Strategic Business Reporting revision

Strategic Business Reporting

Revision of F7 -Quiz

by Mary Francis

All the best

Multiple Choice

The fundamental qualitative characteristics of useful financial information are: 

• Comparability and relevance

• Relevance and reliability

• Relevance, reliability and comparability

• Relevance and faithful representation

Multiple Choice

The Conceptual Framework describes prudence as:

• A bias towards understating assets or income and towards overstating liabilities or expenses

• The exercise of caution when making judgements under conditions of uncertainty

• mechanism for smoothing profits over time (understate profits in good years and overstate profits in bad years)

• A form of accounting conservatism

Fill in the Blanks

The Conceptual Framework defines an asset as:

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​held for sale in the

ordinary

Fill in the Blanks

IAS2 states that inventories should be measured at:

Fill in the Blanks

On 1 April 20x4 Gamma purchased a property for 4.4 m crowns.

Of the initial carrying amount, 60% of the value of the property was attributed to the building element. Useful life was 40years. Gamma applies revaluation model and on 31 March 20x5, the fair value of the property was 4.8m crowns. Calculate the gain in revaluation.

Multiple Choice

A company pays £40,000 to replace a major component of a factory machine. The faulty component that is replaced is sold for$2,000. The carrying amount of the machine just before this replacement occurs is $450,000, of which $10,000 relates to the faulty component that is being replaced. The revised carrying amount of the machine after the replacement occurs and the profit or loss on disposal of the faulty component are:

• Carrying amount £480,000, Loss £8,000

• Carrying amount £490,000, Profit £2,000

Multiple Choice

Which of the following does NOT define investment property?

• A) Property held to earn rentals

• B) Property held for capital appreciation

• C) Property used in the production or supply of goods or services

Open Ended

Property A: An office building used by Daniel for administrative purposes with a depreciated historical cost of $2 million. At 1 September 2014 it had a remaining life of 20 years. After a reorganisation on 1 March 2015, the property was let to a third party and reclassified as an investment property applying Daniel’s policy of the fair value model. An independent valuer assessed the property to have a fair value of $2·3 million at 1 March 2015, which had risen to $2·34 million at 31 August 2015.

Explain how to account for the office building.

Open Ended

Property B: Another office building sub-let to a subsidiary of Daniel. At 1 September 2014, it had a fair value of $1·5 million which had risen to $1·65 million at 31 August 2015.

in the case of property B, state how it would be classified in Daniel’s consolidated statement of financial position.

Fill in the Blanks

Property companies often purchase blocks of land, either to sell as subdivided parcels of land, or for development as apartments, homes or offices. Such properties are classified [as inventory or PPE or Investment property]

Poll

Property Co purchases a vacant plot of land in the CBD for $10 million which it intends to sell in the normal course of business.

Property Co has had expressions of interest from the owners of several buildings on adjacent lots but is aware that the sale process could take a significant amount of time.

Property Co therefore decides to lease the land to Parking Co which will use the land to operate a temporary parking lot until the land is sold.

Property Co’s accounting policy is to measure investment property at fair value.

At reporting date, Property Co had an independent valuation of the land, which is now worth $11 million.

• Because Property Co’s intention is to sell the land in the ordinary course of business, the land should be accounted for as inventories and measured at cost (i.e. $10 million).

• classifies this land as investment property because of the existence of the lease to Parking Co and therefore measure at fair value of 11m. and a gain in fv is recognised in p/l

• Classified as P

Multiple Choice

A company has the following general borrowings outstanding throughout the whole of an accounting year:6.5% Bank loan of $400,0008% Bank loan of $800,000 If a qualifying asset costing $50,000 is funded out of these general borrowings, the capitalisation rate that should be used is:

• 8%

• 7.5%

• 6.5%

• 7.25%

Multiple Choice

An asset's carrying amount is £25,000. Its fair value less costs of disposal is £15,000 and its value in use is £19,000. There is an impairment loss of:

• £6,000

• £4,000

• £10,000

Multiple Choice

The carrying amount of a CGU is £900,000. This consists of goodwill £250,000 and property, plant and equipment £650,000. The CGU has a recoverable amount of only £520,000. How is the impairment loss allocated between the assets of the CGU?

