 250,000 and PL by Rs. 250,000
(c) Debit Deferred grant by Rs. 1,500,000 and PL by Rs. 500,000
(d) Debit Deferred grant by Rs. 500,000 and PL by Rs. 1,500,000
04. Which TWO of the following statements about IAS 20 Accounting for Government Grants and
Disclosure of Government Assistance are true?
(a) A government grant related to the purchase of an asset must be deducted from the carrying
amount of the asset in the statement of financial position.
(b) A government grant related to the purchase of an asset should be recognised in profit or loss
over the life of the asset.

(c) Free marketing advice provided by a government department is excluded from the definition of
government grants.
(d) Any required repayment of a government grant received in an earlier reporting period is treated
as prior period adjustment.
05. Which TWO of the statements below regarding IAS 23 Borrowing Costs are correct?
(a) Borrowing costs must be capitalised if they are directly attributable to qualifying assets
(b) Borrowing costs should cease to be capitalised once the related asset is substantially complete
(c) Borrowing costs must be capitalised if they are directly attributable to non-current assets
(d) Borrowing costs may be capitalised if they are directly attributable to qualifying assets
06. Fine Limited (FL) received a Rs.10 million loan at 7.5% on 1 April 2017. The loan was specifically issued
to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on 28
February 2018 but did not open for trading until 1 April 2018.
How much should be recorded as finance costs in the statement of profit or loss for the year ended 31
March 2018?
(a) Rs. 250,000

(b) Rs. 750,000
(c) Rs. 125,000
(d) Rs. 625,000
07. Fine Limited (FL) received a Rs.10 million loan at 7.5% on 1 April 2017. The loan was specifically issued
to finance the building of a new store.
Construction of the store commenced on 1 May 2017 and it was completed and ready for use on 28
February 2018 but did not open for trading until 1 April 2018.
How much interest should be capitalised as part of property, plant and equipment as at 31 March 2018?
(a) Rs. 250,000

(b) Rs. 750,000
(c) Rs. 125,000
(d) Rs. 625,000
08. An entity decided that not all of the funds raised were needed immediately and temporarily invested
some of the funds for one month before the construction started, earning Rs.40, 000 interest.
How should the Rs. 40,000 be accounted for in the financial statements?
(a) Net off the amount capitalised in property, plant and equipment
(b) Taken to the statement of profit or loss as investment income
(c) Taken as other comprehensive income
(d) Deducted from the outstanding loan amount in the statement of financial position

09. Shine Limited (SL) had the following bank loans outstanding during the whole of 2018:
Rs. m
9% loan repayable 2019 15
11% loan repayable 2022 24
SL began construction of a qualifying asset on 1 April 2018 and withdrew funds of Rs. 6 million on that
date to fund construction. On 1 August 2018 an additional Rs. 2 million was withdrawn for the same
purpose.
Calculate the borrowing costs which can be capitalised in respect of this project for the year ended 31
December 2018.
(a) Rs. 545,600

(b) Rs. 472,350
(c) Rs. 750,600
(d) Rs. 350,350
10. Jazz Limited (JL) has borrowed Rs. 24 million to finance the building of a factory. Construction is
expected to take two years.
The loan was drawn down and incurred on 1 January 2019 and work began on 1 March 2019. Rs. 10
million of the loan was not utilized until 1 July 2019 so JL was able to invest it until needed. JL is paying
8% on the loan and can invest surplus funds at 6%.
Calculate the borrowing costs to be capitalised for the year ended 31 December 2019 in respect of this
project.
(a) Rs. 1,400,000

(b) Rs. 1,920,000
(c) Rs. 1,300,000
(d) Rs. 1,620,000
11. A company has the following loans in place throughout the year ended 31 December 2018.
Rs. m
10% bank loan 140
8% bank loan 200
On 1 July 2018 Rs. 50 million was drawn down for construction of a qualifying asset which was
completed during 2019.
What amount should be capitalised as borrowing costs at 31 December 2018 in respect of this asset?
(a) Rs. 5.6 million

(b) Rs. 2.8 million
(c) Rs. 4.4 million
(d) Rs. 2.2 million

12. An entity purchased an investment property on 1 January 2013 for a cost of Rs. 35m. The property had
an estimated useful life of 50 years, with no residual value, and at 31 December 2015 had a fair value
of Rs. 42m.
On 1 January 2016 the property was sold for net proceeds of Rs. 40m.
Calculate the profit or (loss) on disposal under both the cost and fair value (FV) model.
(a) Cost model: Rs. 7.1 m and FV model: (Rs. 2.0 m)

(b) Cost model: Rs. 2.0 m and FV model: Rs. 2.0 m
(c) Cost model: Rs. 5.0 m and FV model: (Rs. 2.0 m)
(d) Cost model: Rs. 7.1 m and FV model: Rs. 5.0 m
13. An investment property with a useful life of 10 years was purchased by Akram Limited on 1 January
2019 for Rs. 200 million. By 31 December 2019 the fair value of the property had risen to Rs. 300
million. Akram Limited measures its investment properties under the fair value model.
What values would go through the statement of profit or loss in the year?
(a) Gain: Rs. 100 million and Depreciation Rs. 30 million

(b) Gain: Rs. 0 and Depreciation of Rs. 30 million
(c) Gain: Rs. 100 million and Depreciation of 0
(d) Gain: Rs. 120 million and Depreciation of Rs. 20 million
14. Which of the following properties owned by an entity would be classified as an investment property?
(a) A property that had been leased to a tenant, but which is no longer required and is now being
held for resale
(b) Land purchased for its investment potential. Planning permission has not been obtained for
building construction of any kind
(c) A new office building used as entity’s head office, purchased specifically in order to exploit its
capital gains potential
(d) A bungalow used for executive training
15. Sarfraz Limited (SL) uses fair value accounting where possible and has an office building used by SL
for administrative purposes. At 1 April 2012 it had a carrying amount of Rs. 20 million and a remaining
life of 20 years. On 1 October 2012, the property was let to a third party and reclassified as an
investment property. The property had a fair value of Rs. 23 million at 1 October 2012, and Rs. 23.4
million at 31 March 2013.
What is the correct treatment when the above property is reclassified as an investment property?
(a) Take Rs. 3,500,000 gain to other comprehensive income

(b) Take Rs. 3,500,000 gain to the statement of profit or loss
(c) Take Rs. 4,000,000 gain to other comprehensive income
(d) Take Rs. 4,000,000 gain to the statement of profit or loss

16. A manufacturing entity receives a grant of Rs. 1,000,000 towards the purchase of a machine on 1
January 2013. The grant will be repayable if the entity sells the asset within 4 years, which it does not
intend to do. The asset has a useful life of 5 years.
What is the deferred income liability balance at 30 June 2013?
Rs. ___________
17. A company receives a government grant of Rs. 500,000 on 1 April 2017 to facilitate purchase on the
same day of an asset which costs Rs. 750,000. The asset has a five-year useful life and is depreciated
on a 30% reducing balance basis. Company policy is to account for all grants received as deferred
income.
What amount of income will be recognized in respect of the grant in the year to 31 March 2019?
Rs. ___________
18. A manufacturing entity is entitled to a grant of Rs. 3 million for creating 50 jobs and maintaining them
for three years. Rs. 1.5m is received when the jobs are created and the remaining Rs. 1.5m is receivable
after three years, provided that the 50 jobs are still in existence. The entity creates 50 jobs at the
beginning of year one and there is reasonable assurance that this level of employment will be
maintained.
What is the deferred income balance at the end of the first year?
Rs. ___________
19. An entity uses funds from its general borrowings to build a new production facility. Details of the entity's
borrowings are shown below:
Rs.10 million 6% loan
Rs.6 million 8% loan
The entity used Rs.12 million of these funds to construct the facility, which was under construction for
the entire year.
How much interest should be capitalised as part of the cost of the asset?
Rs. ___________
20. Cool Limited acquired a building with a 40-year life for its investment potential for Rs. 8 million on 1
January 2013. At 31 December 2013, the fair value of the property was estimated at Rs. 9 million with
costs to sell estimated at Rs. 200,000.
If Cool Limited uses the fair value model for investment properties, what gain should be recorded in the
statement of profit or loss for the year ended 31 December 2013?
Rs. ___________
21. If a government grant must be repaid, then it is;

(a) An error
(b) A change in accounting policy
(c) A change in accounting estimate
(d) A new transaction

22. If an entity receives a non-monetary asset as a grant, this is accounted for at the;
(a) Market value
(b) Fair value
(c) Net realizable value
(d) Present value
23. Which of the following is not covered by IAS 20 – Government Grants?

(a) Tax breaks
(b) Employment grants
(c) Subsidized loans
(d) Forgivable loans
24. Which of the following is not a correct treatment of government grants related to an asset?
(a) Deferred income
(b) Credit to income in period received
(c) Deducting the grant from the carrying amount of the asset
25. Which of the following is not a correct treatment of government grants related to income?
(a) Present as. Other income
(b) Deduct from the related expense
(c) Deduct from the cost of the asset
26. Which of the following is not considered a “borrowing cost” under IAS 23?
(a) Interest expense calculated by the effective interest method
(b) Finance charges in respect of loan
(c) Exchange differences arising from foreign currency borrowings to the extent that they are
regarded as an adjustment to interest costs
(d) Principal repayments on a loan for property, plant and equipment
27. When activities to prepare an asset for its sale or use are suspended, borrowing costs must be?
(a) Capitalized
(b) Expensed
(c) Ignored
(d) Charged to equity

28. Which of the following is not a condition to commence capitalisation of borrowing costs?
(a) Expenditures are being incurred
(b) Borrowing costs are being incurred
(c) Repayment of borrowings has commenced
(d) Activities to produce the asset for its intended use or sale have commenced
29. Ghazi Limited (GL) is constructing an office building and is capitalising borrowing costs in accordance
with IAS 23. The office is almost complete; the only remaining work is to install furniture. Is GL allowed
to continue capitalising the borrowing costs?
(a) Yes
(b) No
(c) Don’t know
30. Which of the following is not a “qualifying asset” under IAS 23?
(a) Mass produced inventory
(b) Manufacturing plants
(c) Made to order inventory
(d) Investment property
31. Under IAS 40 – Investment Property, where should a gain or loss on disposal be recognized?
(a) Statement of Financial Position
(b) Profit and loss statement
(c) Statement of changes in equity
(d) None
32. If an entity uses part of a building for their own use, and rents the remainder. How should this be treated?
(a) All as investment property under IAS 40 – Investment Property
(b) All under IAS 16 – Property, Plant and Equipment
(c) Account for separately under ‘IAS - 16 Property, Plant and Equipment’ and ‘IAS - 40 Investment
Property’
(d) None of these
33. An investment property should initially be measured at?

(a) Cost
(b) Fair value
(c) Market value
(d) Net realizable value

34. If an entity wishes to change from a cost model to fair value model under IAS 40 – Investment Property,
when may it do so?
(a) When the board of directors approves a change
(b) When the value of the assets will improve with a revised model
(c) When a change will result in a more appropriate presentation
(d) When the market for these properties is fluctuation
35. Which two of the following properties fall under the definition of investment property and therefore within
the scope of IAS 40?
(a) Property occupied by an employee paying market rent
(b) A building owned by an entity and leased out under an operating lease
(c) Property being constructed on behalf of 3rd parties
(d) Land held for long term appreciation


01. (b) This is a grant related to income and would therefore be released to the statement of
profit or loss over the 4 year life. By the end of year one, Rs. 250,000 would have
been credited to the statement of profit or loss, leaving Rs. 750,000 held in deferred
income. At this point the amount is repaid, meaning that the deferred income is
removed, as well as the Rs. 250,000 income previously recorded.
02. (c) The grant can be treated as deferred income or deducted from the carrying amount
of the asset. It cannot be credited directly to profit or loss.
03. (a) Half repayment is Rs. 1,000,000 (Rs. 2,000,000 x 50%)

At the date of repayment, the balance in deferred grant would be Rs. 500,000 and
additional Rs. 500,000 shall be charged to profit or loss.
04. (b, c) Item a is incorrect as the deferred income method can be used.
Item d is incorrect as any repayment is corrected in the current period, not
retrospectively.
05. (a, b) Borrowing costs must be capitalised if they are directly attributable to qualifying
assets, which are assets that take a substantial time to complete. Capitalization
should cease once substantially all the activities to prepare the asset are complete.
06. (c) Rs. 10 million x 7.5% x 2/12 = Rs. 125,000
07. (d) Rs. 10 million x 7.5% x 10/12 = Rs. 125,000
08. (b) Temporary investment income earned during the construction period should be
netted off the amount capitalised.
However, the interest was earned prior to the period of construction. Therefore the
investment income earned should be taken to the statement of profit or loss as
investment income.
09. (a) (9% × 15𝑚) + (11% × 24𝑚)

𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 10.23%
15 + 24
Rs. 6m × 10.23% × 9/12 = Rs.460,350
Rs. 2m × 10.23% × 5/12 = Rs. 85,250
Total Rs. 545,600
10. (a) Rs.
March – December (Rs. 24m × 8% × 10/ 12) 1,600,000
Less investment income (Rs. 10m × 6% × 4/12) (200,000)
1,400,000
Temporary investment income before commencement would be recognized as

finance income in profit or loss.

11. (d) (10% × 140𝑚) + (8% × 200𝑚)

𝐶𝑎𝑝𝑖𝑡𝑎𝑙𝑖𝑠𝑎𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑒 = = 8.8%
140 + 200
Rs. 50 million × 8.8% × 6/12 = Rs. 2.2 million
12. (a) Under the cost model the property will be depreciated over 50 years for 3 years up to
the date of disposal. Therefore, at the disposal date the carrying value would have
been Rs. 35m – (Rs. 35m/50 × 3 years) = Rs. 32.9m and the profit on disposal Rs.
7.1m (Rs. 40m – Rs. 32.9).
Under the fair value model the property will not be depreciated hence the loss on
disposal would be Rs. 2m (Rs. 40m – Rs. 42m).
13. (c) Under the fair value model the property will not be depreciated hence the gain on
valuation would be Rs. 100 million (Rs. 300 million – Rs. 200 million).
14. (b) Asset A would be classed as a non-current asset held for sale under IFRS 5. Assets
C and D would both be classified as property, plant and equipment under IAS 16.
15. (a) As SL uses the fair value model for investment properties, the asset should be
revalued to fair value before being classed as an investment property. The gain on
revaluation should be taken to other comprehensive income, as the asset is being
revalued while held as property, plant and equipment.
At 1 October, the carrying amount of the asset is Rs. 19.5 million, being Rs. 20 million
less 6 months’ depreciation. As the fair value at 1 October is Rs. 23 million, this leads
to a Rs. 3,500,000 gain which will be recorded in other comprehensive income.
16. Rs. 900,000 The grant should be released over the useful life, not based on the possibility of the
item being repaid. Therefore, the Rs. 1m should be released over 5 years, being a
release of Rs. 200,000 a year. At 30 June 2013, 6 months should be released,
meaning Rs. 100,000 has been released (6/12 × Rs. 200,000). This leaves Rs.
900,000 in deferred income.
17. Rs. 105,000
Rs.
Grant received 1.4.17 500,000
Recognized year to 31.3.18 (500,000 × 30%) (150,000)
Balance 31.3.18 350,000
Recognized year to 31.3.19 (350,000 × 30%) 105,000
18. Rs. 500,000 The total grant income is Rs. 3m, to be recognized over a three-year period. Annual
income is therefore Rs. 1m. At the end of the first year the entity has received Rs.
1.5m of which Rs. 1m has been recognized in the statement of profit or loss, leaving
Rs. 500,000 deferred into future periods.
19. Rs. 810,000 Rs.12m × 6.75% = Rs. 810,000

Capitalisation rate
= ((Rs.10m × 6%) + (Rs.6m × 8%))/Rs.16m = 6.75%.

