$70,000 and incurred additional costs of $2,119 for installation on 1
January 20X1. The machine was leased to BBB Limited under a three year
lease with three annual fixed lease payments of $26,364 payable annually
at the start of each financial year beginning on 1 January 20X1. What is
the interest rate implicit in the lease (rounded to the nearest number)? 11%
9%
10%
12%
2) Under FRS 116 Leases, which of the following conditions would
generally lead to a lease being classified as a finance lease by a lessor?
Condition (i) is where ownership is transferred by the end of the lease
term. Condition (ii) is where the lease contains a bargain purchase option.
Condition (iii) is where the lease term is for the major part of the economic
life of the asset. Condition (iv) is where the present value of the lease
payments are substantially equal to the asset’s fair value.
All four conditions must exist.
Conditions (i), (ii) and (iii) only.
Any of the four conditions.
Conditions (i) and (ii) only.
3) Which of the following statements with respect to FRS 116 Leases is
FALSE?
None of the listed options.
A lessor shall disclose the nature of its leasing activities.
A lessor shall disclose why there is any significant changes in the carrying amount of
the net investment in the lease.
A lessor shall disclose how it manages its risk associated with any rights it retains in the
underlying asset.. 4) Contract A does not contain a bargain purchase option but the lease
term is for the major part of the economic life of the leased asset.
Contract B does not transfer title to the lessee at the end of the lease
term but the present value of the lease payments is equal to the fair value
of the leased asset. Which of the following statements is FALSE under FRS
116 Leases?
Lessee determines whether a lease arrangement or a service arrangement exists in the
contract.
Lessor in contract A classifies it as a finance lease while lessor in contract B classifies it
as a finance lease.
Lessee in contract A classifies it as a finance lease while lessee in contract B classifies it
as a finance lease.
Lessor determines whether a lease arrangement or a service arrangement exists in the
contract.
5) AAA Limited, with 31 December financial year-ends, leases out a
machine on 1 January 20X1 on a finance lease. The machine has a fair
value of $50,000. The annual fixed lease payments of $19,753 will be
receivable on 31 December 20X1, 31 December 20X2, and 31 December
20X3. The implicit rate of interest is 9%. Using the effective interest
method, what is the amount of interest income (rounded to the nearest
dollar) earned by AAA Limited in the year ending 31 December 20X2? $4,500
$1,777
$3,127
None of the listed options 6) AAA Limited is in the business of manufacturing and selling computer
systems. It leased computers to BBB Limited on 1 January 20X1. The
manufacturing cost of the computers was $12 million. This noncancellable lease had the following terms: (i) Lease payments: $2,466,754
semi-annually; first payment at 1 January 20X1; remaining payments at
July 1 and Jan 1 each year through 1 July 20X5; (ii) Lease term: 5 years (10
semi-annual payments); (iii) No residual value; (iv) no bargain purchase
option; (v) Economic life of equipment: 5 years; (vi) Implicit interest rate
of 5% semi-annually; (vii) Fair value of the computers at 1 January 20X1:
$20 million. Which of the following statements is FALSE, assuming AAA
Limited adopts FRS 116 Leases?
None of the listed options.
AAA Limited records sales revenue of $20 million in year ending 31 December 20X1. AAA Limited records cost of goods sold of $12 million in year ending 31 December
20X1.
AAA Limited records interest expense in the year ending 31 December 20X1.
7) Contract A does not contain a bargain purchase option but the lease
term is for the major part of the economic life of the leased asset.
Contract B does not transfer title to the lessee at the end of the lease
term but the present value of the lease payments is equal to the fair value
of the leased asset. How should these leases be classified by the lessor
under FRS 116?
Lessor in contract A classifies it as an operating lease while lessor in contract B
classifies it as a finance lease.
Lessor in contract A classifies it as a finance lease while lessor in contract B classifies it
as a finance lease.
Lessor in contract A classifies it as a finance lease while lessor in contract B classifies it
as an operating lease.
Lessor in contract A classifies it as an operating lease while lessor in contract B
classifies it as an operating lease.
8) Which of the following is not part of the lease payments taken into
account by the lessor under FRS 116 Leases?
any amounts guaranteed by the lessee or by a party related to the lessee or by an
unrelated third party.
the payments over the lease term that the lessee is required to make.
Any payment the lessee must make at the end of the lease term to exercise the bargain
purchase option to purchase the leased asset.
