ACCA PROGRESS TEST

Financial Reporting

FR
Time allowed 3 hours 15 minutes

This paper is divided into three sections:

Section A – ALL 15 questions are compulsory and MUST be
attempted
Section B – ALL 15 questions are compulsory and MUST be
attempted
Section C – BOTH questions are compulsory and MUST be
attempted
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 PRO G RE S S TE S T QU E S TI ON S

SECTION A
ALL 15 QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED

1 Which of the following conditions must be met in order to classify an asset as held for
sale?

(i) The asset is expected to be sold within 12 months

(ii) The asset will definitely be sold
(iii) The asset is available for immediate sale in its present condition
(iv) The asset is due to be marketed in the next month

A (i), (ii) and (iii)

B (i), (iii) and (iv)
C (i) and (iii)
D (ii) and (iv)

2 Krash Plc issued a three year 5% convertible bond on 1 July 20X5. The bond has a nominal
value of $250,000.

The market rate of interest applicable to non‐convertible bonds is 7%.

The present value of $1 payable at the end of the year, based on rates of 5% and 7% is as
follows:
End of year 5% 7%
1 0.95 0.93
2 0.91 0.87
3 0.86 0.82
What is the value of the equity component of the convertible bond issued by Krash Plc as
at 1 July 20X5?
A $nil
B $5,000
C $15,000
D $12,250

3 Which of the following require restatement and retrospective application in the financial
statements?

(i) The discovery of a material error

(ii) A change in accounting policy
(iii) A change in accounting estimate

A All of them
B (i) and (ii)
C (ii) and (iii)
D (i) and (iii)
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4 Castle Co purchased an investment property many years ago, and values this property using
the fair value model.

The property is currently valued at $3,500,000, which is the value brought forward at the
start of the current year when the property had a remaining life of 10 years. The valuation
at year end has just been received and estimates the value of the property at $3,250,000.
Which of the following summarises the correct accounting entries for the year?
A Depreciation of $350,000 in the statement of profit or loss, gain of $100,000 shown
in the statement of profit or loss
B Depreciation of $350,000 in the statement of profit or loss, gain of $100,000 shown
in other comprehensive income
C Loss of $250,000 shown in the statement of profit or loss
D Loss of $250,000 shown in other comprehensive income.

5 Duck Co purchased an asset for $250,000 on 1 July 20X2.

They received a government grant of $30,000 towards the cost of this asset.
Duck Co wish to treat the government grant income as a deferred credit.
The useful life of the asset is 12 years.
What is the deferred income balance relating to this grant income as at 30 June 20X4?
A $25,000
B $27,500
C $30,000
D $nil

6 Wallace had $2,000,000 50¢ shares in issue on 1 January 20X4.

On 1 May 20X4, Wallace issued 500,000 shares at their market value of $1.20 each
On 1 August 20X4, Wallace made a bonus issue of 1 share for every 5 in issue
What is the weighted average number of shares to use in Wallace’s Basic Earnings
Per Share calculation for the year ended 31 December 20X4?
A 2,800,000
B 4,150,000
C 5,000,000
D 5,200,000
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7 Rain bought 75% of Sun on 1 July 20X4, at a cost of $2 million. The non‐controlling interest
was recorded at its initial fair value of $500,000. The fair value of Sun’s net assets as at
acquisition was $1,750,000. During the year ended 30 June 20X5, an impairment of 20%
was recognised in relation to the goodwill for Sun.