20. Rs. The fair value gain of Rs. 1 million (Rs. 9m – Rs. 8m) should be taken to the statement
1,000,000 of profit or loss. Costs to sell are ignored and, since entity uses the fair value model,
no depreciation will be charged on the building.
21. (c)
22. (b)
23. (a)
24. (b)
25. (c)
26. (d)
27. (b)
28. (c)
29. (b)
30. (a)
31. (b)
32. (c)
33. (a)
34. (c)
35. (b) & (d)

9
CHAPTER
IAS 36: Impairment of assets
Contents
1 Impairment of assets

Chapter 9: IAS 36: Impairment of assets

01. If the fair value less costs to sell cannot be determined
(a) The asset is not impaired.
(b) The recoverable amount is the value-in-use.
(c) The net realizable value is used.
(d) The carrying value of the asset remains the same.
02. Which TWO of the following could be an indication that an asset may be impaired according to IAS 36
Impairment of Assets?
(a) Decrease in market interest rates
(b) Increase in market values for the asset
(c) Damage caused to the asset
(d) Management intention to reorganise the business
03. IAS 36 Impairment of Assets contains a number of examples of internal and external events which
may indicate the impairment of an asset.
In accordance with IAS 36, which of the following would definitely NOT be an indicator of the potential
impairment of an asset (or group of assets)?
(a) An unexpected fall in the market value of one or more assets
(b) Adverse changes in the economic performance of one or more assets
(c) A significant change in the technological environment in which an asset is employed making
its software effectively obsolete
(d) The carrying amount of an entity’s net assets being below the entity’s market capitalisation
04. A fire at the factory on 1 October 2016 damaged the machine, leaving it with a lower operating
capacity. The accountant considers that entity will need to recognise an impairment loss in relation to
this damage. The accountant has ascertained the following information at 1 October 2016:
 The carrying amount of the machine is Rs.60,750.
 An equivalent new machine would cost Rs.90,000.
 The machine could be sold in its current condition for a gross amount of Rs.45,000.
Dismantling costs would amount to Rs.2,000.
 In its current condition, the machine could operate for three more years which gives it a value
in use figure of Rs.38,685.
What is the total impairment loss associated with the above machine at 1 October 2016?
(a) Rs.nil
(b) Rs.17,750
(c) Rs.22,065
(d) Rs.15,750

05. Which of the following is NOT an indicator of impairment?
(a) Advances in the technological environment in which an asset is employed have an adverse
impact on its future use.
(b) An increase in interest rates which increases the discount rate an entity uses.
(c) The carrying amount of an entity’s net assets is higher than the entity’s number of shares in
issue multiplied by its share price.
(d) The estimated net realisable value of inventory has been reduced due to fire damage
although this value is greater than its carrying amount.
06. Cost of disposal are
(a) Incremental costs, directly attributable to the disposal of an asset, excluding finance costs and
income tax expense
(b) Incremental costs, directly attributable to the disposal of an asset, plus finance costs, but
excluding income tax expense
(c) Incremental costs, directly attributable to the disposal of an asset, plus finance costs and
income tax expense
(d) Incremental costs, directly attributable to the disposal of an asset, plus tax expense, but
excluding finance costs
07. An asset is impaired if:
(a) Its carrying amount equals the amount to be recovered through use (or sale) of the asset
(b) Its carrying amount exceeds the amount to be recovered through use (or sale) of the asset
(c) The amount to be recovered through use (or sale) of the asset exceeds its carrying amount
(d) If it has been damaged
08. Value in use is:
(a) The market value
(b) The discounted present value of future cash flows arising from use of the asset and from its
disposal.
(c) The higher of an asset’s fair value less cost to sell and its market value.
(d) The amount at which an asset is recognized in the statement of financial position.
09. IAS 36 applied to which of the following assets:
(a) Inventories.
(b) Financial assets including property plant and equipment and intangible assets
(c) Assets held for sale.
(d) Property, plant, and equipment and intangible assets

10. In accordance with IAS 36 Impairment of Assets which of the following statements are true?
1. An impairment review must be carried out annually on all intangible assets.
2. If the fair value less costs to sell of an asset exceed the carrying amount there is no need to
calculate a value in use.
3. Impairment is charged to the statement of profit or loss unless it reverses a gain that has been
recognised in equity in which case it is offset against the revaluation surplus.
(a) All three
(b) 1 and 2 only
(c) 1 and 3 only
(d) 2 & 3 only
11. What is the recoverable amount of an asset?
(a) Its current market value less costs of disposal
(b) The lower of carrying amount and value in use
(c) The higher of fair value less costs of disposal and value in use
(d) The higher of carrying amount and market value
12. A machine has a carrying amount of Rs. 850,000 at the year end of 31 March 2019. Its market value
is Rs. 780,000 and costs of disposal are estimated at Rs. 25,000. A new machine would cost Rs.
1,500,000. The company which owns the machine expects it to produce net cash flows of Rs. 300,000
per annum for the next three years. The company has a cost of capital of 8%.
What is the impairment loss on the machine to be recognised in the financial statements at 31 March
2019?
(a) Rs. 76,870
(b) Rs. 95,000
(c) Rs. 1,66,700
(d) Rs. 220,000
13. IAS 36 Impairment of Assets suggests how indications of impairment might be recognised.
Which TWO of the following would be external indicators that one or more of an entity's assets may
be impaired?
(a) An unusually significant fall in the market value of one or more assets
(b) Evidence of obsolescence of one or more assets
(c) A decline in the economic performance of one or more assets
(d) An increase in market interest rates used to calculate value in use of the assets

14. The following information relates to an item of plant.

 Its carrying amount in the statement of the financial position is Rs. 3 million.
 The company has received an offer of Rs. 2.7 million from a company in Karachi interested in
buying the plant.
 The present value of the estimated cash flows from continued use of the plant is Rs. 2.6
million.
 The estimated cost of transport the plant to Karachi is Rs. 50,000.
What is the amount of the impairment loss that should be recognised on the plant?
(a) Rs. 300,000
(b) Rs. 400,000
(c) Rs. 350,000
(d) Rs. 250,000
15. When calculating the estimates of the future cash flows, which of the following cash flows should not
be included?
(a) Cash flows from disposal.
(b) Income tax payments.
(c) Cash flows from the sale of assets produced by the asset.
(d) Cash outflows on the maintenance of the asset.
16. The following information relates to three assets held by a company:

Asset A Asset B Asset C
Rs. m Rs. m Rs. m
Carrying amount 200 100 80
Value in use 160 120 70
Fair value less cost to sell 180 130 60
What is the total impairment loss?
Rs. ___________
17. The following information relates to four assets held by the company:
A B C D
Rs.m Rs.m Rs.m Rs.m
Carrying amount 240 60 80 140
Value in use 160 140 160 40
Fair value less costs to sell 180 80 140 60
What is the total impairment loss?
Rs. ___________

18. A vehicle was involved in an accident exactly halfway through the year. The vehicle cost Rs. 10 million
and had a remaining life of 10 years at the start of the year. Following the accident, the expected present
value of cash flows associated with the vehicle was Rs. 3.4 million and the fair value less costs to sell
was Rs. 6.5 million.
What is the recoverable amount of the vehicle following the accident?
Rs. ___________
19. Radium Limited (RL) acquired a non-current asset on 1 October 2019 at a cost of Rs. 100 million which
had a useful life of ten years and a nil residual value. The asset had been correctly depreciated up to
30 September 2024.
At that date the asset was damaged and an impairment review was performed. On 30 September 2024,
the fair value of the asset less costs to sell was Rs. 30 million and the expected future cash flows were
Rs. 8.5 million per annum for the next five years.
The current cost of capital is 10% and a five year annuity of Rs. 1 per annum at 10% would have a
present value of Rs. 3.79.
What amount would be charged to profit or loss for the impairment of this asset for the year ended 30
September 2024?
Rs. ___________
20. Metal Limited (ML) owns an item of plant which has a carrying amount of Rs. 248 million as at 1 April
2013. It is being depreciated at 12.5% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a slow decline in sales.
ML has estimated that the plant will be retired from use on 31 March 2017.
The estimated net cash flows from the use of the plant and their present values are:
Net cash flows Present values
Rs.000 Rs.000
Year to 31 March 2015 120,000 109,200
Year to 31 March 2016 80,000 66,400
Year to 31 March 2017 52,000 39,000
252,000 214,600
On 1 April 2014, Metric had an offer from a rival to purchase the plant for Rs. 200 million
At what value should the plant appear in Metric’s statement of financial position as at 31 March 2014?
Rs. ___________
21. Which of the following is covered by IAS 36 – Impairment?
(a) Non-current assets held for sale
(b) Investment property carried at cost
(c) Investment property carried at fair value
(d) Inventories

22. Which of the following is not covered by IAS 36 – Impairment?
(a) Goodwill
(b) Investment property carried at cost
(c) Investment property carried at fair value
(d) Intangible assets
23. When should an impairment loss be recognised?
(a) Immediately
(b) Over a number of accounting periods
(c) At management’s discretion
(d) When requested by the entity’s auditors
24. Value in use is?
(a) The undiscounted present value of future cash flows expected to arise from continuing use of
asset, and from its disposal at the end of its useful life.
(b) The undiscounted future value of present cash flows expected to arise from continuing use of
(c) The discounted present value of future cash flows expected to arise from continuing use of
(d) The discounted present value of historical cash flows expected to arise from continuing use of
25. Which of the following element is not considered while computing value in use?
(a) expectations about possible variations in the amount or timing of those future cash flows
(b) the time value of money, represented by the current market risk-free rate of interest
(c) the price for bearing the uncertainty inherent in the asset
(d) estimated future restructuring cost
26. In measuring value in use, the discount rate used for discounting the cash flows should be the?
(a) Pre-tax rate that reflects the market assessment of time value of money and risks specific to
the asset
(b) Pre-tax rate that reflects the market assessment of time value of money and risks specific to
the entity’s competitors
(c) Post-tax rate that reflects the entity’s assessment of time value of money and risks specific to
the asset
(d) Pre-tax rate that reflects the entity’s assessment of time value of money and risks specific to
the asset

27. When the recoverable amount of an asset is less than its carrying value in the Statement of Financial
Position, the asset is?
(a) in a revaluation deficit
(b) Flawed
(c) In negative equity
(d) Impaired
28. Which of the following is an internal indication of impairment?
(a) Decline in market value
(b) Worse economic performance than expected
(c) Increase in market interest rates
(d) Technological obsolescence
29. Which of the following is an external indication of impairment?
(a) Physical damage
(b) Worse economic performance than expected
(c) Increase in market interest rates
(d) Asset is part of a restructuring program
30. Under IAS 36, what is the recoverable amount of an asset?
(a) The lower of its cost and net realisable value
(b) The higher of fair value less costs of disposal and value in use
(c) The lower of net present value and cost
(d) The higher of net present value and cost
31. Which of the following is not permitted as a cost to sell under IAS 36?
(a) Cost to dismantle machine
(b) Auctioneers fees
(c) Standard wages for employees
(d) Transport costs for machine

32. If the fair value less costs to sell for an asset cannot be determined, then recoverable amount is its?
(a) Market value
(b) Fair value
(c) Value in use
(d) Replacement value
33. Which of the following is the best evidence of an asset's fair value less costs to sell?
(a) The carrying value of the asset
(b) The price in a binding sale agreement
(c) The disposal value of the asset in an arm`s length transaction
(d) An asset that is traded in an active market
34. When calculating the estimates of future cash flows which of the following cash flows should not be
included?
(a) Cash out flows on the maintenance of the asset
(b) Cash flows from disposal
(c) Cash flows from the sale of inventory produced by the asset
(d) Benefits from future restructuring


01. (b) The recoverable amount is higher of value in use and fair value less cost to sell
and in case fair value cannot be measured reliably, the recoverable amount is
value in use.
02. (c) & (d) A decrease in interest rates would reduce the discount applied to future cash
flows in calculating the value in use, therefore increasing the value in use. An
increase in market values will lead to the asset value increasing rather than
being impaired.
03. (d) The entity’s market capitalisation would not be reflected within the values on the
statement of financial position.
04. (b) Value in use of Rs.38,685 is lower than fair value less costs to sell of Rs.43,000,
so recoverable amount is Rs.43,000 and impairment is Rs.60,750 – Rs.43,000
= Rs.17,750.
05. (d) Although the estimated net realisable value is lower than it was (due to fire
damage), the entity will still make a profit on the inventory and thus it is not an
indicator of impairment.
06. (a) Tax and finance costs are not cost of disposal.
07. (b) Asset may not be impaired even after damage. Impairment loss is excess of
carrying amount over recoverable amount.
08. (b) This is definition of value in use
09. (d) (a), (b) and (c) are excluded from scope of IAS 36 as the prudence mechanism
is already incorporated in the relevant standards of these items.
10. (d) Item 1 is untrue. An annual impairment review is only required for intangible
assets with an indefinite life.
11. (c) The higher of fair value less costs of disposal and value in use.
12. (a)
Fair value – costs of disposal

(780,000 – 25,000) Rs. 75,500
Value in use:
300,000 × 1 / 1.08 277,780
300,000 × 1 / 1.082 257,200
300,000 × 1 / 1.083 238,150
Rs. 773,130
Recoverable amount is Rs. 773,130 and carrying amount is Rs. 850,000, so

impairment is Rs. 76,870.

13. (a & d) The other options are internal indicators of impairment.
14. (c)
Rs.
Fair value less costs of disposal (2.7m – 50,000) 2,650,000
Value in use 2,600,000
Recoverable amount is therefore: 2,650,000
Impairment loss (balancing figure) 350,000
Carrying amount 3,000,000
15. (b) Cash flows related to taxations are ignored while calculating value in use.
16. Rs. 30 million 20 + Nil + 10 = Rs. 30 million
17. Rs. 140 million 60 + Nil + Nil +80 = Rs. 140 million
18. Rs. 6.5 million The recoverable amount of an asset is the higher of its value in use (being the
present value of future cash flows) and fair value less costs to sell. Therefore
the recoverable amount is Rs. 6.5 million.
19. Rs. 17.785

million Rs. m
Cost 1 October 2019 100
Depreciation (100 /10 x 5 years) (50)
Carrying amount 50
The recoverable amount is the higher of fair value less costs to sell (Rs. 30
million) and the value in use (Rs. 8.,5 x 3.79 = Rs. 32.215). Recoverable
amount is therefore Rs. 32.215.
Rs. m
Carrying amount 50
Recoverable amount (32.215)
Impairment to statement of profit or loss 17.785
20. Rs. Is the lower of its carrying amount (Rs. 217 million) and recoverable amount
214,600,000 (Rs. 214.6 million) at 31 March 2015.
Recoverable amount is the higher of value in use (Rs. 214.6 million) and fair
value less costs to (Rs. 200 million).
Carrying amount = Rs. 217 million (248 million – (248 million × 12.5%))
Value in use is based on present values = Rs. 214.6 million
21. (b)

22. (c)
23. (a)
24. (c)
25. (d)
26. (a)
27. (d)
28. (b)
29. (c)
30. (b)
31. (c)
32. (c)
33. (b)
34. (d)

10
CHAPTER
IFRS 15: Revenue from contracts
with customers
Contents
1 IFRS 15: Revenue from contracts with customers
2 IFRS 15: The five step model
3 Other aspects of IFRS 15
4 Examinable Examples of IFRS 15
w
Chapter 10: IFRS 15: Revenue from contracts with customers

01. Which of the following is not one of the 5 steps for recognizing revenue according to IFRS 15 Revenue
from contracts with customers?
(a) Identify the contract
(b) Assess the likelihood of economic benefits
(c) Determine the contract price
(d) Allocate the transaction price to the performance obligations in the contract.
02. Whale Limited (WL) is an agent who works on behalf of Dolphin, a famous performer. WL has just
collected Rs. 100 million from a promoter in terms of ticket sales for a recent show done by Dolphin.
WL earns commission of 10% in relation to Dolphin's work.
What is the correct double entry for the receipt of the Rs? 100 million?
(a) Dr Cash Rs. 100 million

Dr Trade Receivables Rs. 10 million
Cr Trade payables Rs. 100 million
Cr Revenue Rs. 10 million
(b) Dr Cash Rs. 100 million

Dr COS Rs. 90 million
(c) Dr COS Rs. 90 million

Dr Cash Rs. 10 million
(d) Dr Cash Rs. 100 million

03. Coin Limited (CL) sells a specialized piece of equipment to Orbit Limited on 1st September 2017 for
Rs. 4m. Due to the specialized nature of the equipment, CL has additionally agreed to provide a support
service for the next two years. The cost per annum to CL of providing this service will be Rs. 300,000.
CL usually earns a gross margin of 20% on such contracts.
What revenue should be included in the statement of profit or loss of CL for the year ended 31 December
2017?
(a) Rs. 3,343,750
(b) Rs. 3,250,000
(c) Rs. 3,375,000
(d) Rs. 4,000,000

04. River Limited (RL) has prepared its draft financial statements for the year ended 30 September 2014.
It has included the following transactions in revenue at the amounts stated below.
Which of these has been correctly included in revenue according to IFRS 15 Revenue from Contracts
with Customers?
(a) Agency sales of Rs. 2.5 million on which RL is entitled to a commission of 10%.
(b) Sale proceeds of Rs. 20 million for motor vehicles which were no longer required by RL
(c) Sales of Rs. 15 million on 30 September 2014. The amount invoiced to and received from the
customer was Rs. 18 million, which includes Rs. 3 million for ongoing servicing work to be done
by RL over the next two years.
(d) Sales of Rs. 20 million on 1 October 2013 to an established customer who (with the agreement
of RL) will make full payment on 30 September 2015. RL has a cost of capital of 10%.
05. Cat Limited (CL) sold and installed an item of machinery for Rs. 800,000 on 1 November 2017. Included
within the price was 2 years servicing contract which has a value of Rs. 240,000 and a fee for installation
of Rs. 50,000.
How much should be recorded in CL’s revenue in its statement of profit or loss for the year ended 31
December 2017 in relation to the machinery sale?
(a) Rs. 530,000
(b) Rs. 680,000
(c) Rs. 560,000
(d) Rs. 580,000
06. Sales director of a company is close to selling a machine which it sells for Rs. 650,000, offering free
service, therefore selling the entire machine for Rs. 560,000 including installation. The company never
sells servicing separately.
How should this discount be applied in relation to the sale of the machinery?
(a) Machine only
(b) Machine and Installation only
(c) Machine and Service only
(d) Machine, Installation and Service
07. Cheetah Limited (CL) works as an agent for a number of smaller contractors, earning commission of
10%. CL’s revenue includes Rs. 6 million received from clients under these agreements with Rs. 5.4
million in cost of sales representing the amount paid to the contractors.
What adjustment needs to be made to revenue in respect of the commission sales?
(a) Reduce revenue by Rs. 6 million
(b) Reduce revenue by Rs. 5.4 million
(c) Increase revenue by Rs. 600,000
(d) No adjustment is required

08. An entity regularly sells Products A, B and C individually, thereby establishing the following stand-alone
selling prices:
Product Stand-alone selling price Rs.
Product A 40
Product B 55
Product C 45
In addition, the entity regularly sells Products B and C together for Rs. 60.
The entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100.
Allocate the transaction price of Rs. 100 to Product A, B and C in accordance with IFRS 15
(a) A Rs. 40 and B Rs. 55 and C Rs. 45
(b) A Rs. 29 and B Rs. 39 and C Rs. 32
(c) A Rs. 40 and B Rs. 33 and C Rs. 27
(d) A Rs. 40 and B Rs. 27 and C Rs. 33
09. An entity enters into a contract with a customer to sell Products A, B and C in exchange for Rs. 100.
Product Stand-alone selling price
Product A 50
Product B 25
Product C 75
Total 150
Allocate the transaction price of Rs. 100 to Product A, B and C in accordance with IFRS 15
(a) A Rs. 50 and B Rs. 25 and C Rs. 75
(b) A Rs. 33 and B Rs. 17 and C Rs. 50
(c) A Rs. 33 and B Rs. 50 and C Rs. 17
(d) A Rs. 17 and B Rs. 33 and C Rs. 50
10. Which of the following items has correctly been included in Hakeem Limited (HL)’s revenue for the year
to 31 December 2011?
(a) Rs. 2 million in relation to a fee negotiated for an advertising contract for one of HL’s clients. HL
acted as an agent during the deal and is entitled to 10% commission.
(b) Rs. 500,000 relating to a sale of specialized equipment on 31 December 2011. The full sales
value was Rs. 700,000 but Rs. 200,000 relates to servicing that HL will provide over the next 2
years, so HL has not included that in revenue this year.
(c) Rs. 800,000 relating to a sale of some surplus land owned by HL.
(d) Rs. 1 million in relation to a sale to a new customer on 31 December 2011. Control passed to the
customer on 31 December 2011. The Rs. 1 million is payable on 31 December 2013. Interest
rates are 10%.