None of the listed options.
9) AAA Limited is in the business of manufacturing and selling computer
systems. It leased computers to BBB Limited on 1 January 20X1. The
manufacturing cost of the computers was $12 million. This noncancellable lease had the following terms: (i) Lease payments: $2,466,754
semi-annually; first payment at 1 January 20X1; remaining payments at
July 1 and Jan 1 each year through 1 July 20X5; (ii) Lease term: 5 years (10
semi-annual payments); (iii) No residual value; (iv) no bargain purchase
option; (v) Economic life of equipment: 5 years; (vi) Implicit interest rate
of 5% semi-annually; (vii) Fair value of the computers at 1 January 20X1:
$20 million. Which of the following statements is FALSE, assuming AAA
Limited adopts FRS 116 Leases?
AAA Limited records interest income in the year ending 31 December 20X1.
AAA Limited records sales revenue of $20 million in year ending 31 December 20X1.
AAA Limited records cost of goods sold of $12 million in year ending 31 December
20X1. None of the listed options. 10) Under FRS 116 Leases, which of the following characteristics would
not apply to a finance lease?
The lease term is for the major part of the economic life of the asset.
The leased assets are specialised in nature such that only the lessee can use them
without major modification.
Ownership of the asset is transferred to the lessee at the end of the lease term.
At the inception of the lease, the present value of the lease payments amounts to 10% of
the fair value of the leased asset.
11) How does FRS 109 Financial Instruments determine the measurement
method to be used for a particular financial asset?
By reviewing the business model of each entity and the risks and rewards of ownership
of the instrument.
By reviewing the realisability and the contractual cash flow characteristics of the
instrument.
By reviewing the business model of each entity and the risks and rewards of ownership
of the instrument.
By reviewing the business model of each entity and the contractual cash flow
characteristics of the instrument.
12) Which of the following statements is FALSE under FRS 109 Financial
Instruments?
Investments measured at fair value through other comprehensive income is measured at
its fair value plus transaction costs directly attributable to its acquisition at initial
recognition.
Investments measured at fair value through profit or loss is measured at its fair value at
initial recognition.
Investments measured at fair value through profit or loss is measured at its fair value
plus transaction costs directly attributable to its acquisition at initial recognition.
Investments measured at amortised cost is measured at its fair value plus transaction
costs directly attributable to its acquisition at initial recognition. 13) AAA Ltd purchased several investments during 20X1, its first year of
operations. The following information are provided. Note that the
fluctuations in the fair values are transitory. It purchased BBB Ltd bonds at
$380,000 on 1 January 20X1. These bonds are 4-year bond with a coupon
rate of 10% and par value of $400,000. BBB Ltd will make coupon
payments annually on 31 December with the first coupon payment made
on 31 December 20X1. As at the end of 20X1 and 20X2, its amortised cost
is $384,194 and $388,875 and its fair value is $385,000 and $400,000
respectively. AAA Ltd also purchased CCC Ltd shares. The cost of these
shares was at $137,900. The fair values as at the end of 20X1 and 20X2
are $139,000 and $175,000. AAA Ltd also purchased DDD Ltd shares. The
cost of these shares was at $125,000. The fair values as at the end of
20X1 and 20X2 are $130,500 and $150,400. AAA Ltd classifies its
investments in BBB Ltd as measured at amortised cost, those in CCC Ltd
as measured at fair value through profit or loss and those in DDD Ltd as
measured at fair value through other comprehensive income. What is the
amount of total investment reflected on AAA Ltd’s statement of financial
position as at the end of 20X1?
$654,500.
$653,694.
$714,275.
725,400 14) The scope of FRS 109 Financial Instruments includes all of the
following items except:
financial instruments that meet the definition of a financial asset.
none of the listed options.
financial instruments that meet the definition of a financial liability.
contracts to buy or sell non-financial items that can be settled net. 15) Under which of the following circumstances is derecognition of a
financial asset generally not appropriate under FRS 109 Financial
Instruments? The financial asset has been transferred by the entity and the entity has retained
substantially all the risks and rewards of the transferred assets.
None of the listed options.
The financial asset has been transferred by the entity and the entity has neither retained
nor transferred substantially all the risks and rewards of ownership of the transferred
asset. Further, the entity has lost control of the asset.
The contractual rights to the cash flows of the financial assets have expired. 16) Which of the following categories generally exclude equity
investments?