A further 10% impairment has been recorded for the year ended 30 June 20X6, based on
the carrying amount at 1 July 20X5.
What is the impairment charge to be included in the consolidated statement of profit or
loss for the year ended 30 June 20X6?
A $60,000
B $75,000
C $210,000
D $225,000

8 The following is an extract from the statement of cash flows for QW for the year ended
31 December 20X1:
$m
Cash flows from operating activities 950
Cash flows from investing activities (1,130)
Cash flows from financing activities 120
–––––
Net cash flow for the year (60)
Cash and cash equivalents at start of year 650
–––––
Cash and cash equivalents at end of year 590
–––––
Based on the information provided, which one of the following independent statements
would be a reasonable conclusion about the financial adaptability of QW for the year to
31 December 20X1?
A QW is in decline as there is a significant cash outflow in investing activities.
B QW has financed a high proportion of its investing activities by utilising its operating
cash.
C QW must have made a profit in the year, as it has a net cash inflow from operating
activities.
D QW must be facing serious liquidity problems as its cash and cash equivalents have
fallen by $60 million throughout the year.

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9 KL operates in the fashion wholesale business and its management team has become
increasingly concerned about the liquidity of the entity. It has asked you for your opinion
and you have calculated the following ratios to help you with your assessment:
30 June 20X3 30 June 20X2
Inventory holding period 128 days 77 days
Receivables collection period 88 days 87 days
Payables payment period 170 days 118 days
Current ratio 1.3:1 2.1:1
Quick ratio 0.7:1 1.4:1
Which one of the following is NOT a valid statement about the ratios shown above?
A The increase in inventory holding period is a significant concern as there is a high risk
of obsolescence in the industry.
B The deterioration in the ratios shown at the 30 June 20X3 year‐end could simply be a
result of a significant purchase of goods being made on credit terms close to the
year‐end.
C KL are attempting to finance their increased inventory holding period by delaying
payments to suppliers.
D The significant increase in payables payment period will have caused the cash
position to worsen dramatically.

10 Which ONE of the following definitions is NOT included within the definition of control
according to IFRS 10 Consolidated Financial Statements?

A Having power over the investee

B Having exposure, or rights, to variable returns from its investment in the investee
C Holding the majority of shares in the investee
D Having the ability to use its power over the investee to affect the amount of the
investor’s returns

11 The IASB®’s Conceptual Framework for Financial Reporting lists two fundamental
qualitative characteristics of financial statements, one of which is faithful representation.

Which of the following is NOT a characteristic of faithful representation?

A Completeness
B Neutrality
C Free from error
D Prudence
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12 Which of the following are advantages of applying a principles‐based framework of

accounting rather than a rules‐based framework?

(i) It avoids ‘fire‐fighting’, where standards are developed in response to specific

problems as they arise
(ii) It allows preparers and auditors to deal with complex transactions which may not be
specifically covered by an accounting standard
(iii) Principles‐based standards are thought to be harder to circumvent
(iv) A set of rules is given which attempts to cover every eventuality
(v) Accounting standards can be developed in relation to agreed principles

A All of the above

B (i), (iii) and (v) only
C (i), (ii) and (v) only
D (i), (ii), (iii) and (v) only

13 On 1 January 20X5 Ness revalued its head office to $21m, creating a revaluation surplus of
$7m. At this date, the head office had a 35‐year remaining life.

On 1 January 20X9 property prices crashed and the head office was revalued to $11m.
Ness makes an annual reserves transfer for excess depreciation.
What loss on revaluation will be taken to the statement of profit or loss at the date of the
revaluation on 1 January 20X9?
A Nil
B $1,400,000
C $600,000
D $7,600,000

14 AB acquired an 80% investment in XY on 1 January 20X1. The consideration consisted of the

following:

– The transfer of 500,000 shares in AB with a nominal value of $1 each and a market
value on the date of acquisition of $3.50 each
– $408,000 cash paid on 1 January 20X1, and
– $1,000,000 cash payable on 1 January 20X3 (a discount rate of 9% has been used to
value the liability in the financial statements of AB).
AB also paid legal and professional fees in respect of the acquisition of $150,000.
The best estimate of the fair value of the consideration to be included (to the nearest
thousand) in the calculation of goodwill arising on the acquisition of XY is:
A $1,750,000
B $3,000,000
C $3,150,000
D $3,158,000