• Goodwill £250,000, PPE £130,000

• Goodwill £nil, PPE £380,000

• Goodwill £130,000, PPE £250,000

• Goodwill £190,000, PPE £190,000

Fill in the Blanks

A company that extracts natural gas and oil has a drilling platform in the Caspian Sea. It is required

by legislation of the country concerned to remove and dismantle the platform at the end of its useful life. Accordingly, the company has included an amount in its accounts for removal and dismantling costs, and is depreciating this amount over the platform's expected life. The company is carrying out an exercise to establish whether there has been an impairment of the platform. (a)

Its carrying amount in the statement of financial position is $3m.

(b) The company has received an offer of $2.8m for the platform from another oil company. The bidder would take over the responsibility (and costs) for dismantling and removing the platform at the end of its life.

(c) The present value of the estimated cash flows from the platform's continued use is $3.3m.

(d) The carrying amount in the statement of financial position for the provision for dismantling and removal is currently $0.6m.

Required What should be the value of the drilling platform in the statement of financial position, and what, if anything, is the impairment loss?

Multiple Choice

Joy Plc is planning to dispose of a collection of assets. These assets are a disposal group and the carrying amount of these assets immediately before classification was $40m. Joy uses the revaluation model in IAS 16. Upon being classified as a disposal group the assets were revalued to $36m under IFRS. Joy feels that the selling costs would amount to $2m.

 

How would the revaluation of the assets on classification as a disposal group be treated in the financial statements?

• The entity recognises a loss of $2m

• The entity recognises a loss of $4m under IAS 16 immediately before classification as held-for-sale and then recognises an impairment loss of $2m

• The entity recognises an impairment loss of $4m

• The entity recognises an impairment loss of $6m

Fill in the Blanks

On 1 September 20X5, Delta decided to sell two properties which were surplus to requirements.

Both properties were measured under the cost model.

Property 1

Property 1 was available and advertised for immediate sale in its current condition. This property

had a carrying amount of $50 million on 1 September 20X5. The property was being actively

marketed at a realistic selling price of $60 million. The advertising agents have advised that a

sale should be achievable within three months of 1 September 20X5. The agents will charge a

commission of 5% of the selling price.

So, property 1 will be measured at $

million

Fill in the Blanks

Property 2

Property 2 required essential repair work to be undertaken on it prior to it being in a condition to

be offered for sale. This work is planned for October 20X5 and is expected to cost $10 million.

This property had a carrying amount of $40 million at 30 September 20X5. The selling agents

have advised that once the work has been carried out, the property could realistically be sold for

$45 million. The agents’ commission will also be 5% of the selling price.

Property 2 will therefore be recognised in PPE at $

million

Multiple Choice

Fair value measurement assumes that the transaction to sell the asset or transfer the liability takes place in the principal market for the asset or liability or, in the absence of a principal market, in the most advantageous market for the asset or liability. What is the definition of the most advantageous market in IFRS 13?

• The one with the highest value activity for the asset or liability that can be accessed by the entity

• The one with the greatest volume and level of activity for the asset or liability that can be accessed by the entity

• The one maximises the amount that would be received for the asset or the minimum price paid to extinguish the liability after transport and transaction costs

• The one with the highest and best price for the asset or liability that can be accessed by the entity

Multiple Choice

On 1 January 2008, A acquired a 50% interest in B for $60m. A already held a 20% interest which had been acquired for $20m but which was valued at $24m at 1 January 2008. The fair value of the non-controlling interest at 1 January 2008 was $40m and the fair value of the identifiable net assets of B was $110m. The goodwill calculation would be as follows using the full goodwill method:

• $14m

• $10m

Open Ended

Francis is a listed company with several investments in other entities. The directors currently misunderstand the nature of the control principle within certain International Financial Reporting Standards (IFRSs) and the Conceptual Framework. During the year ended 30 November 2017, Francis entered into a joint venture, Font, with another entity, Loft. Font was structured in such a way that all business decisions were taken by the management committee of Francis and the only decisions which needed the approval of both Francis and Loft were those which were outside normal operational decisions. Font was financed initially through the issue of bonds whose return was based upon the performance of the joint venture. Francis purchased the bonds from third parties during the year. As a bondholder, Francis has the right to appoint the general manager of the joint venture. For the year ended 30 November 2017, Francis intends to account for Font under IFRS 11 Joint Arrangements.

Required: The directors of Formatt wish to know how to account for Font in the financial statements for the year ended 30 November 2017. (4 marks)