11. Hover Limited (HL) is a car retailer. On 1 April 2014, HL sold a car to a customer on the following terms:
The selling price of the car was Rs. 25.3 million. The customer paid Rs. 12.65 million (half of the cost)
on 1 April 2014 and will pay the remaining Rs. 12.65 million on 31 March 2016 (two years after the
sale). The customer can obtain finance at 10% per annum.
What is the total amount which HL should credit to profit or loss in respect of this transaction in the year
ended 31 March 2015?
(a) Rs. 23.105 million
(c) Rs. 20.909 million
12. Determining the amount to be recognized in the first year of a long term contract with a customer is an
example of which step in the IFRS 15’s 5-step model?
(a) Determining the transaction price
(b) Recognizing revenue when a performance obligation is satisfied
(c) Identifying the separate performance obligations
(d) Allocating the transaction price to the performance obligations
13. X Limited wins a competitive bid to provide consulting services to a new customer. X Limited incurred
the following costs to obtain the contract:
Rs.
Commissions to sales employees for winning the contract 10,000
External legal fees for due diligence 15,000
Travel costs to deliver proposal 25,000
Total costs incurred 50,000
How to recognize the above costs?
(a) Capitalize Rs. Nil and expense Rs. 50,000
(b) Capitalize Rs. 10,000 and expense Rs. 40,000
(c) Capitalize Rs. 25,000 and expense Rs. 25,000
(d) Capitalize Rs. 50,000 and expense Rs. Nil
14. On 1 January 2019, an entity enters into a non-cancellable contract to transfer a product to a customer
on 31 March 2019. The contract requires the customer to pay consideration of Rs. 1,000 in advance on
31 January 2019 but the customer pays the consideration on 1 March 2019. The entity transfers the
product on 31 March 2019.
What journal entry is required to be passed on 31 January 2019?
(a) No entry is required
(b) Debit Cash Rs. 1,000 and Credit Contract liability Rs. 1,000
(c) Debit Receivables Rs. 1,000 and Credit Contract liability Rs. 1,000
(d) Debit Receivables Rs. 1,000 and Credit Revenue Rs. 1,000

15. An entity enters into 100 contracts on 31 December 2017 with customers. Each contract includes the
sale of one product for Rs.100.
Cash is received when control of a product transfers. The entity’s customary business practice is to
allow a customer to return any unused product within 30 days and receive a full refund. The entity’s
cost of each product is Rs. 60.
Using the expected value method, the entity estimates that 97 products will not be returned. The entity
estimates that the costs of recovering the products will be immaterial and expects that the returned
products can be resold at a profit.
What should be recognized in respect of above?
(a) Revenue Rs. Nil and Contract Liability Rs. 10,000
(b) Revenue Rs. 300 and Contract Liability Rs. 9,700
(c) Revenue Rs. 9,700 and Contract Liability Rs. 300
(d) Revenue Rs. 10,000 and Contract Liability Rs. Nil
16. Mechanical Limited (ML) sells machines, and also offers installation and technical support services. The
individual selling prices of each product are shown below.
Sale price of goods Rs. 75,000
Installation Rs. 30,000
One-year service Rs. 45,000
ML sold a machine on 1 May 2011, charging a reduced price of Rs. 100,000 including installation and
one year’s service. ML only offers discounts when customers purchase a package of products together.
According to IFRS 15 Revenue from Contracts with Customers, how much should ML record in revenue
for the year ended 31 December 2011?
Rs. ___________
17. Car Limited (CL) sold a large number of vehicles spare parts to a new customer for Rs. 10 million on 1
July 2017. The customer paid Rs. 990,000 up front and agreed to pay the remaining balance on 1 July
2018. CL has a cost of capital of 6%.
How much should initially be recorded in revenue in respect of the sale of vehicles spare parts in the
statement of profit or loss for the year ended 31 December 2017?
Rs. __________
18. Golden Limited enters into a contract with a major chain of retail stores. The customer commits to buy
at least Rs.20m of products over the next 12 months. The terms of the contract require Golden Limited
to make a payment of Rs.1 m to compensate the customer for changes that it will need to make to its
retail stores to accommodate the products.
By the 31 December 2011, Golden Limited has transferred products with a sales value of Rs.4m to the
customer.
How much revenue should be recognized by Golden Limited in the year ended 31 December 2011?
Rs. ___________

19. Silver Limited sells a machine and one year’s free technical support for Rs. 100,000. It usually sells the
machine for Rs. 95,000 but does not sell technical support for this machine as a standalone product.
Other support services offered by Silver Limited attract a markup of 50%. It is expected that the technical
support will cost Silver Limited Rs. 20,000.
How much of the transaction price should be allocated to the technical support?
Rs. ___________
20. Jupiter Limited (JL) entered into a two-year contract on 1 January 2017, with a customer for the
maintenance of computer network. JL has offered the following payment options:
Option 1: Immediate payment of Rs. 200,000.
Option 2: Payment of Rs. 110,000 at the end of each year.
The applicable discount rate is 6.596%.
What amount of revenue should be recognized under option 2 on 31 December 2017?
Rs. ___________
21. Which two standards have been replaced by IFRS 15 Revenue from Contracts with Customers?
(a) IAS 20 Government Grants and IAS 36 Impairment of Assets
(b) IAS 36 Impairment of Assets and IAS 11 Construction Contracts
(c) IAS 18 Revenue and IAS 20 Government Grants
(d) IAS 18 Revenue and IAS 11 Construction Contracts
22. The accounting principle applied by IFRS 15 when determining whether or not revenue should be
recognized in respect of a repurchase agreement is:
(a) Prudence
(b) Relevance
(c) Substance over form
(d) Verifiability
23. With regard to the definition of revenue given by IFRS 15, which of the following statements is true?
(a) Revenue includes cash received from share issues
(b) Revenue includes cash received from borrowings
(c) Revenue may arise from either ordinary activities or extraordinary activities
(d) Revenue arises from ordinary activities only

24. Identifying contract with customer under IFRS 15, a contract with customer exist when all the following
criteria are met when;
(a) It is approved and enforceable, can identify each party rights, payment terms, and probable to
collect consideration
(b) It is approved, can identify each party rights, payment terms, has commercial substance and
probable to collect consideration
(c) It is approved and enforceable, can identify each party rights, has commercial substance and
probable to collect consideration
(d) It is approved, can identify payment terms, has commercial substance and probable to collect
consideration
25. Step 1, “identifying the contract” of IFRS 15 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) Each party's rights with regard to the goods or services concerned can be identified
(b) The payment terms can be identified
(c) The entity and the customer have approved the contract and are committed to perform their
contractual obligations
(d) It is certain that the entity will collect the consideration to which it is entitled
26. Step two requires the identification of the separate performance obligations in the contract. This is often
referred to as unbundling and is done at beginning of a contract. What is the key factor in identifying a
separate performance obligation?
(a) The passing of the risks and rewards to the customer
(b) The distinctiveness of the good or service
(c) The identification of the payment terms
(d) The enforceability of the contract
27. Step three requires the entity to determine the transaction price. This is the amount of consideration
that an entity expects to be entitled to in exchange for the promised goods or services. The transaction
price might include variable or contingent consideration. How does the entity estimate the amount of
the variable consideration?
(a) The expected value or the most likely amount whichever best predicts the consideration
(b) The lower of the expected value or the most likely amount
(c) The choice of the expected value or the most likely amount
(d) The higher of the expected value or the most likely amount
28. Step 4 requires the allocation of the transaction price to separate performance obligations. The
allocation is based on the relative standalone selling prices of the goods or services promised and are
made at inception of the contract. It is not adjusted to reflect subsequent changes in the standalone
selling prices of those goods or services. What is the best evidence of standalone selling price?

(a) An estimate that maximizes the use of observable inputs
(b) The observable price of a good or service when the entity sells that good or service separately
(c) Unadjusted market prices for similar goods or services
(d) Expected cost
29. Step 5 allows an entity to recognize revenue when (or as) each performance obligation is satisfied.
Revenue is recognized in line with the pattern of transfer. If an entity does not satisfy its performance
obligation over time, it satisfies it at a point in time and revenue will be recognized when control is
passed at that point in time. Which of the following factors may not indicate the passing of control?
(a) The present right to payment for the asset
(b) The customer has legal title to the asset
(c) The entity has physical possession but has transferred a portion of the economic risks
(d) The entity has transferred physical possession of the asset
30. Which of the following is true regarding discounts offered on a bundle of products/services?
(a) The discount should be applied across each performance obligation in the contract
(b) The discount should be recorded within cost of sales
(c) The discount should be applied to the largest component of the contract
(d) The discount should be recorded as an administrative cost
31. An entity can only include variable consideration in the transaction price to the extent that it is highly
probable that a subsequent change in the estimated variable consideration will not result in a significant
revenue reversal. What action should the entity take if it is not appropriate to include all of the variable
consideration in the transaction price?
(a) The entity should not include any of the variable consideration
(b) The entity can use its judgment in all matters such as this
(c) The entity should assess whether it should include part of the variable consideration subject to
the revenue reversal test
(d) The entity should assess whether it should include part of the variable consideration without the
need to use the revenue reversal test
32. Which one of the following condition is not allow when performance condition to be satisfied over time?
(a) the customer simultaneously receives and consumes the benefits provided by the entity’s
performance as the entity performs
(b) the entity’s performance creates or enhances an asset that the customer controls as the asset is
created or enhance
(c) they customer has paid the consideration in advance and goods / services are still to be received
(d) the entity’s performance does not create an asset with an alternative use to the entity

33. In general, contract costs incurred in relation to a contract with a customer must be:
(a) Recognized as an expense when incurred
(b) Recognized as an asset if they relate to a performance obligation which has been satisfied
(c) Recognized as an asset if they are not expected to be recovered
(d) Recognized as an asset if they relate to a performance obligation which has not yet been satisfied
34. A company enters into a construction contract to build a warehouse for a customer. The agreed price
is Rs.20 million and the specified completion date is 31 October 2020. However, the contract provides
that the company should receive an incentive payment of a further Rs.2.5 million if the warehouse is
completed before 30 June 2020. Similarly, the price will be reduced by Rs. 2 million if the warehouse is
not completed until after 31 December 2020.
The company estimates that there is a 15% probability that the warehouse will be completed before 30
June 2020, an 80% probability that it will be completed by 31 October 2020 and a 5% probability that it
will not be completed until after 31 December 2020.
What is the expected value of the transaction price for this contract?
(a) Rs. 20 million
(c) Rs.20.5 million
(d) Rs.20.75 million


01. (b) Assessing the likelihood of economic benefits is not one of the five steps. It is one
of the criteria for identifying the contract with customer.
02. (d) As an agent, WL should only record the commission of Rs. 10 million in revenue.
As the cash has been received, WL must record that in cash and create a payable
for Rs. 90 million to Dolphin.
03. (c) There are two performance obligations here. The sale of the equipment should
be recognizing at a point in time, and the revenue in relation to the support should
be recognized over time. The services element costs Rs. 300,000 a year.
As CL makes a margin of 20% a year, this would be sold for Rs. 375,000 per year
(300,000 × 100/80). Therefore, the total revenue on the service for 2 years = Rs.
375,000 × 2 = Rs. 750,000.
The revenue on the goods = Rs.4m – Rs. 750,000 = Rs. 3,250,000.
The revenue in relation to the service is released over 2 years.
By 31 December, 4 months of the service has been performed so can be
recognized in revenue (Rs. 375,000 × 4/12 = Rs. 125,000).
Therefore, the total revenue = Rs.3,250,000 + Rs.125,000 = Rs.3,375,000
04. (c) Although the invoiced amount is Rs. 180,000, Rs. 30,000 of this has not yet been
earned and must be deferred until the servicing work has been completed. This
is only correct inclusion in sales.
05. (d) The revenue in relation to the installation and the machine itself can be
recognized, with the revenue on the service recognized over time as the service
is performed. The service will be recognized over the 2-year period. By 31
December 2017, 2 months of the service has been performed. Therefore, Rs.
20,000 can be recognized (Rs. 240,000 × 2/24). Total revenue is therefore Rs.
580,000, being the Rs. 800,000 less the Rs. 220,000 relating to the service which
has not yet been recognized.
06. (d) Discounts should be applied evenly across the components of a sale unless any
one element is regularly sold separately at a discount. As entity does not sell the
service and installation separately, the discount must be applied evenly to each
of the three elements.
07. (b) Revenue as an agent is made by earning commission. Therefore, the revenue on
these sales should only be Rs. 600,000 (10% of Rs. 6 million). As CL currently
has Rs. 6 million in revenue, Rs. 5.4 million needs to be removed, with Rs. 5.4
million also removed from cost of sales.
08. (c)
Product Allocated price
Product A 40 Remaining amount
Product B 33 (55/100 x Rs. 60)
Product C 27 (45/100 x Rs. 60)
Total 100
The entire discount relates to Product B and C as when Product A is added it total
stand-alone price has been added in the package price.

09. (b)
Product Allocated price
Product A 33 (Rs. 50 / Rs. 150 × Rs. 100)
Product B 17 (Rs. 25 / Rs. 150 × Rs. 100)
Product C 50 (Rs. 75 / Rs. 150 × Rs. 100)
Total 100
10. (b) For item (b) the sale of the goods has fulfilled a contractual obligation so the
revenue in relation to this can be recognized. The service will be recognized over
time, so the revenue should be deferred and recognized as the obligation is
fulfilled.
For item (a) HL acts as an agent, so only the commission should be included in
revenue.
For item (c) any profit or loss on disposal should be taken to the statement of
profit or loss. The proceeds should not be included within revenue.
For item (d) the Rs. 1 million should be initially discounted to present value as
there is a significant financing component within the transaction. The revenue
would initially be recognized at Rs. 826,000, with an equivalent receivable. This
receivable would then be held at amortized cost with finance income of 10% being
earned each year.
11. (d) At 31 March 2015, the deferred consideration of Rs. 12.65 million would need to
be discounted by 10% for one year to Rs. 11.5 million (effectively deferring a
finance cost of Rs. 1.15 million).
The total amount credited to profit or loss would be Rs. 24.15 million (12.65 million
+ 11.5 million).
12. (b) Recognizing revenue when a performance obligation is satisfied, it may be a

point in time or over time.
13. (b) The commission to sales employees is incremental to obtaining the contract and
should be capitalized as a contract asset. The external legal fees and the
travelling cost are not incremental to obtaining the contract because they have
been incurred regardless of whether X Limited obtained the contract or not.
14. (c) The receivable is recorded when unconditional right to receive payment is
established and as entity has not performed its performance obligation yet; a
contract liability shall be recognized.
15. (c) Revenue Rs. 9,700 (97 x Rs. 100 for products expected to be not returned) and
remaining as contract liability.
16. Rs. 90,000 The discount should be allocated to each part of the bundled sale.
Applying the discount across each part gives revenue as follows:
Goods Rs. 50 (Rs. 75 × Rs. 100/Rs. 150)
Installation Rs. 20 (Rs. 30 × Rs. 100/Rs. 150)
Service Rs. 30 (Rs. 45 × Rs. 100/Rs. 150)
The revenue in relation to the goods and installation should be recognized on 1
May 2011.
As 8 months of the service has been performed (from 1 May to 31 December
2011), then Rs. 20 should be recognized (Rs. 30 × 8/12).
This gives a total revenue for the year of 50 + 20 + 20 = Rs. 90.