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15 Sakho owned a 1 year‐old herd of cattle on 1 January. At this date, the herd’s fair value less
costs to sell was $70,000. At 31 December, the fair value of a 1 year‐old herd of cattle is
$75,000, and the fair value of a 2 year‐old herd of cattle is $80,000. If Sakho sold the cattle,
commission of 5% would be payable.
What is the correct accounting treatment for the cattle at 31 December according to
IAS 41 Agriculture?
A Revalue to $71,250 taking gain of $1,250 to the revaluation surplus
B Revalue to $76,000, taking gain of $6,000 to the statement of profit or loss
C Revalue to $76,000, taking gain of $6,000 to the revaluation surplus
D Revalue to $71,250, taking gain of $1,250 to the statement of profit or loss
 PRO G RE S S TE S T QU E S TI ON S

SECTION B
ALL 15 QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED

The following scenario relates to questions 16–20

Vendo owns a large amount of non‐current assets and is undertaking a review of asset values, as
the Vendo finance director believes that holding them at historical cost is becoming increasingly
irrelevant. Vendo would like to hold assets at fair value but has never previously revalued any
assets.
Vendo took out a $10m 9% loan on 1 January 20X7 for the construction of a new office building.
Due to delays, construction didn’t begin until 1 March 20X7 and was completed on 1 November
20X7. As not all funds were needed immediately, $2m was invested in 5% bonds from 1 January
to 30 April 20X7.
On 1 January 20X7, Vendo revalued all of its properties. The majority of these increased in value,
giving a total net increase in assets of $24 million. Included in this figure were two items which
had fallen by $2 million. Vendo makes an annual transfer from the revaluation surplus in respect
of excess depreciation. At 1 January 20X7 the properties had a remaining life of 10 years.

16 In relation to the Vendo finance director’s beliefs, which of the following is NOT a
deficiency of historical cost accounts in times of rising prices?

A Asset values are understated

B Items are less verifiable as they happened years ago
C Profits are overstated
D Financial statements contain a mix of current values and historical cost values

17 Which ONE of the statements regarding IFRS 13 Fair Value Measurement is NOT true?

A Level 1 inputs are likely to be used without adjustment.

B Level 3 inputs are based on the best information available to market participants and
are therefore regarded as providing the most reliable evidence of fair value.
C Level 2 inputs may include quoted prices for similar (but not identical) assets and
liabilities in active markets.
D Level 1 inputs comprise quoted prices in active markets for identical assets and
liabilities at the reporting date.

18 What amount of interest should be capitalised in relation to Vendo’s new office building
in accordance with IAS 23 Borrowing costs?

A $566,667
B $716,667
C $600,000
D $583,333

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19 What is the balance on Vendo’s revaluation surplus at 31 December 20X7?

A $24 million
B $26 million
C $21.6 million
D $23.4 million

20 Which, if either, of the following statements regarding the revaluation of assets is/are
correct?

Statement 1: If the revaluation model is used for Vendo’s properties, all non‐current assets
must be revalued
Statement 2: Vendo must perform a revaluation of its properties every three years
A Statement 1 only is correct
B Statement 2 only is correct
C Neither statement is correct
D Both statements are correct

The following scenario relates to questions 21–25

Burtie is in the process of constructing a number of assets for its customers, the details of which
can be found below.
Contract 1: Contract 1 has a price of $8 million and is 40% complete. Contract 1 is estimated to
have total costs of $5 million, of which Burtie has spent $2 million to date. Burtie has received
$1.5 million from the customer to date.
Contract 2: Contract 2 has a price of $7 million and is 60% complete. Due to rising raw material
costs, contract 2 now has estimated total costs of $9 million.
Contract 3: Contract 3 has a price of $6 million but only began 1 month ago so its progress cannot
be measured. Burtie has incurred costs to date of $100,000 out of total estimated costs of
$4 million, and is expected to take three years to complete the contract.

21 What should be recorded in current assets in relation to contract 1?

A $1.2 million
B $1.7 million
C $2 million
D $3.2 million

22 What should be recorded in cost of sales in relation to contract 2?

A $6.2 million
B $9 million
C $4.2 million
D $5.4 million
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23 What should be recorded in revenue in relation to contract 3?

