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Financial Reporting ACCA Theory Questions

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CBE-Style Question Practice for F7
Introduction
This collection of questions is designed to allow you to practice answering questions in an environment similar to
that of the live exams, even when you cannot access ACCA’s online support resources.
1.This interactive PDF will allow you to answer Objective Test (OT) and OT Case questions similar to the styles that
appear in sections A and B in the live exam.
2.Questions in the style of the constructed response (CR) questions that appear in section C in the live exam can
be accessed in the accompanying spreadsheet.
3. These documents can be saved and submitted for marking.
4. The questions are organised into broad topic areas, as indicated on the Contents page.
Some important points to note are as follows:
•These documents cannot replicate the exact functionality of the live exam environment but will provide a
similar experience
•The questions are presented in a way which closely mirrors, but is not the same as the live exam
•If you have not done so already, please refer to the full specimen exam and other resources available at
www.accaglobal.com/uk/en/student/exam-support-resources.html
• The full specimen exam has been prepared by ACCA’s examining team and reflects the live exam experience
in terms of its structure, range of questions and functionality, and these resources should be a key part of your
preparation for the exam.
The content for this F7 question pack has been provided by BPP Learning Media and may feature in the
BPP Q&A banks.
Contents
TOPICS
OT/OT CASE
QUESTIONS
CONSTRUCTED
RESPONSE QUESTIONS*
PAGE
1
The conceptual and regulatory frameworks
1-8
3-4
2
Accounting for assets
9-23
5-10
3
Accounting for income
24 - 28
11-12
4
Consolidated financial statements (1)
29
13
5
Consolidated financial statements (2)
30
14
6
Financial instruments and leasing
31-35
15-16
7
Provisions, inventories, biological assets
and taxation
36-40
17-18
8
Financial statements
41
19
9
Interpretation of financial statements
42
20
10
Statements of cash flows, inflation and
specialised entities
43
21
*See related spreadsheet file for constructed response questions
Topic 1 – The conceptual and regulatory frameworks
QUESTION 1
How does the Conceptual Framework define an asset?
A resource owned by an entity as a result of past events and from which future economic benefits
are expected to flow to the entity.
A resource over which an entity has legal rights as a result of past events and from which economic
benefits are expected to flow to the entity.
A resource controlled by an entity as a result of past events and from which future economic benefits
are expected to flow to the entity.
A resource to which an entity has a future commitment as a result of past events and from which
future economic benefits are expected to flow from the entity.
QUESTION 2
Which of the following would be classified as a liability?
Dexter’s business manufactures a product under licence. In 12 months’ time the licence expires and
Dexter will have to pay $50,000 for it to be renewed.
Reckless purchased an investment 9 months ago for $120,000. The market for these investments has
now fallen and Reckless’s investment is valued at $90,000.
Carter has estimated the tax charge on its profits for the year just ended as $165,000.
Expansion is planning to invest in new machinery and has been quoted a price of $570,000.
QUESTION 3
Which of the following would correctly describe the net realisable value of a two year old asset?
The original cost of the asset less two years’ depreciation.
The amount that could be obtained from selling the asset, less any costs of disposal.
The cost of an equivalent new asset less two years’ depreciation.
The present value of the future cash flows obtainable from continuing to use the asset.
QUESTION 4
Which of the following is the underlying assumption in preparing financial statements identified in the
Conceptual Framework?
G
oing concern
M
ateriality
Substance over form
A
ccruals
3
QUESTION 5
The Conceptual Framework identifies four enhancing qualitative characteristics of financial information.
For which of these characteristics is disclosure of accounting policies particularly important?
Verifiability
T
imeliness
C
omparability
U
nderstandability
QUESTION 6
Which of the following is NOT a purpose of the IASB’s Conceptual Framework?
To assist the IASB in the preparation and review of IFRS.
To assist auditors in forming an opinion on whether financial statements comply with IFRS.
To assist in determining the treatment of items not covered by an existing IFRS.
To be authoritative where a specific IFRS conflicts with the Conceptual Framework.
QUESTION 7
Recognition is the process of including within the financial statements items which meet the definition of an
element according to the IASB’s Conceptual Framework for Financial Reporting.
Which of the following items should be recognised as an asset in the statement of financial position of
a company?
A skilled and efficient workforce which has been very expensive to train. Some of these staff are still in
the employment of the company.
A highly lucrative contract signed during the year which is due to commence shortly after the year end.
A government grant relating to the purchase of an item of plant several years ago, which has a remaining life of
four years.