Investments classified as subsequently measured at fair value through profit or loss.
Investments classified as subsequently measured at fair value through other
comprehensive income.
Investments classified as subsequently measured at amortised cost.
None of the listed options. 17) Which of the following best describes the effective interest rate of a
bond investment measured at amortised cost?
The interest rate that exactly discounts estimated future cash payments or receipts
through the expected life of the bond.
The basic risk-free interest rate that is derived from government bonds.
The stated coupon rate of the bond.
The interest rate currently charged by the entity on similar bond instruments.
18) AAA Ltd purchased several investments during 20X1, its first year of
operations. The following information are provided. Note that the
fluctuations in the fair values are transitory. It purchased BBB Ltd bonds at
$380,000 on 1 January 20X1. These bonds are 4-year bond with a coupon
rate of 10% and par value of $400,000. BBB Ltd will make coupon
payments annually on 31 December with the first coupon payment made
on 31 December 20X1. As at the end of 20X1 and 20X2, its amortised cost
is $384,194 and $388,875 and its fair value is $385,000 and $400,000
respectively. AAA Ltd also purchased CCC Ltd shares. The cost of these
shares was at $137,900. The fair values as at the end of 20X1 and 20X2
are $139,000 and $175,000. AAA Ltd also purchased DDD Ltd shares. The
cost of these shares was at $125,000. The fair values as at the end of
20X1 and 20X2 are $130,500 and $150,400. AAA Ltd classifies its
investments in BBB Ltd as measured at amortised cost, those in CCC Ltd
as measured at fair value through profit or loss and those in DDD Ltd as measured at fair value through other comprehensive income. Which of the
following statements relating to AAA Ltd’s financial year ending 31
December 20X1 is FALSE?
AAA Ltd recognises an unrealised marked to market gain of $5,500 in the income
statement on DDD Ltd shares.
AAA Ltd recognises an unrealised marked to market gain of $5,000 in the income
statement on BBB Ltd bonds.
All of the listed options.
AAA Ltd recognises an unrealised marked to market loss of $1,100 in the income
statement on CCC Ltd shares. 19) When is a financial asset initially recognised under FRS 109 Financial
Instruments?
A financial asset is recognised when, and only when, the entity becomes a party to the
contractual provisions of the instrument.
A financial asset is recognised when, and only when, the entity obtains control of the
instrument and has the ability to dispose of the financial asset independently of others.
A financial asset is recognised when, and only when, it is probable that future economic
benefits will flow to the entity and the cost or value of the financial asset can be
measured reliably.
A financial asset is recognised when, and only when, the entity obtains the risks and
rewards of ownership of the financial asset and has the ability to dispose of the financial
asset. 20) AAA Ltd purchased several investments during 20X1, its first year of
operations. The following information are provided. Note that the
fluctuations in the fair values are transitory. It purchased BBB Ltd bonds at
$380,000 on 1 January 20X1. These bonds are 4-year bond with a coupon
rate of 10% and par value of $400,000. BBB Ltd will make coupon
payments annually on 31 December with the first coupon payment made
on 31 December 20X1. As at the end of 20X1 and 20X2, its amortised cost
is $384,194 and $388,875 and its fair value is $385,000 and $400,000
respectively. AAA Ltd also purchased CCC Ltd shares. The cost of these
shares was at $137,900. The fair values as at the end of 20X1 and 20X2
are $139,000 and $175,000. AAA Ltd also purchased DDD Ltd shares. The
cost of these shares was at $125,000. The fair values as at the end of
20X1 and 20X2 are $130,500 and $150,400. AAA Ltd classifies its
investments in BBB Ltd as measured at amortised cost, those in CCC Ltd
as measured at fair value through profit or loss and those in DDD Ltd as
measured at fair value through other comprehensive income. Which of the
following statements is TRUE? On 31 December 20X2, AAA Ltd has accumulated other comprehensive income of
$20,000 on BBB Ltd bonds.
All of the listed options.
On 31 December 20X2, AAA Ltd has accumulated other comprehensive income of
$25,400 on DDD Ltd shares.
On 31 December 20X2, AAA Ltd has accumulated other comprehensive income of
$37,100 on CCC Ltd shares. 21) Which of the following statements relating to FRS 109 Financial
Instruments is FALSE?
An entity shall present the amount of change in the fair value of the financial liability
that is designated as fair value through profit or loss that is attributable to changes in the
credit risk of that liability in Other Comprehensive Income.