A Nil
B $150,000
C $100,000
D $166,667

24 Which of the following statements best describes the contracts in this scenario?

A Contracts where the performance obligation is not met

B Contracts where the performance obligation is satisfied at a point in time
C Contracts where the performance obligation is discounted
D Contracts where the performance obligation is satisfied over time

25 Burtie also acts as an agent in other transactions. In transactions where Burtie acted as the
agent, Burtie has received $5 million, on which Burtie earns commission at 20%.

Which of the following statements is NOT correct in relation to this transaction?

A Burtie’s revenue consists of the commission only
B Income of $1 million should be recognised
C $4 million should be held in trade payables
D $4 million should be recorded in cost of sales

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The following scenario relates to questions 26–30

Extracts from the Financial Statements of Armstrong plc, a retailer of electronic products, are
given below for the year ended 31 October 20X9:
20X9 20X8
$000 $000
Statement of financial position
Non‐current assets
Property, plant & equipment 16,104 13,918
Equity
Retained earnings 8,951 8,824
Non‐current liabilities
Deferred taxation 234 108
Current liabilities
Taxation 300 250

Statement of profit or loss

Profit before tax 1,299
Taxation (672)
––––––
Profit for the year 627
––––––
Additional information:
(i) An item of plant with a carrying amount of $965,000 was sold at a loss of $50,000 during
the year. Depreciation of $2,395,000 was charged to operating expenses in respect of
property, plant and equipment in the year ended 31 October 20X9.
(ii) During the year ended 31 October 20X9 new assets were acquired under a leasing
agreement. The present value of the total lease rentals payable was $960,000.

26 What should be recorded in Armstrong’s statement of cash flows in relation to the

dividend paid during the year?

A $500,000
B $127,000
C $754,000
D $1,172,000

27 What should be recorded in Armstrong’s statement of cash flows in relation to the tax
paid during the year?

A $176,000
B $496,000
C $388,000
D $848,000
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28 What should be recorded in Armstrong’s statement of cash flows in relation to the

purchase of property, plant and equipment during the year?

A $4,586,000
B $4,636,000
C $5,546,000
D $5,596,000

29 Which, if either, of the following statements is/are true regarding Armstrong’s statement
of cash flows?

Statement 1: Armstrong’s depreciation should be added back to profit from operations in

order to calculate cash generated from operations
Statement 2: Armstrong’s loss on disposal should be deducted from profit from operations
in order to calculate cash generated from operations
A Statement 1 only
B Statement 2 only
C Both statement 1 and statement 2
D Neither statement

30 Which describes the correct treatment for payments made in relation to lease liabilities?

A Liability repaid is shown in investing activities, interest paid in operating activities

B Liability repaid is shown in financing activities, interest paid in operating activities
C Liability repaid is shown in investing activities, interest paid in investing activities D
Only liability repaid is shown in financing activities

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SECTION C
BOTH QUESTIONS ARE COMPULSORY AND MUST BE ATTEMPTED

31 The following draft financial statements relate to Bartlett, a private limited company:
Extracts from the statement of profit or loss for Bartlett for the year ended 30 September
20X5 20X4
$000 $000
Revenue 10,200 12,800
Cost of sales (7,340) (8,930)
–––––– ––––––
Gross profit 2,860 3,870
Distribution costs (1,020) (700)
Administrative expenses (1,750) (1,340)
–––––– ––––––
Profit from operations 90 1,830
–––––– ––––––

Extracts from the statement of financial position for Bartlett as at 30 September