A receivable from a customer which has been sold (factored) to a finance company.
The finance company has full recourse to the company for any losses.
QUESTION 8
Comparability is identified as an enhancing qualitative characteristic in the IASB’s Conceptual Framework for
Financial Reporting.
Which of the following does NOT improve comparability?
Restating the financial statements of previous years when there has been a change of accounting policy.
Prohibiting changes of accounting policy unless required by an IFRS or to give more relevant and
reliable information.
Disclosing discontinued operations in financial statements.
Applying an entity’s current accounting policy to a transaction which an entity has not engaged
in before.
4
Topic 2 – Accounting for assets
INFORMATION RELEVANT TO QUESTIONS 9-13.
The draft financial statements of Plethora plc for the year to 31 December 20X9 are being prepared and the
accountant has requested your advice on dealing with the following issues.
(i) P
lethora plc has an administration building which it no longer needs. On 1 July 20X9 Plethora plc entered into
an agreement to lease the building out to another company. The building cost $600,000 on 1 January 20X0 and
is being depreciated over 50 years, based on the IAS 16 cost model. Plethora plc applies the fair value model
under IAS 40 Investment property and the fair value of the building was judged to be $800,000 on 1 July 20X9.
This valuation had not changed at 31 December 20X9.
(ii)Plethora plc owns another building which has been leased out for a number of years. It had a fair value of
$550,000 at 31 December 20X8 and $740,000 at 31 December 20X9.
(iii)Plethora plc owns a retail business which has suffered badly during the recession. Plethora plc treats this
business as a separate cash generating unit.
The carrying amounts of the assets comprising the retail business are:
Building
Plant and equipment
Inventory
Other current assets
Goodwill
$’000
900
300
70
130
40
An impairment review has been carried out as at 31 December 20X9 and the recoverable amount of the
cash generating unit is estimated at $1.3m.
QUESTION 9
What is the amount of the revaluation surplus that will be recognised in respect of the building in (i)?
$
200,000
$
314,000
$
308,000
N
il
QUESTION 10
In respect of the building in (ii), how will the increase in value from $550,000 to $740,000 be accounted for?
Credited to profit or loss
Credited to the revaluation surplus
Credited to retained earnings
Credited to an investment property reserve
5
QUESTION 11
When an impairment review is carried out, a potentially impaired asset is measured at what amount?
Fair value
Value in use
Recoverable amount
Carrying amount
QUESTION 12
What will be the carrying amount of the inventory after the impairment loss in (iii) has been accounted for?
$
64,000
$
70,000
N
il
$
65,000
QUESTION 13
What will be the carrying amount of the building after the impairment loss has been accounted for?
$
900,000
$
836,000
$
795,000
$
825,000
6
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 14-18.
Advent is a publicly listed company. Details of Advent’s non-current assets at 1 October 20X8 were:
Land and
Plant
Telecommunications
building
licence
$m
$m
$m
Total
$m
Cost/valuation
280
150
300
730
Accumulated depreciation/amortisation
(40)
(105)
(30)
(175)
Carrying amount
240
45
270
555
The following information is relevant:
(i) T
he land and building were revalued on 1 October 20X3 with $80 million attributable to the land and $200
million to the building. At that date the estimated remaining life of the building was 25 years. A further
revaluation was not needed until 1 October 20X8 when the land and building were valued at $85 million and
$180 million respectively. The remaining estimated life of the building at this date was 20 years.
lant is depreciated at 20% per annum on cost with time apportionment where appropriate. On 1 April 20X9
(ii) P
new plant costing $45 million was acquired. In addition, this plant cost $5 million to install and commission.
No plant is more than four years old.
(iii) T
he telecommunications licence was bought from the government on 1 October 20X7 and has a ten-year life.
It is amortised on a straight line basis. In September 20X9, a review of the sales of the products related to the
licence showed them to be very disappointing. As a result of this review the estimated recoverable amount of
the licence at 30 September 20X9 was estimated at only $100 million.
There were no disposals of non-current assets during the year to 30 September 20X9.
QUESTION 14
What is the carrying amount of the land and buildings at 30 September 20X9?
$
256m
$
265m
$
240m
$
271m
QUESTION 15
What is the depreciation charge on the plant for the year ended 30 September 20X9?
$
30m
$
25m
$
20m
$
35m
7
QUESTION 16
Having revalued its property Advent is required to make certain disclosures in respect of the revaluation.
Which one of the following is NOT one of these disclosures?