17. Rs. 9,490,000 The fact that CL has given the customer a year to pay on such a large amount
suggests there is a significant financing component within the sale. The Rs.
990,000 received can be recognized in revenue immediately. The remaining Rs.
9.01 million must be discounted to its present value of Rs. 8.5 million. This is then
unwound over the year, with the interest recognized as finance income.
Therefore, total initial revenue = Rs. 990,000 + Rs. 8,500,000 = Rs. 9,490,000.
18. Rs. 3,800,000 The payment made to the customer is not in exchange for a distinct good or
service. Therefore, the Rs.1m paid to the customer is a reduction of the
transaction price.
The total transaction price is being reduced by 5% (Rs.1m/Rs.20m).
Therefore, Golden Limited reduces the transaction price of each good by 5% as
it is transferred. By 31 December 2011, Golden Limited should have recognized
revenue of Rs.3.8m (Rs.4m × 95%).
19. Rs. 24,000 The selling price of the service would be Rs. 30,000 (Rs. 20,000 × 150%).
The total standalone selling prices of the machine and support are Rs. 125,000
(Rs. 95,000 + Rs. 30,000).
The transaction price allocated to the machine is Rs. 76,000 (Rs. 95,000 ×
100,000 / 125,000). The transaction price allocated to the technical support is
Rs.24, 000 (Rs.30, 000 × 100,000 / 125,000).
20. Rs. 110,000 No need to calculate present value under option 2 as cash is being received
exactly when performance obligation is being satisfied.
21. (d)
22. (c)
23. (d)
24. (b)
25. (d)
26. (b)
27. (a)
28. (b)
29. (c)
30. (a)
31. (c)
32. (c)
33. (d)
34. (b) (20 x 80%) + (22.5 x 15%) + (18 x 5%) = Rs. 20.275 million

1
Financial accounting and reporting II
CHAPTER
Legal Background to the Preparation of
Financial Statements
Contents
1 Key Definitions
2 Regulatory framework for accounting in Pakistan
3 Companies Act, 2017: Fourth Schedule
4 Companies Act, 2017: Fifth Schedule


01. Which of the following body/institution decides on accounting rules that must be applied by companies
in Pakistan?
(a) Federal Government
(b) Securities and Exchange Commission of Pakistan
(c) State Bank of Pakistan
(d) The Institute of Chartered Accountants of Pakistan
02. Which of the following body/institution is responsible for recommending accounting standards for
notification by Securities and Exchange Commission of Pakistan?
(a) Pakistan Institute of Corporate Governance
(b) Pakistan Stock Exchange
(c) The Institute of Chartered Accountants of Pakistan
(d) Pakistan Chamber of Commerce
03. Which of the following are applicable to a company listed on Pakistan Stock Exchange?
(a) IFRSs and Fourth Schedule of Companies Act, 2017
(b) IFRSs and Fifth Schedule of Companies Act, 2017
(c) IFRSs for SMEs and Fourth Schedule of Companies Act, 2017
(d) IFRSs for SMEs and Fifth Schedule of Companies Act, 2017
04. Which of the following are applicable to a non-listed public interest company?
05. Which of the following are applicable to a non-listed large size Pakistani company?
06. How a public utility or similar company carrying on the business of essential public services shall be
classified according to Companies Act, 2017?
(a) Pubic Interest Company
(b) Large Sized Company
(c) Medium Sized Company
(d) Small Sized Company

Chapter 1: Legal background to the preparation of financial statements
07. A public unlisted company has paid up capital of Rs. 8 million, turnover of Rs. 90 million and 225
employees. How it shall be classified according to Companies Act, 2017?
08. A private company has paid up capital of Rs. 80 million, turnover of Rs. 900 million and 525 employees.
How it shall be classified according to Companies Act, 2017?
09. A public unlisted company has paid up capital of Rs. 80 million, turnover of Rs. 1,200 million and 225
10. A foreign company has paid up capital equivalent of Rs. 250 million, turnover of Rs. 900 million and 725
11. In the case of sale of fixed assets, if the aggregate book value of assets exceeds five hundred
thousand rupees, following particulars of each asset shall be disclosed:
(i) cost or revalued amount, as the case may be.
(ii) the book value.
(iii) the sale price and the mode of disposal (e.g. by tender or negotiation).
(iv) the particulars of the purchaser.
(v) gain or loss.
(vi) relationship, if any of purchaser with Company or any of its directors.
(a) (i), (ii) and (v) only
(b) (i) to (iv) only
(c) (i) to (v) only
(d) (i) to (vi) all

12. With regards to loans and advances to directors a company is required to disclose whether the loans
and advances have been made in compliance with the requirements of the Companies Act, 2017.
The above disclosure is required by:
(a) Fourth Schedule
(b) Fifth Schedule
(c) Both (a) and (b)
(d) Neither (a) nor (b)
13. In respect of loans and advances, other than those to the suppliers of goods or services, the name of
the borrower and terms of repayment if the loan or advance exceeds rupees one million, together with
the particulars of collateral security, if any, shall be disclosed separately.
The above disclosure is required by:
(a) Fourth Schedule
(b) Fifth Schedule
(c) Both (a) and (b)
(d) Neither (a) nor (b)
14. In Fourth and Fifth Schedule, an executive has been defined as an employee, other than the chief
executive and directors, whose basic salary exceeds a certain amount in a financial year. What is that
amount?
(a) Rs. 600,000
(b) Rs. 1,200,000
(c) Rs. 2,000,000
(d) Rs. 3,000,000
15. In respect of issued share capital of a company following shall be disclosed separately:
(i) shares allotted for consideration paid in cash.
(ii) shares allotted for consideration other than cash, showing separately shares issued against
property and others (to be specified).
(iii) shares allotted as bonus shares.
(iv) treasury shares.
(a) (i), (ii) and (iii) only
(b) (i) and (ii) only
(c) (i) and (iii) only
(d) (i) to (iv) all
16. Mercury Limited is a listed company on Pakistan Stock Exchange. Which schedule of Companies Act,
2017 is applicable to it for disclosure requirements?
___________
17. Neptune (Private) Limited is a large size company according to Third schedule of Companies Act, 2017.
Which schedule of Companies Act, 2017 is applicable to it for disclosure requirements?
___________

Chapter 1: Legal background to the preparation of financial statements
18. Mars Limited is public unlisted company. It is subsidiary of Mercury Limited which is listed on Pakistan
Stock Exchange. Which schedule of Companies Act, 2017 is applicable to it for disclosure
requirements?
___________
19. Which schedule of Companies Act, 2017 lists the classification criteria of the companies based on
company size?
___________
20. Earth Limited is a non-listed company but according to Third schedule of Companies Act, 2017 it is
public interest company. Which schedule of Companies Act, 2017 is applicable to it for disclosure
requirements?
___________


01. (b)
02. (c)
03. (a)
04. (b)
05. (b)
06. (a)
07. (c) If it was private company, it would have been classified as small sized company.
08. (c)
09. (b) It has turnover of more than Rs. 1 billion.
10. (c) Only turnover criteria are evaluated for foreign companies.
11. (d) All are required under Fourth and Fifth Schedule.
12. (a) This is requirement of Fourth Schedule only.
13. (a) This is requirement of Fourth Schedule only.
14. (b)
15. (d)
16. Fourth Schedule The Fourth schedule is applicable to all listed companies.
17. Fifth Schedule The Fifth schedule is applicable to non-listed companies regardless of its size.
18. Fifth Schedule The Fifth schedule also applies to private and non-listed companies that are a
subsidiary of a listed company.
19. Third Schedule The Third schedule lists the classification criteria of the company on the basis
of company size.
20. Fifth Schedule The Fifth schedule is applicable to non-listed companies even if it is public
interest company.

2
CHAPTER
IAS 1: Presentation of
Financial Statements
Contents
1 Key Definition
2 The components of financial statements
3 General features of financial statements
4 Structure and content of the statement of financial position
5 Structure and content of the statement of comprehensive income
6 Statement of changes in equity (SOCIE)
7 Notes to the financial statements
8 Financial statements – Specimen formats

Chapter 2: IAS 1: Presentation of financial statements

01. Which one of the following would not necessarily lead to a liability being classified as a current
liability?
(a) The liability is expected to be settled in the course of the entity's normal operating cycle.
(b) The liability has arisen during the current accounting period.
(c) The liability is held primarily for the purpose of trading.
(d) The liability is due to be settled within 12 months after the end of the reporting period.
02. Which one of the following would be shown in the 'other comprehensive income' section of the
statement of profit or loss and other comprehensive income?
(a) A revaluation gain on an investment property
(b) Profit on sale of an investment
(c) Receipt of a government grant
(d) Gain on revaluation of a factory building
03. Which of the following are not items required by IAS 1 Presentation of Financial Statements to be
shown on the face of the statement of financial position?
(a) Inventories
(b) Provisions
(c) Government grants
(d) Intangible assets
04. How does IAS 1 define the 'operating cycle' of an entity?
(a) The time between acquisition of assets for processing and delivery of finished goods to
customers
(b) The time between delivery of finished goods and receipt of cash from customers
(c) The time between acquisition of assets for processing and payment of cash to suppliers
(d) The time between acquisition of assets for processing and receipt of cash from customers
05. Where are equity dividends paid presented in the financial statements?
(a) As a deduction from retained earnings in the statement of changes in equity
(b) As a liability in the statement of financial position
(c) As an expense in profit or loss
(d) As a loss in 'other comprehensive income'

06. Inappropriate accounting policies are rectified by:
(a) Disclosure of the accounting policies used
(b) Notes
(c) Explanatory material
(d) None of above
07. Each component of the financial statements shall be identified clearly. In addition, the following
information shall be displayed prominently:
(i) The name of the reporting undertaking
(ii) The name of chief accountant
(iii) Whether the financial statements cover the individual undertaking, or a group
(iv) The SFP date, or the period covered by the financial statements, whichever is appropriate to
that component of the financial statements
(v) the presentation currency
(vi) the level of rounding used in presenting amounts in the financial statements
(a) All of above
(b) All of above except (iii)
(c) All of above except (ii)
(d) All of above except (v)
08. Which of the following is appropriate statement regarding compliance with IFRSs?
(a) These financial statements have been prepared in accordance with most of IFRSs.
(b) These financial statements have been prepared in accordance with all the IFRSs except IAS
8 and IAS 2.
(c) These financial statements have been prepared in accordance with IFRSs.
(d) These financial statements have been prepared in accordance with selected IFRSs.
09. An entity’s year end is June 30, 2019 when it has a long-term loan due on February 29, 2020. The
loan is refinanced on July 20, 2019 and now it will be repaid on April 30, 2025.
This loan shall be presented as:
(a) Current liability
(b) Non-current liability
(c) Equity
(d) Contingent liability

10. An entity’s year end is June 30, 2019. It breached a condition of loan and it is now payable on demand.
However, on June 30, 2019, the lender agrees not to demand payment as a consequence of the
breach prior to June 30, 2020 giving at least 12 months grace to rectify the breach.
This loan shall be presented as:
(a) Current liability
(b) Non-current liability
(c) Equity
(d) Contingent liability
11. The judgement on whether additional items are presented separately is based on an assessment of:
(i) The nature and liquidity of assets
(ii) The function of assets
(iii) The amounts, nature and timing of liabilities
(iv) The space available in the financial statements
(a) (i) and (ii)
(b) (i) and (iv)
(c) (ii) and (iii)
(d) (i), (ii) and (iii)
12. Which of the following statements are correct according to IAS 1?

(i) Profit or loss is the total of income less expenses, including the components of other comprehensive
income.
(ii) An entity shall present with equal prominence all of the financial statements in a complete set of
financial statements.
(a) (i) only
(b) (ii) only
(c) (i) and (ii) both
(d) Neither (i) nor (ii)

(i) All financial statements are prepared using the accrual basis of accounting.
(ii) The entity shall reclassify comparative amounts unless reclassification is impracticable.
(a) (i) only
(b) (ii) only


(i) An entity need not provide a specific disclosure required by an IFRS if the information is not material.
(ii) Measuring assets net of valuation allowance is not offsetting.
(a) (i) only
(b) (ii) only

(i) Statement of comprehensive income may be presented as a single statement or in two statements,
displaying profit or loss and other comprehensive income separately.
(ii) Analysis of expense in profit or loss may be presented using a classification based on their nature or
their function.
(a) (i) only
(b) (ii) only
16. On January 1, 2015 Yasir Limited issued debenture certificates of Rs. 80 million which are repayable
at premium in 2020. The coupon rate is 0% but effective interest rate is 10% per annum due to
premium payable at redemption
At which amount these debentures should be presented in statement of financial position as at June
30, 2015 under the heading non-current liabilities?
Rs. ___________
17. On January 1, 2015 Yasir Limited issued debenture certificates of Rs. 80 million which are repayable
at par in 2020. The coupon rate and effective rate is 10% per annum. The interest is payable half
yearly on July 1 and January 1 each year until redemption.
At which amount these debentures should be presented in statement of financial position as at June
30, 2015 under the heading non-current liabilities?
Rs. ___________

18. On 1 January 2016, Hadi Limited (HL) started research and development work for a new product. On
1 May 2016, the recognition criteria for capitalization of internally generated asset was met. The
product was launched on 1 November 2016.
HL incurred Rs. 20 million from commencement of research and development work till launching of
the product and charged it to cost of goods sold. It is estimated that the useful life of this new product
will be 20 years. It may be assumed that all costs accrued evenly over the period.
On 31 December 2016, the recoverable amount of the development expenditure was Rs. 10 million.
For the year ended 31 December 2016, what amount should be transferred from cost of goods sold
to administrative expenses?
Rs. ___________
19. Hadi Limited (HL) sells goods with a 1-year warranty and it is estimated that warranty expenses are
3% of annual sales
Actual payments during the year, against warranty claims of the products sold during current and
previous years were Rs. 2.5 million and Rs. 8 million respectively. These have been debited to
administrative expenses.
Provision for warranty balance as appearing in trial balance is Rs. 10 million. Sales for the year ended
31 December 2016 are Rs. 201,407,000.
What would be the impact of above on administrative expenses for the year ended 31 December 2016
if correct adjustment is made based on above information?
Rs. ___________
20. Hadi Limited (HL) trial balance as at 31 December 2016 reflects the following:
Debit Credit
Rs. m Rs. m
Capital work-in-progress 145,000
Plant and machinery – at cost 305,000
Accumulated depreciation 53,250
No depreciation has been charged in the current year. Depreciation is provided at 10% per annum
using the straight-line method
A machine which was purchased on 1 January 2015 for Rs. 25 million was traded-in, on 1 July 2016
for a new and more sophisticated machine. The disposal was not recorded, and the new machine was
capitalized at Rs. 15 million being the net amount paid to supplier. The trade-in allowance amounted
to Rs. 20 million.
Calculate the amount of depreciation to be charged for the year ended 31 December 2016, in respect
of above?
Rs. ___________


01. (b) The fact that a liability has arisen during the current accounting period does not
make it a current liability. The other options would all lead to classification as a
current liability.
02. (d) The revaluation gain on the factory will be presented under 'other comprehensive
income'. The other items will be recognised in profit or loss. Note that gains on
investment properties go through profit or loss.
03. (c) Inventories, provisions and intangible assets are shown separately. There is no
such requirement for government grants.
04. (d) The time between acquisition of assets for processing and receipt of cash from
customers
05. (a) Equity dividends are presented in the statement of changes in equity.
06. (d)
07. (c) The name of chief accountant is not required.
08. (c) The statement must be explicit and unreserved.
09. (a) Refinancing or rescheduling after the year end does not change classification.
10. (b) The loan is not payable in twelve months due to grace period.
11. (d) The availability of space is not reason for any additional item. If any disclosure is
necessary, the space is created.
12. (b) Other comprehensive income is not part of profit or loss.
13. (b) Statement of cash flows is not prepared under accrual basis of accounting.
14. (c) Both statements are correct.
15. (c) Both statements are correct.
16. Rs. 84 million Rs. 80 million + Rs. 80 million x 10% x 6 /12 = Rs. 84 million
The interest will be included in debentures amount as it is payable at redemption.
17. Rs. 80 million The interest is payable on July 1, 2015 and shall be presented as current liabilities.
18. Rs. 10 million Research 20 million x 4/10 months = Rs. 8 million

Amortisation 12 million /20 years x 2/12 = Rs. 0.1 million
Impairment 11.9 million – 10 million = Rs. 1.9 million
Total Rs. 10 million
19. Rs. 6,458,000 Rs. 000

Actual expense of warranty 6,042 – 2,000 = Rs. 4,042
Recorded already as given in question 8,000 + 2,500 = Rs. 10,500
Adjustment required 10,500 – 4,042 = Rs. 6,458

Provision for warranty (Rs. 000)

Cash 8,000 b/d 10,000
PL (reversed) 2,000
Cash 2,500 PL 201,407 x 3% 6,042

c/d (remaining of 3,542
current year)
16,042 16,042
20. Rs. 29.5 Rs. 000

million
Opening (other than disposed)
305,000 – 25,000 – 15,000 = 265,000 x 10% x 12/12 = 26,500
On addition
35,000 x 10% x 6/12 = 1,750
On disposed
25,000 x 10% x 6/12 = 1,250
Total Rs. 29,500

7
CHAPTER
IAS 8: Accounting Policies, Changes in
Accounting Estimates and Errors
Contents
1 Key Definitions
2 Accounting policies
3 Accounting estimates
4 Errors


01. Which TWO of the following situations would not require a prior year adjustment as per IAS 8
Accounting Policies, Changes in Accounting Estimates and Errors?
(a) In last year's financial statements, inventories were understated by a material amount due
to system error
(b) A company has changed its allowance for irrecoverable receivables from 10% of
outstanding debt to everything over 120 days old
(c) A new accounting standard has been issued that requires a company to change its
accounting policy but gives no guidance on the specific application of the change itself
(d) A company has decided to move from charging depreciation on the straight line basis to
the reducing balance basis
02. In accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors how is
a change in accounting estimate accounted for?
(a) By changing the current year figures but not the previous years' figures
(b) By changing the current year figures and the previous years' figures
(c) No alteration of any figures but disclosure in the notes
(d) Neither alteration of any figures nor disclosure in the notes
03. According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how should
a material error in the previous financial reporting period be accounted for in the current period?
(a) By making an adjustment in the financial statements of the current period through the
statement of profit or loss, and disclosing the nature of the error in a note.
(b) By making an adjustment in the financial statements of the current period as a movement
on reserves, and disclosing the nature of the error in a note.
(c) By restating the comparative amounts for the previous period at their correct value, and
disclosing the nature of the error in a note.
(d) By restating the comparative amounts for the previous period at their correct value, but
without the requirement for a disclosure of the nature of the error in a note.
04. Which of these changes would be classified as ‘a change in accounting policy’ as determined by
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors?
(a) Increased the allowance for irrecoverable receivables from 5% to 10% of outstanding debts
(b) Changed the method of valuing inventory from FIFO to average cost
(c) Changed the depreciation of plant and equipment from straight line depreciation to
reducing balance depreciation
(d) Changed the useful life of motor vehicles from six years to four years
05. In which TWO of the following situations can a change in accounting policy be made by an entity?
(a) If the change is required by an IFRS
(b) If the entity thinks that a new accounting policy would be easier to report
(c) If a new accounting policy would show more favourable results
(d) If a new accounting policy results in more reliable and relevant presentation of events or
transactions