At initial recognition, an entity shall measure a financial liability classified as measured
at fair value through profit or loss at its fair value.
At initial recognition, an entity shall measure a financial liability not classified as
measured at fair value through profit or loss at its fair value minus transaction costs that
are directly attributable to the issue of the financial liability.
None of the listed options. 22) Which of the following is generally NOT a consideration when
evaluating whether to derecognise a financial liability?
None of the listed options.
Whether the obligation has been cancelled?
Whether the obligation has expired?
Whether the obligation has been discharged? 23) On 1 January 20X3, AAA Ltd issued a bond with a principal amount of
$500,000 and bears interest at the coupon rate of 10%. The current
market rate of interest is 11%. These bonds will sell at a price that is:
less than $500,000.
equal to $500,000.
undeterminable.
more than $500,000. 24) Which of the following statements is most likely TRUE with respect to
accounting for a compound financial instrument?
The issuer shall classify a compound financial instrument as either a financial liability
or equity based on an evaluation of the predominant characteristics of the contractual
arrangement.
The issuer shall classify the compound financial instrument entirely as liability until it
gets converted into equity.
None of the listed options.
The issuer shall classify the liability and equity components of a compound financial
instrument separately as financial liability and equity respectively. 25) On 1 January 20X0, AAA Ltd sold 10% ten-year $200,000 par value
bonds. Interest is payable semiannually on June 30 and December 31. The
bonds were sold for $177,000. The annual effective interest rate is 12%.
AAA Ltd records interest using the effective rate method. Assume that
AAA Ltd rounds computations to the nearest dollar. Which of the following
statements is TRUE?
On December 31, 20X0, AAA debits the interest expense from 1 July 20X0 to 31
December 20X0 of $10,657.
On 1 January 20X0, AAA Ltd credits bond payable of $177,000.
On 1 January 20X0, AAA Ltd debits cash of $177,000.
All of the listed options. 26) On 30 June 20X3, AAA Ltd had outstanding $80 million of 8%
convertible bonds that mature on June 30, 20X4. Interest is payable each
year on June 30 and December 31. The bonds are convertible into 6
million ordinary shares. The equity portion of the convertible bond is
valued at $6 million at issuance. At 30 June 20X3, the unamortised
balance in the discount on bonds payable account was $4 million. On 30
June 20X3, 50% of the bonds were converted when AAA Ltd’s ordinary
shares has a market price of $3 per share. Which of the following
statements is most likely TRUE on conversion?
Credit share capital $41 million.
Debit bond payable $40 million.
All of the listed options.
Credit bond discount $2 million. 27) Which of the following statements is most likely TRUE with respect to
accounting for a compound financial instrument?
The fair values of the liability and equity components are estimated and the proceeds are
allocated to the respective components using the relative fair value method.
None of the listed options.
The equity component is measured at fair value, and the residual amount of the proceeds
is allocated to the liability component.
The liability component is measured at fair value, and the residual amount of the
proceeds is allocated to the equity component.
28) On 1 January 20X1, AAA Ltd issued a six-year $10 million 4%
convertible debenture for $11 million. The effective interest rate is 6% per
annum. Which of the following statements (figures are rounded to the
nearest million) is most likely FALSE on recognition?
Credit bond payable $9 million.
Debit cash $11 million.
All of the listed options.
Debit capital reserve $2 million.
29) Which of the following statements relating to FRS 32 Financial
Instruments – Presentation is TRUE?
There must be an existence of a clearing market mechanisim for net settlement and an
expectation of net settlement before one can offset financial assets and financial
liabilities for presentation purpose. There must be a legal right of set-off before one can offset financial assets and financial
liabilities for presentation purpose.
All of the listed options.
There must be a legal right of set-off and an intention to settle net or simultaneously
before one can offset financial assets and financial liabilities for presentation purpose. 30) On 30 June 20X3, AAA Ltd had outstanding $80 million of 8%
convertible bonds that mature on June 30, 20X4. Interest is payable each
year on June 30 and December 31. The bonds are convertible into 6
million ordinary shares. The equity portion of the convertible bond is
valued at $6 million at issuance. At 30 June 20X3, the unamortised
balance in the discount on bonds payable account was $4 million. On 30
June 20X3, 50% of the bonds were converted when AAA Ltd’s ordinary
shares has a market price of $3 per share. Which of the following
statements is most likely FALSE on conversion?