Effective date of revaluation
Professional qualifications of valuer
Basis used to revalue assets
Carrying amount of assets if no revaluation had taken place
QUESTION 17
What is the amount of the impairment loss on the licence?
$
200m
$
170m
$
140m
$
60m
QUESTION 18
Advent’s licence is now carried at its recoverable amount. How is recoverable amount measured?
Higher of fair value less costs of disposal and value in use
Lower of fair value less costs of disposal and value in use
Higher of carrying amount and fair value less costs of disposal
Lower of carrying amount and fair value less costs of disposal
8
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 19-23.
Systria is preparing its financial statements for the year ended 31 December 20X7 and has a number of issues to
deal with regarding non-current assets.
(i)Systria has suffered an impairment loss of $90,000 to one of its cash generating units. The carrying amounts of
the assets in the cash-generating unit prior to adjusting for impairment are:
Goodwill
Patent
Land and buildings
Plant and machinery
Net current assets
$’000
50
10
100
50
10
The patent is now estimated to have no value.
uring the year to 31 December 20X7 Systria acquired Dominica for $10 million, its tangible assets being
(ii) D
valued at $7 million and goodwill on acquisition being $3 million. Assets with a carrying amount of $2.5 million
were subsequently destroyed. Systria has carried out an impairment review and has established that Dominica
could be sold for $6 million, while its value in use is $5.5 million.
(iii)A freehold property originally costing $100,000 with a 50-year life has accumulated depreciation to date of
$20,000. The asset is to be revalued to $130,000 at 31 December 20X7.
QUESTION 19
What is the post-impairment carrying amount of plant and machinery in (i) above?
$
QUESTION 20
The Finance Director has been asked to report to the Board on the reasons for the impairment review on the cashgenerating unit.
Which TWO of the following would be an internal indicator of impairment of an asset under IAS 36
Impairment of assets?
The market value of the asset has fallen significantly.
There are adverse changes to the use to which the asset is put.
The asset is fully depreciated.
The operating performance of the asset has declined.
QUESTION 21
What is the carrying amount of the goodwill in (ii) following the impairment review?
$
9
QUESTION 22
Which set of double entries is required to record the revaluation in (iii)?
DR Accumulated depreciation $20,000 / CR Revaluation surplus $20,000
DR Property at cost $50,000 / CR Revaluation surplus $50,000
DR Accumulated depreciation $20,000
DR Property at cost $30,000 / CR Revaluation surplus $50,000
DR Revaluation surplus $50,000 / CR Accumulated depreciation $20,000
CR Property at cost $30,000
QUESTION 23
What will be the depreciation charge on the asset in (iii) for the year ended 31 December 20X8?
$
2,000
$
2,600
$
3,250
$
2,750
10
Topic 3 – Accounting for income
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 24-28.
Derringdo is a broadband provider which receives government assistance to provide broadband to remote areas.
Derringdo invested in a new server at a gross cost of $800,000 on 1 October 20X2. The server has an estimated life
of ten years with a residual value equal to 15% of its gross cost. Derringdo uses straight-line depreciation on a time
apportioned basis.
The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms
of the grant are that if the company retains the asset for four years or more, then no repayment liability will be
incurred. Derringdo has no intention of disposing of the server within the first four years. Derringdo’s accounting
policy for capital-based government grants is to treat them as deferred credits and release them to income over
the life of the asset to which they relate.
QUESTION 24
What is the net amount that will be charged to operating expenses in respect of the server for the year
ended 31 March 20X3?
$
10,000
$
28,000
$
22,000
$
34,000
QUESTION 25
What amount will be presented under non-current liabilities at 31 March 20X3 in respect of the grant?
$
228,000
$
216,000
$
240,000
$
204,000
QUESTION 26
Derringdo also sells a package which gives customers a free laptop when they sign a two-year contract for provision
of broadband services. The laptop has a stand-alone price of $200 and the broadband contract is for $30 per month.
In accordance with IFRS 15 Revenue from contracts with customers, what amount will be recognised as
revenue on each package in the first year?
$
439
$
281
$
461
$
158
11
QUESTION 27
Determining the amount to be recognised in the first year is an example of which step in the IFRS 15
5-step model?
Determining the transaction price
Recognising revenue when a performance obligation is satisfied
Identifying the separate performance obligations
Allocating the transaction price to the performance obligations
QUESTION 28
Derringdo is carrying out a transaction on behalf of another entity and the finance director is unsure whether
Derringdo should be regarded as an agent or a principal in respect of this transaction.