Chapter 7: IAS 8: Accounting policies, changes in accounting estimates and errors
06. Which one of the following would be treated under IAS 8 Accounting policies, changes in accounting
estimates and errors as a change of accounting policy?
(a) A change in valuation of inventory from a weighted average to a FIFO basis
(b) A change of depreciation method from straight line to reducing balance
(c) Adoption of the revaluation model for non-current assets previously held at cost
(d) Capitalisation of borrowing costs which have arisen for the first time
07. Which of the following would be a change in accounting policy in accordance with IAS 8 Accounting
policies, changes in accounting estimates and errors?
(a) Adjusting the financial statements of a subsidiary prior to consolidation as its accounting
policies differ from those of its parent
(b) A change in reporting depreciation charges as cost of sales rather than as administrative
expenses
(c) Depreciation charged on reducing balance method rather than straight line
(d) Reducing the value of inventory from cost to net realisable value due to a valid adjusting
event after the reporting period
08. Which of the following items is a change of accounting policy under IAS 8 Accounting policies,
changes in accounting estimates and errors?
(a) Classifying commission earned as revenue in the statement of profit or loss, having
previously classified it as other operating income
(b) Switching to purchasing plant using leases from a previous policy of purchasing plant for
cash
(c) Changing the value of a subsidiary's inventory in line with the group policy for inventory
valuation when preparing the consolidated financial statements
(d) Revising the remaining useful life of a depreciable asset
09. The directors of Tom Limited are disappointed by the draft profit for the year ended 30 September
2013. The company's assistant accountant, Jerry, has suggested following:
A major item of plant that cost Rs. 20 million to purchase and install on 1 October 2010 is being
depreciated on a straight-line basis over a five-year period. On 1 October 2012, the production
manager believed that the plant was likely to last eight years in total (i.e. from the date of its
purchase).
Jerry believes that as the useful life estimate has increased, the previous years’ depreciation was
overstated and it depreciation expense should be reversed in current year leading to increased
profit.
What is the nature of the change being proposed by Jerry and how should it be applied?
(a) Change of accounting policy : Retrospective application
(b) Change of accounting policy : Prospective application
(c) Change of accounting estimate : Retrospective application
(d) Change of accounting estimate : Prospective application
10. If it is impractical to make a retrospective application to a period:

(a) Make the change only to the current period
(b) Apply the change to the earliest period that is practical

(c) Do not make the change at all

(d) Make the change in next year
11. Which TWO of the following would be treated as a change of accounting policy?
(a) Entity has received its first government grant and is applying the deferred income method.
(b) Entity has revalued its properties. Up to now they had all been carried at historical cost.
(c) Entity has reclassified development costs from other operating expenses to cost of sales.
(d) Entity has increased its irrecoverable debt allowance from 10% to 12%.
12. Correcting the recognition, measurement and disclosure of amounts in financial statements as if a
prior-period error had never occurred. This is:
(a) Retrospective restatement
(b) Retrospective application
(c) Change in accounting estimate
(d) Prospective restatement
13. Specific principles bases conventions rules and practices applied in presenting financial statements.
This defines:
(a) Accounting estimates
(b) Accounting policies
(c) Prospective application
(d) Accounting method
14. Adjustment of the carrying amount of an asset or a liability or the consumption of an asset as a
result of change in assessment. This defines:
(a) A change in accounting estimate
(b) Accounting policies
(c) Misstatements
(d) Correction of error
15. Applying a new policy to transactions as if that policy had always been applied. This is:
(a) Retrospective restatement
(b) Retrospective application
(c) Change in accounting estimate
(d) Prospective application
16. The directors of Tom Limited are disappointed by the draft profit for the year ended 30 September
2013. The company's assistant accountant, Jerry, has suggested following:
A major item of plant that cost Rs. 20 million to purchase and install on 1 October 2010 is being
depreciated on a straight-line basis over a five-year period. On 1 October 2012, the production
manager believed that the plant was likely to last eight years in total (i.e. from the date of its
purchase).

Jerry believes that as the useful life estimate has increased, the previous years’ depreciation was
overstated and it depreciation expense should be reversed in current year leading to increased
profit.
Adjusting for the change of useful life correctly, what will be the carrying amount of the plant at 30
September 2013?
Rs. ___________
17. Imad Textile Limited (ITL) purchased a plant on January 01, 2011 for Rs. 1,120,000. At this date
the useful life of the asset was estimated at 10 years after which it can be sold for Rs. 120,000.
However, during 2013 ITL estimates the remaining useful life of this plant as 6 years and expects
to fetch residual value of Rs. 170,000. ITL uses straight line method for depreciating such plants.
Calculate the amount of depreciation for the year ended on 31 December 2018.
Rs. ___________
18. A company is preparing its financial statements for the year ended 31 December 2019 and
discovered that in previous years following amounts were incorrectly capitalised in an intangible
asset with indefinite useful life.
Year Rs. m
2018 5
2017 4
2016 4
2015 3
The applicable tax rate is 30%.
What amount should be deducted from retained earnings in statement of changes in equity on 1
January 2018 for correction of above error?
Rs. ___________
19. A company is preparing its financial statements for the year ended 31 December 2019 and
discovered that in previous years following amounts were incorrectly capitalised in an intangible
asset with indefinite useful life.
Year Rs. m
2018 5
2017 4
2016 4
2015 3
The applicable tax rate is 30%.
Calculate the effect on profit after tax for the year ended 31 December 2018 correction of above
error.
Rs. ___________

20. Most of entity’s competitors value their inventory using the average cost (AVCO) basis, whereas the
entity uses the first in first out (FIFO) basis.
The value of inventory at 30 September 2013 (on the FIFO basis) is Rs. 20 million, however on the
AVCO basis it would be valued at Rs. 18 million. By adopting the same method (AVCO) as its
competitors. The inventory at 30 September 2012 was reported as Rs. 15 million, however on the
AVCO basis it would have been reported as Rs. 13.4 million.
What will be the effect of the change on profits for the year ended 30 September 2013?
Rs. ___________


01. (b) & (d) A change in the calculation of the allowance for irrecoverable receivables, and a
change in the depreciation method, are changes in accounting estimate so
therefore require prospective adjustment only.
02. (a) Change in accounting estimates results in alteration of figures but not
retrospectively. The change is made prospectively.
03. (c) The prior period error is corrected by restating the comparative amounts for the
previous period at their correct value. A note to the accounts should disclose the
nature of the error, together with other details.
04. (b) A change in the method of inventory valuation would be classed as a change in
accounting policy under IAS 8. The allowance for receivables, useful life and
depreciation method are all accounting estimates.
05. (a) & (d) A change in accounting policy may be made firstly if this is required by an IFRS
Standard. If there is no requirement, an entity can choose to change their
accounting policy if they believe a new accounting policy would result in a more
reliable and relevant presentation of events and transactions. Entities cannot
change their accounting policies simply to make financial reporting easier, or to
try and show a more favourable picture of results.
06. (a) A change of depreciation method is treated as a change of accounting estimate.

Adoption of the revaluation method is dealt with under IAS 16. Application of a
new accounting policy (such as capitalisation of borrowing costs) for transactions
that did not previously occur is not a change in accounting policy according to IAS
8.
07. (b) This is a change in presentation which will affect calculation of gross profit and
will be retrospectively adjusted when presenting comparatives. (a( and (d) are
simply adjustments made during preparation of the financial statements, (c) is a
change of accounting estimate.
08. (a) This is a change in presentation so qualifies as a change in accounting policy.
09. (d) This is a change of accounting estimate so does not need to be retrospectively
applied.
10. (b) In this situation, change is applied to the earliest period possible.
11. (b) & (c) This is change in measurement basis, so it is a change in accounting policy.
This is a change in presentation, so it is a change of accounting policy.
12. (a) Correction of error in previous period is called retrospective restatement.
13. (b) Specific principles bases conventions rules and practices applied in presenting
financial statements are accounting policies.
14. (a) Change in assessment is change in estimate.
15. (b) Retrospective application is applying a policy as if it had always been applied.

16. Rs. 10 million

Rs. m
Original cost 1 October 2010 20
Two years depreciation ((20/5) × 2) (8)
Carrying amount at 1 October 2012 12
Depreciation to 30 September 2013 (12 / 6) (2)
Carrying amount at 30 September 2013 10
17. Rs. 125,000

Per year depreciation Rs.
Year 2011 (Rs. 1,120,000 – 120,000) / 10 years 100,000
Year 2012 100,000
Year 2013 ((Rs. 920,000 – 170,000) / 6 years 125,000
18. Rs. 7.7 million Adjustment in opening balance of retained earnings (net of tax)
Rs. 4m + 4m + 3m = Rs. 11m x 70% = Rs. 7.7 million
19. Rs. 3.5 million Effect on profit for the year ended 31 December 2018 (net of tax)
Rs. 5m x 70% = Rs. 3.5 million
20. Rs. (400,000)

FIFO AVCO Profit
Rs. m Rs. m Rs. m
Year to 30 September 2012 15 13.4 (1.6)
B/f 1 October 2012 1.6
Year to 30 September 2013 20 18 ( 2.0)
At 30 September 2013 (0.4)
The net effect at 30 September 2013 of this will be to reduce current year profits
by Rs. 400,000.

8
CHAPTER
IAS 12: Income Taxes
Contents
1 Key Definitions
2 Accounting for taxation
3 Deferred tax: Introduction
4 Recognition of deferred tax: basic approach
5 Recognition and measurement rules
6 Presentation and disclosure


01. A piece of machinery cost Rs. 500,000. Tax depreciation to date has amounted to Rs. 220,000 and
depreciation charged in the financial statements to date is Rs. 100,000. The rate of income tax is 30%.
Which of the following statements is incorrect according to IAS 12 Income Taxes?
(a) The deferred tax liability in relation to the asset is Rs. 36,000
(b) The tax base of the asset is Rs. 280,000
(c) There is a deductible difference of Rs. 120,000
(d) There is a taxable temporary difference of Rs. 120,000
02. Tall Limited (TL)’s accounting records shown the following:
Rs. 000
Income tax payable for the year 60,000
Over provision in relation to the previous year 4,500
Opening deferred tax liability 2,600
Closing for deferred tax liability 3,200
What is the income tax expense that will be shown in the statement of profit or loss for the year?
(a) Rs. 54,900,000
(b) Rs. 67,700,000
(c) Rs. 65,100,000
(d) Rs. 56,100,000
03. The following information has been extracted from the accounting records of Candle Limited:
Rs. 000
Estimated income tax
for the year ended 30 September 2020 Rs. 75,000
Income tax paid
Estimated income tax
What figures will be shown in the statement of comprehensive income for the year ended 30 September
2021 in respect of income tax?
(a) Rs. 75,000,000
(b) Rs. 80,000,000
(c) Rs. 88,000,000
(d) Rs. 83,000,000
04. Home Limited (HL) has the following balances included on its trial balance at 30 June 2014.
Rs. 000
Taxation 4,000 Credit
Deferred taxation 12,000 Credit
The taxation balance relates to an over-provision from 30 June 2013.

Chapter 8: IAS 12: Income taxes
At 30 June 2014, the directors estimate that the provision necessary for taxation on current year profits
is Rs. 15,000,000.
The carrying amount of HL’s non-current assets exceeds the tax written-down value by Rs. 30,000,000.
The rate of tax is 30%.
What is the charge for taxation that will appear in the statement of profit or loss for the year to 30 June
2014?
(a) Rs. 23,000,000
(b) Rs. 28,000,000
(c) Rs. 8,000,000
(d) Rs. 12,000,000
05. Hall Limited has the following balances included on its trial balance at 30 June 2014:
Rs. 000
Taxation 7,000 Credit
Deferred taxation 16,000 Credit
The taxation balance relates to an overprovision from 30 June 2013.
At 30 June 2014, the directors estimate that the provision necessary for taxation on current year profits
is Rs. 12 million. The balance on the deferred tax account needs to be increased to Rs. 23 million, which
includes the impact of the increase in property valuation below.
During the year Hall Limited revalued its property for the first time, resulting in a gain of Rs. 10 million.
The rate of tax is 30%.
What is the charge for taxation that will appear in the statement of profit or loss for the year to 30 June
2014?
(a) Rs. 9 million
(b) Rs. 12 million
(c) Rs. 23 million
(d) Rs. 1 million
06. Vase Limited (VL)’s assistant accountant has discovered that there is a debit balance on the trial
balance of Rs. 3,000 relating to the over/under-provision of tax from the prior year.
What impact will this have on VL’s current year financial statements?
(a) Increase the tax liability by Rs. 3,000 in the statement of financial position
(b) Decrease the tax liability by Rs. 3,000 in the statement of financial position
(c) Increase the tax expense by Rs. 3,000 in the statement of profit or loss
(d) Decrease the tax expense by Rs. 3,000 in the statement of profit or loss
07. A company's trial balance shows a debit balance of Rs. 2.1 million brought forward on current tax and
a credit balance of Rs. 5.4 million on deferred tax. The tax charge for the current year is estimated at
Rs. 16.2 million and the carrying amounts of net assets are Rs. 13 million in excess of their tax base.
The income tax rate is 30%.
What amount will be shown as income tax in the statement of profit or loss for the year?

08. A company's trial balance at 31 December 2013 shows a debit balance of Rs. 700,000 on current tax
and a credit balance of Rs. 8,400,000 on deferred tax. The directors have estimated the provision for
income tax for the year at Rs. 4.5 million and the required deferred tax provision is Rs. 5.6 million, Rs.
1.2 million of which relates to a property revaluation.
What is the profit or loss income tax charge for the year ended 31 December 2013?
(a) Rs. 1 million
(b) Rs. 2.4 million
(c) Rs. 1.2 million
(d) Rs. 3.6 million
09. The following information relates to an entity.

(i) At 1 January 2018 the carrying amount of non-current assets exceeded their tax written down
value by Rs. 850,000.
(ii) For the year to 31 December 2018 the entity claimed depreciation for tax purposes of Rs.
500,000 and charged depreciation of Rs. 450,000 in the financial statements.
(iii) During the year ended 31 December 2018 the entity revalued a property. The revaluation
surplus was Rs. 250,000. There are no current plans to sell the property.
(iv) The tax rate was 30%.
What is the deferred tax liability required by IAS 12 Income Taxes at 31 December 2018?
(a) Rs. 240,000
(b) Rs. 270,000
(c) Rs. 315,000
(d) Rs. 345,000
10. The accountant of an entity is confused by the term 'tax base'. What is meant by 'tax base'?
(a) The amount of tax payable in a future period
(b) The tax regime under which an entity is assessed for tax
(c) The amount attributed to an asset or liability for tax purposes
(d) The amount of tax deductible in a future period
11. The carrying amount of Jewel Limited (JL)'s property, plant and equipment at 31 December 2013 was
Rs. 310,000 and the tax written down value was Rs. 230,000.
The following data relates to the year ended 31 December 2014:
(i) At the end of the year the carrying amount of property, plant and equipment was Rs. 460,000
and the tax written down value was Rs. 270,000. During the year some items were revalued by
Rs. 90,000. No items had previously required revaluation. In the tax jurisdiction in which JL
operates revaluations of assets do not affect the tax base of an asset or taxable profit. Gains
due to revaluations are taxable on sale.
(ii) JL began development of a new product during the year and capitalised Rs. 60,000 in
accordance with IAS 38. The expenditure was deducted for tax purposes as it was incurred.
None of the expenditure had been amortised by the year end.
What is the taxable temporary difference to be accounted for at 31 December 2014 in relation to
property, plant and equipment and development expenditure?
Property, plant and equipment Development expenditure
(a) Rs. 270,000 Rs. 60,000
(b) Rs. 270,000 Nil
(c) Rs. 190,000 Rs. 60,000
(d) Rs. 190,000 Nil

At the end of the year, 31 December 2014, the carrying amount of property, plant and equipment was
Rs. 460,000 and the tax written down value was Rs. 270,000. During the year some items were revalued
by Rs. 90,000. No items had previously required revaluation. In the tax jurisdiction in which JL operates
revaluations of assets do not affect the tax base of an asset or taxable profit. Gains due to revaluations
are taxable on sale.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as Rs. 45,000.
What amount should be charged to the revaluation surplus at 31 December 2014 in respect of deferred
tax?
(a) Rs. 60,000
(b) Rs. 90,000
(c) Rs. 18,000
(d) Rs. 27,000
At the end of the year, 31 December 2014, the carrying amount of property, plant and equipment was
Rs. 460,000 and the tax written down value was Rs. 270,000. During the year some items were revalued
by Rs. 90,000. No items had previously required revaluation. In the tax jurisdiction in which JL operates
revaluations of assets do not affect the tax base of an asset or taxable profit. Gains due to revaluations
are taxable on sale.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as Rs. 45,000.
What amount will be shown as current tax payable in the statement of financial position of JL at 31
December 2014?
(a) Rs. 45,000
(b) Rs. 72,000
(c) Rs. 63,000
(d) Rs. 75,000
14. Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Which one
of the following is not a circumstance giving rise to a temporary difference?
(a) Depreciation accelerated for tax purposes
(b) Development costs amortised in profit or loss but tax was deductible in full when incurred
(c) Accrued expenses which have already been deducted for tax purposes
(d) Revenue included in accounting profit when invoiced but only liable for tax when the cash is
received.
15. Which of the following statements regarding taxation of lease arrangement are true?
(i) Depreciation expense and interest expense should be added back in accounting profit to
calculate current tax
(ii) Rental payments should be deducted from accounting profit for calculating current tax
(iii) Right of use asset has tax base of nil resulting in taxable temporary difference
(iv) Lease liabilities have tax base of nil resulting deductible temporary difference
(a) (i), (ii) and (iii)
(b) (ii), (iii) and (iv)