20X5 20X4
$000 $000
Current assets
Inventory 1,100 800
Trade receivables 1,560 1,240
Bank 20 150
Non‐current liabilities
Loan 1,300 1,100
Current liabilities
Trade payables 900 750
The following information has been obtained in relation to the operations of Bartlett for the
year:
(i) Bartlett has been a major ice cream producer for many years, traditionally making
the bulk of its sales to wholesalers and retailers during the months of May to August.
(ii) In October 20X4 a newspaper article highlighted that a number of Bartlett’s largest
selling ice creams contained extremely high levels of additives, leading to boycotts
from parents.
(iii) Following the boycott, Bartlett changed the ingredients and outsourced the ice
cream production to a specialist factory rather than producing the items themselves.
(iv) Bartlett launched a new brand of healthy frozen yoghurt under the name ‘CoolYo’,
which was taken up by major supermarkets in April 20X5 after lengthy negotiations.
(v) Bartlett started selling products online to the public for the first time.
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(vi) The finance director of Bartlett has prepared the following ratios for the year ended
30 September 20X4 which may be taken as correct.
Gross profit margin 30.2%
Operating profit margin 14.3%
Current ratio 2.9:1
Quick (acid test) ratio 1.9:1
Inventory days 33 days
Receivable days 35 days
Payables days 31 days

Required:
(a) Prepare the equivalent ratios as above for the year ended 30 September 20X5.
(4 marks)
(b) Analyse the performance and position of Bartlett for the year ended 30 September
20X5. (13 marks)
(c) Outline the limitations in using ratio analysis to measure performance and position.
(3 marks)
(Total: 20 marks)

32 On 1 May 20X4 Packer bought 90% of the share capital of Scott. The consideration
consisted of two elements: a share exchange of two shares in Packer for every three
acquired in Scott and the issue of a $100 loan note for every 400 shares acquired in Scott.
Only the loan note consideration has been recorded by Packer. At the date of acquisition
the market value of shares in Packer and Scott was $4.90 and $2.80 respectively. Below are
the summarised draft financial statements of both companies.
Statements of profit or loss for the year ended 30 September 20X4
Packer Scott
$000 $000
Revenue 385,200 234,900
Cost of sales (212,000) (76,560)

Administrative expenses (104,500) (67,800)

Investment income 1,200 0

Statements of financial position as at 30 September 20X4
Packer Scott
$000 $000
Property, plant and equipment 543,000 312,000
Investments 142,000 0
––––––– –––––––
685,000 312,000
Current assets 213,000 132,000
––––––– –––––––
Total assets 898,000 444,000
––––––– –––––––

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Equity
Equity shares of $1 each 480,000 200,000
Retained earnings 158,800 216,000
––––––– –––––––
Total equity 638,800 416,000
Non‐current liabilities
Loan notes 160,000 5,000
Current liabilities 99,200 23,000
––––––– –––––––
Total equity and liabilities 898,000 444,000
––––––– –––––––
The following information is relevant:
(i) At the date of acquisition the fair values of Scott’s assets were equal to their carrying
amounts with the exception of Scott’s head office, which had a fair value of
$60 million in excess of its carrying amount. It had a remaining life of forty years at
that date.
(ii) Over the entire year, including the pre‐acquisition period, Scott sold goods to Packer
for $48 million at a margin of 20%. At the year end, Packer still held $6 million of
these goods in inventory. At the year‐end Packer had paid for all of the goods except
for the final $6 million.
(iii) At the start of the year Packer purchased a small number of shares in an unrelated
company for $97 million. These are currently included in Packer’s investments at
cost. At 30 September 20X4 the value of these shares had risen to $99 million.
(iv) Packer has a policy of accounting for any non‐controlling interest at fair value. For
this purpose Scott’s share price at acquisition can be deemed to be representative of
fair value.
(v) Consolidated goodwill is considered to have become impaired by $1 million at
30 September 20X4.
(vi) Scott made a profit of $34,140,000 in the year ended 30 September 20X4. Other
than where indicated, items from the statement of profit or loss are deemed to
accrue evenly on a time basis.

Required:
(a) Prepare the statement of profit or loss extracts for the Packer group for the year
ended 30 September 20X4. (4 marks)
(b) Prepare the consolidated statement of financial position for Packer as at
30 September 20X4. (16 marks)
(Total: 20 marks)