Which of the following would indicate that Derringdo is acting as an agent?
Derringdo is primarily responsible for fulfilling the contract.
Derringdo is not exposed to credit risk for the amount due from the customer.
Derringdo is responsible for negotiating the price for the contract.
Derringdo will not be paid in the form of commission.
12
Topic 4 – Consolidated financial statements (1)
QUESTION 29
*See related spreadsheet file for constructed response questions
13
Topic 5 – Consolidated financial statements (2)
QUESTION 30
*See related spreadsheet file for constructed response questions
14
Topic 6 – Financial instruments and leasing
THIS SCENARIO RELATES TO QUESTIONS 31-35.
Bertrand issued $10 million convertible loan notes on 1 October 20X0 that carry a nominal interest (coupon) rate of
5% per annum. They are redeemable on 30 September 20X3 at par for cash or can be exchanged for equity shares
in Bertrand on the basis of 20 shares for each $100 of loan. A similar loan note, without the conversion option,
would have required Bertrand to pay an interest rate of 8%.
The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, can be taken as:
End of year
1
2
3
cumulative
5%
0.95
0.91
0.86
2.72
8%
0.93
0.86
0.79
2.58
QUESTION 31
How should the convertible loan notes be accounted for?
A
s debt
As debt and equity
A
s equity
As debt until conversion, then as equity
QUESTION 32
What is the amount that will be recognised as finance costs for the year ended 30 September 20X1?
$
500,000
$
800,000
$
735,000
N
il
QUESTION 33
What is the amount that should be shown under liabilities at 30 September 20X1?
$
9,425,000
$
9,925,000
$
9,690,000
N
il
15
QUESTION 34
If Bertrand had incurred transaction costs in issuing these loan notes, how should these have been
accounted for?
Added to the proceeds of the loan notes
Deducted from the proceeds of the loan notes
Amortised over the life of the loan notes
Charged to finance costs
QUESTION 35
Later that year Bertrand purchased a debt instrument which will mature in five years’ time. Bertrand intends to hold
the debt instrument to maturity to collect interest payments.
How should this debt instrument be measured in the financial statements of Bertrand?
As a financial liability at fair value through profit or loss
As a financial liability at amortised cost
As a financial asset at fair value through profit or loss
As a financial asset at amortised cost
16
Topic 7 – Provisions, inventories, biological assets
and taxation
THE FOLLOWING SCENARIO RELATES TO QUESTIONS 36-40.
The carrying amount of Julian’s property, plant and equipment at 31 December 20X3 was $310,000 and the tax
written down value was $230,000.
The following data relates to the year ended 31 December 20X4:
(i)At the end of the year the carrying amount of property, plant and equipment was $460,000 and the tax written
down value was $270,000. During the year some items were revalued by $90,000. No items had previously
required revaluation. In the tax jurisdiction in which Julian 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)Julian began development of a new product during the year and capitalised $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.
The corporate income tax rate is 30%. The current tax charge was calculated for the year as $45,000.
QUESTION 36
Julian’s accountant is confused by the term ‘tax base’.
What is meant by ‘tax base’?
The amount of tax payable in a future period
The tax regime under which an entity is assessed for tax
The amount attributed to an asset or liability for tax purposes
The amount of tax deductible in a future period
QUESTION 37
What is the taxable temporary difference to be accounted for at 31 December 20X4 in relation to property,
plant and equipment and development expenditure?
Property, plant
and equipment
Development
expenditure
$270,000
$60,000
$270,000
Nil
$190,000
$60,000
$190,000
Nil
QUESTION 38
What amount should be charged to the revaluation surplus at 31 December 20X4 in respect of deferred tax?
$
60,000
$
90,000
$
18,000
$
27,000
17
QUESTION 39
What amount will be shown as tax payable in the statement of financial position of Julian at 31 December
20X4?
$
45,000
$
72,000
$
63,000
$
75,000
QUESTION 40
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?
Depreciation accelerated for tax purposes
Development costs amortised in profit or loss but tax was deductible in full when incurred
Accrued expenses which have already been deducted for tax purposes
Revenue included in accounting profit when invoiced but only liable for tax when the cash is received.
18
Topic 8 – Financial statements
QUESTION 41
*See related spreadsheet file for constructed response questions
19
Topic 9 – Interpretation of financial statements
QUESTION 42
*See related spreadsheet file for constructed response questions
20
Topic 10 – Statements of cash flows, inflation and
specialised entities
QUESTION 43
*See related spreadsheet file for constructed response questions
21
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