(c) (i), (ii) and (iv)

(d) (i), (ii), (iii) and (iv) all
16. Venice Limited (VL)’s assistant accountant estimated the tax expense for the year ended 31 December
2018 at Rs. 43,000. However, he had ignored deferred tax. At 1 January 2018 VL had a deferred tax
liability of Rs. 130,000. At 31 December 2018 VL had temporary taxable differences of Rs. 360,000.
VL pays tax at 25%. All movements in deferred tax are taken to the statement of profit or loss.
What will be recorded as the tax expense in the statement of profit or loss for the year ended 31
December 2018?
Rs. ___________
17. The statements of financial position of Nitrogen Limited (NL) include the following extracts:
Statements of financial position 2012 2011
as at 30 September Rs. m Rs. m
Non-current liabilities
Deferred tax 310 140
Current liabilities
Taxation 130 160
The tax charge in the statement of profit or loss for the year ended 30 September 2012 is Rs. 270
million.
What amount of tax was paid during the year to 30 September 2012?
Rs. ___________
18. The trial balance of Hall Limited (HL) at 31 March 2016 showed credit balances of Rs. 800,000 on
current tax and Rs. 2.6 million on deferred tax.
A property was revalued during the year giving rise to deferred tax of Rs. 3.75 million. This has been
included in the deferred tax provision of Rs. 6.75 million at 31 March 2016.
The income tax charge for the year ended 31 March 2016 is estimated at Rs. 19.4 million.
What will be shown as the income tax charge in the statement of profit or loss of HL at 31 March 2016?
Rs. ___________
19. Orange Limited (OL) is in the process of finalizing its financial statements for the year ended 30 June
2018.
OL sells goods with a 1-year warranty and it is estimated that warranty expenses are 2% of annual
sales. Actual payments during the year related to warranty claims were Rs. 54 million. Of these, Rs. 38
million pertain to goods sold during the previous year. Opening balance of provision for warranty was
Rs. 49 million.
Sales for the year ended 30 June 2018 was Rs. 1,750 million. Under the tax laws, these expenses are
allowed on payment basis. Applicable tax rate is 30%.
What is the amount of deferred tax expense or income in respect of above for the year ended 30 June
2018?
Rs. ___________

20. Orange Limited (OL) is in the process of finalizing its financial statements for the year ended 30 June
2018.
Profit before tax for the year ended 30 June 2018 was Rs. 508 million.
OL sells goods with a 1-year warranty and it is estimated that warranty expenses are 2% of annual
sales. Actual payments during the year related to warranty claims were Rs. 54 million. Of these, Rs. 38
million pertain to goods sold during the previous year. Opening balance of provision for warranty was
Rs. 49 million.
Sales for the year ended 30 June 2018 was Rs. 1,750 million. Under the tax laws, these expenses are
allowed on payment basis. Applicable tax rate is 30%.
What is the amount of current tax after considering above information for the year ended 30 June 2018?
Rs. ___________


01. (c) As carrying amount is greater than tax base of the asset, the resulting temporary
difference is taxable (not deductible).
02. (d) The tax expense in the statement of profit or loss is made up of the current year
estimate, the prior year over-provision and the movement in deferred tax. The prior
year over-provision must be deducted from the current year expense, and the
movement in deferred tax must be added to the current year expense, as the
deferred tax liability has increased.
Tax expense = Rs. 60,000,000 – Rs. 4,500,000 + Rs. 600,000
= Rs. 56,100,000
03. (c) The tax expense in the statement of profit or loss is made up of the current year
estimate and the prior year under-provision. The year-end liability in the statement
of financial position is made up of the current year estimate only.
Tax expense = Rs. 83,000 + Rs. 5,000 under provision = Rs. 88,000
04. (c)
Rs. 000
Deferred tax provision required (30,000 × 30%) 9,000
Opening balance per trial balance 12,000
Reduction in provision (3,000)
Tax expense: Rs. 000

Current year estimate 15,000
Prior year overprovision (4,000)
Deferred tax, as above (3,000)
Charge for year 8,000
05. (a)
Rs.000
Deferred taxation increase (23,000 – 16,000) 7,000
Less tax on revaluation [OCI] (10,000 × 30%) (3,000)
Charge to SPL 4,000
Tax expense: Rs. 000

Current year estimate 12,000
Prior year overprovision (7,000)
Deferred tax, as above 4,000
06. (c) A debit balance represents an under-provision of tax from the prior year. This should
be added to the current year’s tax expense in the statement of profit or loss.
An under or over-provision only arises when the prior year tax estimate is paid so
there is no adjustment required to the current year liability.

07. (c)
Rs. 000
Under provision 2,100
Adjust deferred tax (1,500)
Profit or loss charge 16,800
Deferred tax liability year end (13m × 30%) 3,900

Deferred tax liability opening balance (5,400)
Deferred tax income (1,500)
.
08. (c)
Rs. 000
Prior year under provision 700
Current provision 4,500
Movement of deferred tax (8.4 – 5.6) (2,800)
Deferred tax on revaluation surplus (1,200)
Tax charge for the year in profit or loss 1,200
.…
09. (d)
Temporary difference Rs. 000
B/f 850
Depreciation Year to 31.12.18 (500 – 450) (50)
1,150
Deferred tax 1,150 @ 30% 345
10. (c) The amount attributed to an asset or liability for tax purposes.
11. (c) PPE 460,000 – 270,000 = Rs. 190,000
Development cost 60,000 – 0 = Rs. 60,000
12. (d) (90,000 × 30%) will go to the revaluation surplus
13. (a) Rs. 45,000. The tax charge for the year.
14. (c) Accrued expenses which have already been deducted for tax purposes will not give
rise to a temporary difference as there is no difference in accounting and tax in time
of recognition of tax expense.
15. (d) All the statements are true.
16. Rs. 3,000 The tax expense in the statement of profit or loss consists of the current tax estimate
and the movement on deferred tax in the year. The closing deferred tax liability is
Rs. 90,000, being the temporary differences of Rs. 360,000 at the tax rate of 25%.
This means that the deferred tax liability has decreased by Rs. 40,000 in the year.
This decrease should be deducted from the current tax estimate of Rs. 43,000 to
give a total expense of Rs. 3,000.

17. Rs. 130 million

Rs. m
Opening balances (140 + 160) 300
Charge for year 270
Closing balances (310 + 130) (440)
Tax paid 130
..
18. Rs. 19 million
Rs. 000
Current charge 19,400
Overprovision (800)
Deferred tax (W) 400
19,000
Working
Required provision 6,750
Less revaluation (3,750)
3,000
Balance b/f (2,600)
Charge to income tax 400
19. Rs. 9 million

expense Provision for warranty
Bank (last year) 38 b/d 49
Bank (current year) 16 PL (1,750 x 2%) 35
PL (Reversal last year) 11
c/d 19
84 84
Rs. m
Opening deferred tax asset 49 x 30% 14.7
Closing deferred tax asset 19 x 30% 5.7
Deferred tax expense 9
20. Rs. 143.4

million Provision for warranty
Bank (last year) 38 b/d 49
Bank (current year) 16 PL (1,750 x 2%) 35
PL (Reversal last year) 11
c/d 19
84 84

Rs. m
Profit before tax 508
Add: Warranty expense as per accounting 35 - 11 24
Less: Warranty payments allowed in tax 38 + 16 (54)
478
478 million x 30% = Rs. 143.4 million

10
CHAPTER
IAS 38: Intangible Assets
Contents
1 Key Definitions
2 IAS 38: Intangible assets – Introduction
3 Internally generated intangible assets
4 Intangible assets acquired in a business combination
5 Measurement after initial recognition
6 Disclosure requirements


01. Power Limited has spent Rs. 200,000 researching new cleaning chemicals in the year ended 31
December 2020. They have also spent Rs. 400,000 developing a new cleaning product which will not
go into commercial production until next year. The development project meets the criteria laid down in
IAS 38 Intangible Assets.
How should these costs be treated in the financial statements of Power Limited for the year ended 31
December 2020?
(a) Rs. 600,000 should be capitalised as an intangible asset on the statement of financial
position.
(b) Rs. 400,000 should be capitalised as an intangible asset and should be amortised;
Rs.200,000 should be written off to the statement of profit or loss.
(c) Rs. 400,000 should be capitalised as an intangible asset and should not be amortised; Rs.
200,000 should be written off to the statement of profit or loss.
(d) Rs. 600,000 should be written off to the statement of profit or loss
02. Which TWO of the following items below could potentially be classified as intangible assets?
(a) purchased brand name
(b) training of staff
(c) internally generated brand
(d) licences and quotas
03. Star Limited has provided the following information as at 31 December 2016:
(i) Project A – Rs. 500,000 has been spent on the research phase of this project during the year.
(ii) Project B – Rs. 800,000 had been spent on this project in the previous year and Rs. 200,000
this year. The project was capitalised in the previous year however, it has been decided to
abandon this project at the end of the year.
(iii) Project C – Rs. 1,000,000 was spent on this project this year. The project meets the criteria
of IAS 38 and is to be capitalised.
Which of the following adjustments will be made in the financial statements as at 31 December 2016?
(a) Reduce profit by Rs. 700,000 and increase non-current assets by Rs. 1,000,000
(b) Reduce profit by Rs. 1,500,000 and increase non-current assets by Rs. 1,000,000
(c) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,800,000
(d) Reduce profit by Rs. 1,300,000 and increase non-current assets by Rs. 1,000,000
04. Which of the following statements concerning the accounting treatment of research and development
expenditure are true, according to IAS 38 Intangible Assets?
(i) Research is original and planned investigation undertaken with the prospect of gaining new
knowledge and understanding.
(ii) Development is the application of research findings.
(iii) Depreciation of plant used specifically on developing a new product can be capitalised as part
of development costs.
(iv) Expenditure once treated as an expense cannot be reinstated as an asset.

Chapter 10: IAS 38: Intangible assets
(a) (i), (ii) and (iii)

(b) (i), (ii) and (iv)
(c) (ii), (iii) and (iv)
(d) All of the above
05. Which of the following should be included in a company’s statement of financial position as an
intangible asset under IAS 38 Intangible Assets?
(a) Internally developed brands
(b) Internally generated goodwill
(c) Expenditure on completed research
(d) Payments made on the successful registration of a patent.
06. Which TWO of the following criteria must be met before development expenditure is capitalised
according to IAS 38 Intangible Assets?
(a) the technical feasibility of completing the intangible asset
(b) future revenue is expected
(c) the intention to complete and use or sell the intangible asset
(d) there is no need for reliable measurement of expenditure
07. Which of the following shall be capitalised as intangible asset in financial statements?
(a) Rs. 400,000 developing a new process which will bring in no revenue but is expected to bring
significant cost savings
(b) Rs. 400,000 developing a new product. During development a competitor launched a rival
product and now the entity is hesitant to commit further funds to the process
(c) Rs. 400,000 spent on marketing a new product which has led to increased sales of Rs.
800,000
(d) Rs. 400,000 spent on designing a new corporate logo for the business
08. Which of the following CANNOT be recognised as an intangible non-current asset in Ghalib Limited
(GL)’s consolidated statement of financial position at 30 September 2021?
(a) GL spent Rs. 132 million developing a new type of product. In June 2021 management
worried that it would be too expensive to fund. The finances to complete the project came
from a cash injection from a benefactor received in November 2021.
(b) GL purchased a subsidiary during the year. During the fair value exercise, it was found that
the subsidiary had a brand name with an estimated value of Rs. 50 million but had not been
recognised by the subsidiary as it was internally generated.
(c) GL purchased a brand name from a competitor on 1 November 2020, for Rs. 65 million.
(d) GL spent Rs. 21 million during the year on the development of a new product, after
management concluded it would be viable in November 2020. The product is being launched
on the market on 1 December 2021 and is expected to be profitable.

09. Which of the following could be classified as development expenditure in Mars Limited’s statement of
financial position as at 31 March 2020 according to IAS 38 Intangible Assets?
(a) Rs. 120,000 spent on developing a prototype and testing a new type of propulsion system.
The project needs further work on it as the system is currently not viable.
(b) A payment of Rs. 50,000 to a local university’s engineering faculty to research new
environmentally friendly building techniques.
(c) Rs. 35,000 developing an electric bicycle. This is near completion and the product will be
launched soon. As this project is first of its kind it is expected to make a loss.
(d) Rs. 65,000 developing a special type of new packaging for a new energy-efficient light bulb.
The packaging is expected to reduce Mars Limited distribution costs by Rs. 35,000 a year.
10. Which TWO of the following factors are reasons why key staff cannot be capitalised as an intangible
asset by an entity?
(a) They do not provide expected future economic benefits
(b) They cannot be controlled by an entity
(c) Their value cannot be measured reliably
(d) They are not separable from the business as a whole
11. Which of the following items should be recognised as intangible assets?

(i) Patent for new drug
(ii) Licence for new vaccine
(iii) Specialist training courses
(a) (i) and (ii)
(b) (ii) and(iii)
(c) (i) and (iii)
(d) (i) only
12. Home Limited (HL) has acquired a subsidiary Stairs Limited (SL) in the current year. SL has a brand
which has been reliably valued by HL at Rs. 500,000, and a customer list which HL has been unable
to value.
Which of these describes how HL should treat these intangible assets of SL in their consolidated
Financial Statements?
(a) They should be included in goodwill.
(b) The brand should be capitalised as a separate intangible asset, whereas the customer list
should be included within goodwill.
(c) Both the brand and the customer list should be capitalised as separate intangible assets.
(d) The customer list should be capitalised as a separate intangible asset, whereas the brand
should be included within goodwill.

13. IAS 38 gives examples of activities that would be regarded as research and therefore not eligible for
recognition as an intangible asset.
Which one of the following would be an example of research costs?
(a) The design and construction of chosen alternative products or processes
(b) The design of pre-production prototypes and models
(c) The design of possible new or improved product or process alternatives
(d) The design, construction and operation of a pilot plant
14. Which of the following statements relating to intangible assets is true?

(a) All intangible assets must be carried at amortised cost or at an impaired amount, they cannot
be revalued upwards.
(b) The development of a new process which is not expected to increase sales revenues may
still be recognised as an intangible asset.
(c) Expenditure on the prototype of a new engine cannot be classified as an intangible asset
because the prototype has physical substance.
(d) Impairment losses for a cash generating unit are first applied to goodwill and then to other
intangible assets before being applied to tangible assets.
15. Hali Limited is developing a new product and expects to be able to capitalise the costs. Which one of
the following would preclude capitalisation of the costs?
(a) Development of the product is not yet complete.
(b) No patent has yet been registered in respect of the product.
(c) No sales contracts have yet been signed in relation to the product.
(d) It has not been possible to reliably allocate costs to development of the product.
16. During the year to 31 December 2018 Faiz Limited (FL) incurred Rs. 200,000 of development costs
for a new product. In addition, FL spent Rs. 60,000 on 1 January 2018 on machinery specifically used
to help develop the new product and Rs. 40,000 on building the brand identity.
Commercial production is expected to start during 2019.
The machinery is expected to last 4 years with no residual value.
What value should be included within Intangible Assets in respect of the above in FL’s Statement of
Financial Position as at 31 December 2018?
Rs. ___________
17. A company had Rs. 20 million of capitalised development expenditure at cost brought forward at 1
October 2017 in respect of products currently in production and a new project began on the same date.
The research stage of the new project lasted until 31 December 2017 and incurred Rs. 1.4 million of
costs. From that date the project incurred development costs of Rs. 800,000 per month.
On 1 April 2018 the directors became confident that the project would be successful and yield a profit
well in excess of costs. The project was still in development at 30 September 2018. Capitalised
development expenditure is amortised at 20% per annum using the straight-line method.