All of the listed options
Debit capital reserve $3 million.
Debit bond payable $40 million.
Credit share capital $9 million.
31) A depreciable asset, at the point of purchase, cost $80,000. For
accounting purpose, it is to be depreciated on a straight-line basis over
five years with zero residual value. For tax purpose, it is to be depreciated
on a straight-line basis over four years with zero residual value. The tax
rate is 20%. What are the carrying amount, tax base and deferred tax
liability/asset balance at the end of the fourth year?
$48,000; $40,000; Deferred Tax Liability Balance of $1,600.
$32,000; $20,000; Deferred Tax Liability Balance of $2,400.
$64,000; $60,000; Deferred Tax Liability Balance of $800.
$16,000; $0; Deferred Tax Liability Balance of $3,200 32) A depreciable asset, at the point of purchase, cost $80,000. For
accounting purpose, it is to be depreciated on a straight-line basis over
five years with zero residual value. For tax purpose, it is to be depreciated
on a straight-line basis over four years with zero residual value. The tax
rate is 20%. What are the carrying amount, tax base and deferred tax
liability/asset balance at the end of the first year?
$64,000; $60,000; Deferred Tax Liability Balance of $800.
$48,000; $40,000; Deferred Tax Liability Balance of $1,600.
$16,000; $0; Deferred Tax Liability Balance of $3,200.
$32,000; $20,000; Deferred Tax Liability Balance of $2,400. 33) The interest receivable account has a beginning balance of $120,000
and an ending balance of $70,000. Interest income is taxed when
received. The prevailing tax rate is 20%. Assume that taxable profit will be
available against which the deductible temporary differences can be
utilised. Use the balance sheet approach to determine the adjustment to
the deferred tax liability/asset balance arising from interest receivable as
at 31 December 20×1.
No adjustment required
Credit deferred tax liability of $24,000
Debit deferred tax liability of $10,000
Credit deferred tax liability of 14,000 34) ABC Ltd has accounting profit before tax of $400,000 in year ending
31 December 20X1. The accounting depreciation for the year is $60,000.
The capital allowance for taxation purpose is $100,000. Assume that ABC
Ltd is in its first year of operation and that there is only one depreciable
asset purchased at $300,000. Assume that the tax rate is 25%. What is
the current tax expense recognised for the year ending 31 December
20X1?
$115,000
$100,000
$75,000 $90,000 35)Which of the following statements relating to FRS 12 Income Taxes is
most likely TRUE?
Tax expense comprises of current tax expense and deferred tax expense.
Current tax is the amount of income taxes payable or recoverable in respect of the
taxable profit or tax loss for a future period.
None of the listed options.
Deferred tax liabilities are the amounts of income taxes payable in the current period in
respect of taxable temporary differences. 36)Which of the following statements relating to FRS 12 Income Taxes is
most likely FALSE?
For transactions and other events recognised in other comprehensive income, any
related tax effects need not be recognised.
None of the listed options.
For transactions and other events recognised in other comprehensive income, any
related tax effects are recognised in other comprehensive income.
For transactions and other events recognised in profit or loss, any related tax effects are
recognised in profit or loss.
37) Which formula below is most likely TRUE?
Tax expense = current tax rate x (accounting income + permanent disallowed items –
permanent exempted income items)
Tax expense = current tax rate x (accounting income – permanent disallowed items +
permanent exempted income items)
Tax expense = prior year tax rate x (accounting income + permanent disallowed items –
permanent exempted income items)
Tax expense = prior year tax rate x (accounting income – permanent disallowed items +
permanent exempted income items) 38)Which of the following statements relating to FRS 12 Income Taxes is
most likely TRUE?
When the carrying amount of a liability is greater than its tax base, it gives rise to a
deductible temporary difference.
When the carrying amount of an asset is greater than its tax base, it gives rise to a
deductible temporary difference.
None of the listed options.
When the carrying amount of an asset is less than its tax base, it gives rise to a taxable
temporary difference. 39) A depreciable asset, at the point of purchase, cost $80,000. For
accounting purpose, it is to be depreciated on a straight-line basis over
five years with zero residual value. For tax purpose, it is to be depreciated
on a straight-line basis over four years with zero residual value. The tax
rate is 20%. What are the carrying amount, tax base and deferred tax
lia…