What amount will be charged to profit or loss for the year ended 30 September 2018 in respect of
research and development costs?
Rs. ___________
18. At 30 September 2019 Shakir Limited (SL)'s trial balance showed a brand at cost of Rs. 30 million,
less accumulated amortisation brought forward at 1 October 2018 of Rs. 9 million. Amortisation is
based on a ten-year useful life.
An impairment review on 1 April 2019 concluded that the brand had a value in use of Rs. 12 million
and a remaining useful life of three years. However, on the same date SL received an offer to purchase
the brand for Rs. 15 million.
What should be the carrying amount of the brand in the statement of financial position of SL as at 30
September 2019?
Rs. ___________
19. Down Limited (DL) owns a pharmaceutical business with a year-end of 30 September 2014. DL
commenced the development stage of a new drug on 1 January 2014.
Rs. 40,000 per month was incurred until the project was completed on 30 June 2014, when the drug
went into immediate production. The directors became confident of the project’s success on 1 March
2014. The drug has an estimated life span of five years and time apportionment is used by DL where
applicable.
What amount will DL charge to profit or loss for development costs, including any amortisation, for the
year ended 30 September 2014?
Rs. ___________
20. Apollo Limited (AL) carries out research and development. In the year ended 30 June 2015 AL incurred
total costs in relation to project M of Rs. 750,000, spending the same amount each month up to 30
April 2015, when the project was completed. The product produced by the project went on sale from
31 May 2015.
The project had been confirmed as feasible on 1 January 2015, and the product produced by the
project was expected to have a useful life of five years.
What is the carrying amount of the development expenditure asset as at 30 June 2015?
Rs. ___________


01. (c) Rs. 200,000 is research and should be written off as incurred.
Rs. 400,000 should be capitalised as a development asset but is not amortised
until commercial production begins.
02. (a) & (d) Training cannot be capitalised as a firm cannot control the future economic
benefits by limiting the access of others to the staff.
Internally generated brands cannot be capitalised
03. (b) The expenditure in relation to projects A and B should be written off.
Project C should be capitalised and will therefore increase the value of non-current
assets.
04. (d) All the statements are true.
05. (d) Internally generated intangible assets cannot be recognised, and research costs
are written off as incurred.
06. (a) & (c) There is no need for revenue, there needs to be probable economic benefits which
may come in the form of cost savings as well as revenue.
07. (a) Cost savings are inflow of economic benefits as well.
08. (a) The finance was only available after the year end. Therefore, the criteria of
recognising an asset were not met, as the resources were not available to
complete the project.
Even though the brand is internally generated in the subsidiary’s accounts, it can
be recognised at fair value for the group. Item (b) can be recognised as a
purchased intangible and item (d) meets the criteria for being capitalised as
development costs.
09. (d) Item (a) cannot be capitalised because it does not meet all the criteria as it is not
viable. Item (b) is research and cannot be capitalised. Item (c) cannot be
capitalised because it does not meet all the criteria as it is making a loss.
10. (b) & (c) Key staff cannot be capitalised as firstly they are not controlled by an entity.
Secondly, the value that one member of key staff contributes to an entity cannot
be measured reliably.
11. (a) The training courses should be charged to profit or loss.
12. (b) The brand can be measured reliably, so this should be accounted for as a separate
intangible asset on consolidation. The customer list cannot be valued reliably, and
so will form part of the overall goodwill calculation. It will be subsumed within the
goodwill value.
13. (c) This activity is still at the research stage.
14. (b) A new process may produce benefits (and therefore be recognised as an asset)
other than increased revenues, e.g. it may reduce costs.
15. (d) In order for capitalisation to be allowed it is not necessary for development to be
completed, patents to be registered or sales contracts signed. However, an
intangible asset can only be recognised if its cost can be reliably measured.

16. Rs. 215,000 The development costs of Rs. 200,000 can be capitalised, as can the depreciation
on the asset while the project is being developed. The asset is used for a year on
the project, so the depreciation for the first year (Rs. 60,000/4 years = Rs. 15,000)
can be added to intangible assets. The Rs. 40,000 is an internally generated brand
and cannot be capitalised.
17. Rs. 7,800,000

Rs.
Research costs 1,400,000
Expensed development Jan-Mar (800 × 3) 2,400,000
Depreciation on capitalised amount b/f (20m × 20%) 4,000,000
7,800,000
Note that no depreciation is charged on the new project as it is still in development.
18. Rs. 12,500,000

Rs. m
Recoverable amount (fair value - costs of disposal) 15.0
Less depreciation 1.4.X9 – 30.9.X9 (15m / 3 × 6/12) ( 2.5)
12.5
19. Rs. 88,000

Rs.
Write off to 1 Jan 2014 to 28 Feb 2014 (2 x 40,000) 80,000
Capitalise March to June = 4 x 40,000 = 160,000
Amortisation 160,000/5 years x 3/12 (July to Sep) 8,000
88,000
20. Rs. 295,000 The costs of Rs. 750,000 relate to ten months of the year (up to April 2015).
Therefore, the costs per month were Rs. 75,000. As the project was confirmed as
feasible on 1 January 2015, the costs can be capitalised from this date. So, four
months of these costs can be capitalised = Rs. 75,000 × 4 = Rs. 300,000.
The asset should be amortised from when the products go on sale, so one month’s
amortisation should be charged to 30 June 2015. Amortisation is (Rs. 300,000/5)
× 1/12 = Rs. 5,000. The carrying amount of the asset at 30 June 2015 is Rs.
300,000 – Rs. 5,000 = Rs. 295,000.

13
CHAPTER
IFRS 16: Leases
Contents
1 Key Definitions
2 Introduction
3 Lease classification
4 Accounting for lease by Lessee
5 Accounting for a finance lease: Lessor accounting
6 Accounting for an operating lease


01. During the year ended 30 September 2014 an entity entered into two lease transactions.
On 1 October 2013, the entity made a payment of Rs. 900,000 being the first of five equal annual
payments under a lease for an item of plant. The lease has an implicit interest rate of 10% and the
present value of the total lease payments on 1 October 2013 was Rs. 3,752,879.
On 1 January 2014, the entity made a payment of Rs. 180,000 for a one-year lease of an item of
equipment.
What amount in total would be charged to entity’s statement of profit or loss for the year ended 30
September 2014 in respect of the above transactions?
(a) Rs. 1,080,000
(b) Rs. 1,110,864
(c) Rs. 1,170,864
(d) Rs. 1,155,000
02. Zeta Limited entered into a five-year lease agreement on 1 November 2012, paying Rs. 109,750 per
annum, commencing on 31 October 2013. The present value of the lease payments was Rs. 450,000
and the interest rate implicit in the lease was 7%.
What is the amount to be shown within non-current liabilities at 31 October 2013?
(a) Rs. 262,072
(b) Rs. 288,023
(c) Rs. 371,750
(d) Rs. 364,070
03. IFRS 16 Leases permits certain assets to be exempt from the recognition treatment for right-of-use
assets. Which of the following assets leased to an entity would be permitted to be exempt?
(a) A used motor vehicle with an original cost of Rs. 1,500,000 and a current fair value of Rs.
70,000, leased for 24 months
(b) A new motor vehicle with a cost of Rs. 1,500,000, leased for 24 months
(c) A new motor vehicle with a cost of Rs. 1,500,000, leased for 24 months, to be rented to
customers on a daily rental basis
(d) A new motor vehicle with a cost of Rs. 1,500,000, leased for 12 months
04. On 1 January 2013 Rita Limited acquires a new machine with an estimated useful life of 6 years under
the following agreement:
An initial payment of Rs. 1,376,000 will be payable immediately and 5 further annual payments of Rs.
2,000,000 will be due, commencing 1 January 2013. The interest rate implicit in the lease is 8%.
The present value of the lease payments, excluding the initial payment, is Rs. 8,624,000
What will be recorded in financial statements at 31 December 2014 in respect of the lease liability?

Chapter 13: IFRS 16: Leases
(a) Finance cost Rs. 412,314

Non-current liability Rs. 3,566,234
Current liability (including interest payable) Rs. 2,000,000
(b) Finance cost Rs. 529,900

(c) Finance cost Rs. 531,200

(d) Finance cost Rs. 585,100

Current liability (including interest payable) Rs.1,528,100
05. On 1 April 2017 Pink Limited (PL) entered into a five-year lease agreement for a machine with an
estimated life of 7 years. Which of the following conditions would require the machine to be depreciated
over 7 years?
(a) PL has the option to extend the lease for two years at a market-rate rental
(b) PL has the option to purchase the asset at market value at the end of the lease
(c) Ownership of the asset passes to PL at the end of the lease period
(d) PL’s policy for purchased assets is to depreciate over 7 years
06. On 1 January 2014 Beta Limited (BL) entered into a lease agreement to lease an item of machinery
for 4 years with rentals of Rs. 210,000 payable annually in arrears. The asset has a useful life of 5
years and at the end of the lease term legal ownership will pass to BL. The present value of the lease
payments at the inception of the lease was Rs. 635,000 and the interest rate implicit in the lease is
12.2%.
For the year ended 31 December 2014 BL accounted for this lease by recording the payment of Rs.
210,000 as an operating expense. This treatment was discovered during 2015, after the financial
statements for 2014 had been finalised.
In the statement of changes in equity for the year ended 31 December 2015 what adjustment will be
necessary to retained earnings brought forward?
(a) Rs. 5,530 credit
(b) Rs. 132,530 credit
(c) Rs. 210,000 debit
(d) Rs. Nil
07. On 1 October 2013, Multan Limited acquired an item of plant under a five-year lease agreement.
The agreement had an implicit interest rate of 10% and required annual rentals of Rs. 6 million to be
paid on 30 September each year for five years.

The present value of the annual rental payments was Rs. 23 million.
What would be the current liability for the leased plant in Multan Limited’s statement of financial
position as at 30 September 2014?
(a) Rs. 19,300,000
(b) Rs. 4,070,000
(c) Rs. 5,000,000
(d) Rs. 3,850,000
08. Which of the following would not be included within the initial cost of a right-of-use asset?
(a) Installation cost of the asset
(b) Estimated cost of dismantling the asset at the end of the lease period
(c) Payments made to the lessor before commencement of the lease
(d) Total lease rentals payable under the lease agreement
09. IFRS 16 Leases permits certain assets to be exempt from the recognition treatment for right-of-use
assets. Which of the following leases of assets leased to an entity would NOT be permitted to be
exempt?
(a) Vehicle with cost of Rs. 900,000 leased for 9 months
(b) Telephone system with cost of Rs. 45,000 leased for 24 months
(c) Vehicle with original cost of Rs. 900,000, current market value of Rs. 45,000 leased for 24
months
(d) An item of furniture of Rs. 30,000 leased for 24 months
10. Noor Limited leases a car for office use. The present value of lease payments is Rs. 2,735,500 and
the rate implicit in lease is 10%. The terms of the lease require three annual instalments of Rs.
1,000,000 each at the start of each year.
At the end of first year of lease what amount will be shown for the lease liability in the company’s
statement of financial position under the heading of non-current liabilities?
(a) Rs. 1,000,000
(b) Rs. 1,090,000
(c) Rs. 903,060
(d) Rs. 909,050
11. Which TWOof the following are disclosure requirements relating to a lessor?
(a) Selling profit or loss
(b) Income from subleasing right of use assets

(c) A reconciliation of undiscounted lease payments to the net investment in the lease
(d) The charge related to short term leases
12. Jalal Leasing Limited (JLL) gave a plant under finance lease on 1 January 2011 to a customer. The
lease term is 4 years. The fair value of the asset is Rs. 11,000 and JL incurred initial direct costs of
Rs. 420. The interest rate implicit in lease is 15%. Rentals of Rs. 4,000 are receivable on 31 December
(also financial year end) each year.
What is amount of net investment in lease to be presented under current assets as at 31 December
2012?
(a) Rs. 9,133
(b) Rs. 2,630
(c) Rs. 3,025
(d) Rs. 6,503
13. A company leases a computer server with legal title of the asset passing after four years. The company
usually depreciate computers over six years.
The company also leases a machine for fourteen years, but legal title does not pass to the lessee at
the end of the agreement. The company usually depreciate machinery over twenty years.
Over what period of time should the computer and machine be depreciated?
(a) Computer (4 years) and Machine (14 years)
(b) Computer (4 years) and Machine (20 years)
(c) Computer (6 years) and Machine (14 years)
(d) Computer (6 years) and Machine (20 years)
14. Faheem Limited (FL) leased out its building on 1 January 2011 under an operating lease. The carrying
value of building is Rs. 239,000 and its remaining useful life is 25 years with no residual value.
FL also incurred Rs. 11,000 as initial direct costs. According to agreement, Rs. 16,000 was paid by
lessee as initial deposit and further rental of Rs. 10,000 per annum. shall be paid at the end of next
two years and then Rs. 32,000 per annum. shall be paid for following two years.
The lease term is 4 years.
What amount of lease income should be recognised in profit or loss for the year ended 31 December
2011?
(a) Rs. 10,000
(b) Rs. 26,000
(c) Rs. 25,000
(d) Rs. 16,000

15. Galaxy Leasing Limited (GLL) has leased certain equipment to Dairy Products Limited on 1 July 2013.
In this respect, the following information is available:
Rs. in million
Cost of equipment 28.69
Amount received on 1 July 2013 3.00
Four annual installments payable in arrears (on 30 June, each year) 7.80
Guaranteed residual value on expiry of the lease 5.00
Useful life of the equipment is estimated at 5 years. Rate of interest implicit in the lease is 14%.
What amount will be presented in non-current assets for net investment in lease as at 30 June 2014?
16. Alpha Limited leases an asset with an estimated useful life of 6 years for an initial period of 5 years,
and an optional secondary period of 2 years during which a nominal rental will be payable.
The present value of the initial period lease payments is Rs. 870,000.
What will be the carrying amount of the asset in Alpha Limited's statement of financial position at the
end of the second year of the lease?
Rs. ___________
17. Kamil Limited (KL) is engaged in manufacturing of plants. The following data relates to an asset leased
out by the company on January 01, 2011.
Cost Rs. 200,000
Sales price (quoted) Rs. 240,000
Installment at the end of each year Rs. 40,000
Lease term 7 years
Unguaranteed residual value Rs. 2,000
Initial direct costs Rs. 1,000
Rate of interest (quoted) 4%
(the low rate is quoted to attract customers)
Market rate of interest 7%
What is the amount of net investment in lease as at January 01, 2011?
Rs. ___________

18. Kamil Limited (KL) is engaged in manufacturing of plants. The following data relates to an asset leased
out by the company on January 01, 2011.
Cost Rs. 200,000
Sales price (quoted) Rs. 240,000
Installment at the end of each year Rs. 40,000
Lease term 7 years
Initial direct costs Rs. 1,000
Rate of interest (quoted) 4%
(the low rate is quoted to attract customers)
Market rate of interest 7%
What is the amount to be charged in cost of sales in respect of above transaction on January 01,
2011?
Rs. ___________
19. DJ Products deals in large office machines. It also offers such machines on lease. One such machine
was leased to a customer on July 1, 2004. Its particulars are as follows:
Purchase cost of DJ Products Rs. 150,000

Useful life 8 years
Lease period 6 years
Annual rental payable at beginning of each year Rs. 36,500
The customer's incremental borrowing rate is 10% whereas the discounting rate implicit in the lease
is 8%.
What is amount of net investment in lease that should be recognised on 1 st July 2004?
Rs. ___________
20. Guava Leasing Limited (GLL), had leased a machinery to Honeyberry Limited (HL) on 1 July 2017 on
the following terms:
(i) The non-cancellable lease period is 3.5 years. Each semi-annual lease installment of Rs. 48
million is receivable in arrears.
(ii) The lease contains an option to extend the lease term by 1.5 years. Each semiannual lease
instalment in the extended period will be of Rs. 15 million, receivable in arrears. It is
reasonably certain that HL will exercise this option.
(iii) The rate implicit in the lease is 10% per annum.
(iv) The useful life of machinery is 6 years.
(v) The unguaranteed residual value at the end of lease term is estimated at Rs. 20 million. GLL
incurred a direct cost of Rs. 10 million and general overheads of Rs. 0.5 million to complete
the transaction.
(vi) The net investment in lease at inception of lease has been calculated i.e. Rs. 319.06 million
What is the amount of interest income to be recognised in profit or loss for the year ended 30 June
2018?
Rs. _________ million


01. (c) Depreciation of leased plant Rs. 750,576 (Rs. 3,752,879/5 years)
Finance cost Rs. 285,288 ((Rs.3,752,879 – 900,000) × 10%)
Rental of equipment (short term lease) Rs. 135,000 (180,000 × 9/12)
Total Rs. 1,170,864
02. (b)
Balance at Interest Principal Balance at
Time Rental
beginning @ 7% Element end
T Rupees
31.10.2013 450,000 31,500 109,750 (78,250) 371,750
31.10.2014 371,750 26,023 109,750 (83,727) 288,023
03. (d) Assets permitted to be exempted from recognition are low-value assets and those with a
lease term of 12 months or less. The use of the asset is irrelevant, and, although IFRS 16
Leases does not define low-value, it is the cost when new that is considered rather than
current fair value.
04. (a)
Time Opening Payment Subtotal Interest 8% Closing
Rupees
2013 8,624,000 (2,000,000) 6,624,000 529,920 7,153,920
2014 7,153,920 (2,000,000) 5,153,920 412,314 5,566,234
2015 5,566,234 (2,000,000) 3,566,234
05. (c) The transfer of ownership at the end of the lease indicates that PL will have use of the
asset for its entire life, and therefore 7 years is the appropriate depreciation period.
Potential transactions at market rate would be ignored as they do not confer any benefit
on PL, and PL’s depreciation policy for purchased assets is irrelevant.
06. (a) Reverse incorrect treatment of rental:

Dr Liability Rs. 210,000
Cr Retained Earnings Rs. 210,000
Charge asset depreciation (Rs. 635,000/5):

Dr Retained earnings Rs. 127,000
Cr Property, plant and equipment Rs. 127,000
Charge finance cost (Rs. 635,000 × 12.2%):

Dr Retained Earnings Rs. 77,470
Cr Liability Rs. 77,470
This gives a net adjustment of Rs. 5,530 to be credited to opening retained earnings.

07. (b)
Balance at Interest @ Principal Balance at
Time Rental
beginning 10% Element end
T Rupees
30.09.14 23,000,000 2,300,000 6,000,000 (3,700,000) 19,300,000
30.09.15 19,300,000 1,930,000 6,000,000 (4,070,000)
08. (d) The value recognised in respect of the lease payments will be the present value of future
lease payments rather than the total value.
09. (c) Assets permitted to be exempted from recognition are low-value assets and those with a
lease term of 12 months or less. Although IFRS 16 Leases does not define low-value but
it lists examples which includes telephones and small items of furniture. Low value is
based on original cost and not on current market value.
10. (d)
Time Opening Payment Subtotal Interest 10% Closing
Rupees
1 2,735,500 (1,000,000) 1,735,500 173,550 1,909,050
2 1,909,050 (1,000,000) 909,050
11. (a) & (c) (b) and (d) are relevant to lessee not lessor.
12. (c)
Receivable at Interest Principal Receivable
Receipt time Rental
beginning @ 15% Element after receipt
T Rupees
31.12.2011 11,420 1,713 4,000 (2,287) 9,133
31.12.2012 9,133 1,370 4,000 (2,630) 6,503
31.12.2013 6,503 975 4,000 (3,025)
13. (c) Assets are usually depreciated over lease term, however, if ownership is transferred these
should be depreciated over useful life.
14. (c) Total payments = Rs. 16,000 + (10,000 x2) + (32,000 x 20 = Rs. 100,000
On straight line basis over four years Rs. 100,000 / 4 = Rs. 25,000
15. (d)
Opening Interest payments Principal Closing
Date balance @ 14% repayments balance
------------------------------ Rs. in million ------------------------------
01-Jul-2013 28.69 (3.00) (3.00) 25.69
30-Jun-2014 25.69 3.59 (7.80) (4.21) 21.48
30-Jun-2015 21.48 3.01 (7.80) (4.79) 16.69

16. Rs. The asset would initially be capitalised at Rs. 870,000. This is then depreciated over six
580,000 years, being the shorter of the useful life and the lease term (including any secondary
period).
This would give a depreciation expense of Rs. 140,500 a year. After two years,
accumulated depreciation would be Rs. 290,000 and therefore the carrying amount would
be Rs. 580,000.
17. Rs. PV of MLP Rs. 40,000 x 5.3893 discount factor @7% = Rs. 215,572
216,818
PV of UGRV Rs. 2,000 x 0.6227 discount factor @7% = Rs. 1,246
Total Rs. 216,818
18. Rs. Cost of inventory transferred Rs. 200,000 less present value of unguaranteed residual
198,754 value Rs. 1,246 = Rs. 198,754
19. Rs.
188,545 Cash payment Discount Present
Year Particulars
Rs. factor value Rs.
0 First rentals 36,500 1.000 36,500
1-5 Other 5 rentals 36,500 3.993 145,745
PV of Lease Payment 182,245
6 URV 10,000 0.630 6,300
PV of GI 188,545
20. Rs. 30.3

million Opening Interest @ payments Principal Closing
Date balance 10%x6/12 repayments balance
------------------------------ Rs. in million ------------------------------
31-Dec-17 319.06 15.95 (48) (32.05) 287.01
30-Jun-18 287.01 14.35 (48) (33.66) 253.36
30.3

14
CHAPTER
Other areas of IFRSs
(IFRS 8, IAS 10, IAS 37)
Contents
1 Key Definitions
2 IFRS 8: Operating Segments
3 IAS 10: Events After the Reporting Period
4 IAS 37: Provisions: Recognition
5 IAS 37: Provisions: Measurement
6 IAS 37: Provisions: Double Entry and Disclosures
7 IAS 37: Guidance on Specific Provisions
8 IAS 37: Contingent Liabilities and Contingent Assets

Chapter 14: IFRS 8, IAS 37 and IAS 10

01. Which of the following would NOT be valid reason for recording a provision?
(a) A company has a policy of cleaning up any environmental contamination caused by its operations
but is not legally obliged to do so.
(b) A company is leasing an office building for which it has no further use. However, it is tied into the
lease for another year.
(c) A company is closing down a division. The Board has prepared detailed closure plans which
have been communicated to customers and employees.
(d) A company has acquired a machine which requires a major overhaul every three years. The cost
of the first overhaul is reliably estimated at Rs. 1,200,000.
02. Which of the following statements are correct in accordance with IAS 37 Provisions, contingent liabilities
and contingent assets?
(i) Provisions should be made for both constructive and legal obligations.
(ii) Discounting may be used when estimating the amount of a provision.
(iii) A restructuring provision must include the estimated costs of retraining or relocating continuing
staff.
(iv) A restructuring provision may only be made when a company has a detailed plan for the
restructuring and has communicated to interested parties a firm intention to carry it out.
(a) All four statements are correct
(b) (i), (ii) and (iv) only
(c) (i), (iii) and (iv) only
(d) (ii) and (iii) only
03. Talal Limited (TL) year end is 30 September 2014 and the following potential liabilities have been
identified:
Which TWO of the following should TL recognise as liabilities as at 30 September 2014?
(a) The signing of a non-cancellable contract in September 2014 to supply goods in the following
year on which, due to a pricing error, a loss will be made.
(b) The cost of a reorganisation which was approved by the board in August 2014 but has not yet
been implemented, communicated to interested parties or announced publicly
(c) An amount of deferred tax relating to the gain on the revaluation of a property during the current
year. TL has no intention of selling the property in the foreseeable future.
(d) The balance on the warranty provision which related to products for which there are no
outstanding claims and whose warranties had expired by 30 September 2014
04. Iron Limited (IL) deals extensively with foreign entities, and its financial statements reflect these foreign
currency transactions. After SFP date, and before the “date of authorization” of the issuance of financial
statements, there were abnormal fluctuations in foreign currency rates. IL should:

(a) Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in
foreign exchange rates.
(b) Adjust the foreign exchange year-end balances to reflect all abnormal fluctuations in foreign
exchange rates (and not just abnormal movements).
(c) Disclose the post-SFP event in the notes as a non-adjusting event.
(d) Ignore the post-SFP event.
05. The following information has been extracted from the records of Simple Limited (SL):
1. SL operates a chemical plant which has polluted the surrounding countryside. The Board of
Directors has decided to clean up the environmental damage. This decision has been published in
the local press on 15 June 2018. However, SL is not legally required to clean up the environmental
damage.
2. SL has decided to close down one of its operating segment. However, the decision was made public
after 30 June 2018.
In the financial statements for the year ended 30 June 2018, SL should recognize a provision for the
best estimate of costs in respect of:
(a) (1) only
(b) (2) only
(c) Neither (1) nor (2)
(d) Both (1) and (2)
06. Which of the following events arising after the year end is an adjusting event?
(a) The discovery of fraud or error which shows that financial statements are incorrect.
(b) Announcement of a plan to discontinue an operation.
(c) Destruction of a major production plant by fire.
(d) Restructuring of a major loan
07. Operating segment information should:

(i) increase the number of reported segments and provide more information
(ii) enable users to see an undertaking through the eyes of management
(iii) enable an undertaking to provide timely segment information for external interim reporting with
relatively low incremental cost
(iv) enhance consistency with the management discussion and analysis or other annual report
disclosures
(v) provide various measures of segment performance
(vi) provide information about reduced staff
(a) (i) to (iii) only
(b) (i) to (vi) all

(c) (i) to (iv) only
(d) (i) to (v) only
08. An operating segment is a component of an undertaking

(i) that engages in business activities from which it may earn revenues and incur expenses
(including revenues and expenses relating to transactions with other components of the same
undertaking)
(ii) whose operating results are regularly reviewed by the undertaking’s chief operating decision
maker to make decisions about resources to be allocated to the segment and assess its
performance
(iii) for which discrete financial information is available
(iv) which is taxed separately from other components
(a) (i) to (ii) only
(b) (i) to (iii) only
(c) (i) to (iv) all
(d) (i), (ii) and (iv)
09. A component of an undertaking that sells primarily or exclusively to other operating segments of the
undertaking.
(a) It must be classed as an operating segment
(b) It must be excluded from being an operating segment
(c) It is included as an operating segment if the undertaking is managed that way
(d) It is included as an operating segment if the management so desires
10. IFRS 8 shall apply to

(i) listed companies
(ii) any company reporting under IFRS that wishes to provide the information
(iii) all other companies reporting under IFRS
(a) (i) to (ii) only
(b) (i) to (iii) all
(c) (i) only
(d) (ii) only
11. An operating segment may engage in business activities for which it has yet to earn revenues, for
example, start-up operations and it:
(a) will be reportable segment before earning revenues
(b) may be reportable segment before earning revenues

(c) will not be reportable segment before earning revenues
(d) None of above
12. Head office expenses:
(a) can be allocated to segments on a reasonable basis
(b) must not be allocated to segments
(c) must be allocated to segments based on their turnover
(d) must be allocated to segments based on their profit before tax
13. Two or more operating segments may be aggregated into a single operating segment if aggregation is
consistent with the core principle of IFRS 8, the segments have similar economic characteristics, and
the segments are similar in each of the following respects:
(i) the nature of the products and services
(ii) the nature of the production processes
(iii) the type or class of client for their products and services
(iv) the methods used to distribute their products or provide their services
(v) if applicable, the nature of the regulatory environment, for example, banking, insurance or public
utilities
(vi) staff numbers
(a) (i) to (vi) all
(b) (i) to (iii) only
(c) (i) to (iv) only
(d) (i) to (v) only
14. Which TWO of the following events which occur after the reporting date of an entity but before the
financial statements are authorised for issue are classified as adjusting events in accordance with IAS
10 Events after the Reporting Period?
(a) A change in tax rate announced after the reporting date, but affecting the current tax liability
(b) The discovery of a fraud which had occurred during the year
(c) The determination of the sale proceeds of an item of plant sold before the year end
(d) The destruction of a factory by fire
15. In a review of its provisions for the year ended 31 March 2015, entity’s assistant accountant has
suggested the following accounting treatments:
(i) Based on past experience, a Rs. 200,000 provision for unforeseen liabilities arising after the year
end.
(ii) The partial reversal (as a credit to the statement of profit or loss) of the accumulated depreciation
provision on an item of plant because the estimate of its remaining useful life has been increased
by three years.

(iii) Providing Rs. 1 million for deferred tax at 25% relating to a Rs. 4 million revaluation of property
during March 2015 even though entity has no intention of selling the property in the near future.
Which of the above suggested treatments of provisions is/are permitted by IFRS Standards?
(a) (i) only
(b) (i) and (ii)
(c) (ii) and (iii)
(d) (iii) only
16. Canon Limited (CL) is being sued by a customer for Rs. 2 million for breach of contract over a cancelled
order. CL has obtained legal opinion that there is a 20% chance that CL will lose the case. Accordingly,
CL has provided Rs. 400,000 (Rs. 2 million × 20%) in respect of the claim. The unrecoverable legal
costs of defending the action are estimated at Rs. 100,000. These have not been provided for as the
case will not go to court until next year.
What is the amount of the provision that should have been made by CL in respect of above information?
Rs. ___________
17. During the year Platinum Limited acquired an iron ore mine at a cost of Rs. 600 million. In addition,
when all the ore has been extracted (estimated ten years' time) the company will face estimated costs
for landscaping the area affected by the mining that have a present value of Rs. 200 million. These
costs would still have to be incurred even if no further ore was extracted.
At which amount the mine should be recognised?
Rs. ___________
18. Titanium Limited (TL) is preparing its financial statements for the year ended 30 September 2017. TL is
facing a number of legal claims from its customers with regards to a faulty product sold.
The total amount being claimed is Rs. 3.5 million. TL’s lawyers say that the customers have an 80%
chance of being successful.
According to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, what amount, if any,
should be recognised in respect of the above in TL’s statement of financial position as at 30 September
2017?
Rs. ___________
19. Alpha Limited has a year end of 31 December 2014. On 15 December 2014 the directors publicly
announced their decision to close an operating unit and make a number of employees redundant. Some
of the employees currently working in the unit will be transferred to other operating units within Alpha
Limited.
The estimated costs of the closure are as follows: Rs. 000

Redundancy costs 800
Lease termination costs 200
Relocation of continuing employees to new locations 400
Retraining of continuing employees 300
1,700

What is the closure provision that should be recognised?
Rs. ___________
20. On 1 October 2013, X Limited commenced drilling for oil in an undersea oilfield. The extraction of oil
causes damage to the seabed which has a restorative cost (ignore discounting) of Rs. 10,000 per million
barrels of oil extracted. X Limited extracted 250 million barrels of oil in the year ended 30 September
2014.
X Limited is also required to dismantle the drilling equipment at the end of its five-year licence. This has
an estimated cost of Rs. 30 million on 30 September 2018. X Limited’s cost of capital is 8% per annum
and Re. 1 has a present value of 68 paisa in five years’ time.
What is the total provision (extraction plus dismantling) which X Limited would report in its statement of
financial position as at 30 September 2014 in respect of its oil operations?
Rs. ___________


01. (d) The cost of the overhaul will be capitalised when it takes place. No obligation
exists before the overhaul is carried out. The other options would all give rise to
valid provisions.
02. (b) A restructuring provision must not include the costs of retraining or relocating
staff.
03. (a) & (c) In (b) the obligation does not exist as it has not been communicated to those
affected by it. In (d) there is no obligation as warranty period has expired.
04. (c) This is non-adjusting event, however, being material, it should be disclosed.
05. (a) In (2) the decision was made public after year end, so it is non-adjusting event.
06. (a) The fraud existed at year end, it was only discovered after the year end.
07. (d) Information about reduced staff is not required by IFRS 8
08. (b) Taxation is not criteria for defining operating segment
09. (c) It may be included if entity is so managed (not based on desire).
10. (c) IFRS 8 is applicable to listed companies only.
11. (b) It may be reportable segment if it meets the criteria.
12. (a) These can be allocated on reasonable basis.
13. (d) Staff number is not the factor to combine two or more segments.
14. (b & c) The change in tax rate and the fire will be non-adjusting events as the conditions
did not exist at the reporting date.
15. (d) Deferred tax relating to the revaluation of an asset must be provided for even if
there is no intention to sell the asset in accordance with IAS 12 Income Taxes.
16. Rs. 100,000 Loss of the case is not 'probable', so no provision is made, but the legal costs will
have to be paid so should be provided for.
17. Rs. 800 million Rs. 600 million + Rs. 200 million = Rs. 800 million
18. Rs. 3,500,000 The amount payable relates to a past event (the sale of faulty products) and the
likelihood of payout is probable (i.e. more likely than not). Hence, the full amount
of the payout should be provided for.
19. Rs. 1,000,000 The costs associated with ongoing activities (relocation and retraining of
employees) should not be provided for.
20. Rs. 24,532,000 Extraction provision at 30 September 2014 is

Rs. 2.5 million (250 × 10).
Dismantling provision at 1 October 2013 is
Rs. 20.4 million (30,000 × 0.68).
his will increase by an 8% finance cost by 30 September 2014 = Rs. 22,032,000.
Total provision is Rs. 24,532,000.

Fa Mcqs (Icap)

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Fa Mcqs (Icap)

Uploaded by

Copyright:

Available Formats

MCQs BANK (kit)

FINANCIAL ACCOUNTING &

Courtesy: SYED SHAHBAZ RAZA

IAS 1: Preparation of financial

* The student must refer original handbook of IFRS.

© Emile Woolf International 19 The Institute of Chartered Accountants of Pakistan

2 OBJECTIVE BASED QUESTIONS

04. The total value of shares a company offers to subscribe is called:

© Emile Woolf International 35 The Institute of Chartered Accountants of Pakistan

07. Which of the following issued by an entity is treated as liability?

08. A debit balance on the retained earnings account indicates that:

© Emile Woolf International 36 The Institute of Chartered Accountants of Pakistan

15. Incremental depreciation has following effects on statement of changes in equity:

16. A company has following balances on 1 January 2019:

17. A company has following balances on 1 January 2019:

© Emile Woolf International 37 The Institute of Chartered Accountants of Pakistan

18. A company has following balances on 1 January 2019:

The company made a bonus issue of 2 for 5 shares already held.

19. A company has following balances on 1 January 2019:

The company made a bonus issue of 2 for 5 shares already held.

20. A company has following balances on 1 January 2019:

© Emile Woolf International 38 The Institute of Chartered Accountants of Pakistan

25. Redeemable preferred shares is required to be reported as:

© Emile Woolf International 39 The Institute of Chartered Accountants of Pakistan

(c) It decreases the share capital balance

© Emile Woolf International 40 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 41 The Institute of Chartered Accountants of Pakistan

2 OBJECTIVE BASED ANSWERS

11. (a) & (c)

12. (a) & (b)

16. Rs. 120 million Rs. 100 million +

17. Rs. 39 million Rs. 30 million +

18. Rs. 140 million Rs. 100 million +

© Emile Woolf International 42 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 43 The Institute of Chartered Accountants of Pakistan

IAS 7: Statement of cash flows

* The student must refer original handbook of IFRS.

© Emile Woolf International 45 The Institute of Chartered Accountants of Pakistan

6 OBJECTIVE BASED QUESTIONS

03. A company has provided the following information:

04. A company has provided following balances

© Emile Woolf International 132 The Institute of Chartered Accountants of Pakistan

05. A company has provided following information as at 31 March 2019:

06. A company has provided the following data:

© Emile Woolf International 133 The Institute of Chartered Accountants of Pakistan

10. Which of the following is an advantage of statement of cash flows?

11. A company has made following investments during the year:

© Emile Woolf International 134 The Institute of Chartered Accountants of Pakistan

(b) Rs. 24,000 inflow

© Emile Woolf International 135 The Institute of Chartered Accountants of Pakistan

18. A company has provided following information:

22. Daily sales and purchases and employee costs comprise:

© Emile Woolf International 136 The Institute of Chartered Accountants of Pakistan

23. Which of the following involves a movement of cash?

25. Which of the following are not the operating activities?

© Emile Woolf International 137 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 138 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 139 The Institute of Chartered Accountants of Pakistan

6 OBJECTIVE BASED ANSWERS

Share Capital + Share premium

© Emile Woolf International 140 The Institute of Chartered Accountants of Pakistan

© Emile Woolf International 141 The Institute of Chartered Accountants of Pakistan

Cash flow from investing activities