Financial Accounting III Revision

A company issues 8% convertible bonds at their nominal value of $8 million. Interest is payable annually in arrears. Each $1,000 bond is convertible at any time up to maturity into 400 ordinary shares. Alternatively, the bonds will be redeemed at par after 3 years. The market rate applicable to non-convertible bonds is 9%.

• The rate applied for convertible bond is always higher than the rate for similar bond without conversion right

• At issuing date, the company recognized a financial liability of $ 5 million

• The company recognized interest expense at market rate for non-convertible bonds of 9%

• The bonds are recorded as both liability and equity

Which TWO of the following situations would not require a prior year adjustment per IAS 8

• In last year’s financial statements, inventories were understated by a material amount due to system error.

• A company changes its allowance for irrecoverable debts from 10% of outstanding debt to everything over 120 days old

• A company has chosen to value inventory using FIFO rather than AVCO as in previous periods.

• A company has decided to move from charging the depreciation on the straight-line basis to the reducing balance basis

Which TWO of the following statements is correct

• Deferred tax liability arises from taxable temporary differences

• Deferred tax liability arises from deductible temporary differences

• Deferred tax liability arises when carrying amount of the asset exceeds its tax base

• Deferred tax liability arises when carrying amount of the asset less than its tax base

When funds are borrowed to pay for construction of assets that qualify for capitalization of interest, the excess funds not needed to pay for construction may be temporarily invested in interest-bearing securities. Interest earned on these temporary investments should be

• offset against interest cost incurred during construction

• recognized as revenue of the period

•     increase the cost of assets being constructed

• multiplied by an appropriate interest rate to determine the interest to be capitalized

Which of the following is a change in accounting policy in accordance with IAS8

• An entity changes the warranty provisions, based upon more up-to-date information about claims frequency and value

• Reducing the value of inventory from cost to net relisable value due to a valid adjusting event after the reporting period.

• A change in valuation of inventory from a weighted average to a FIFO basis

• An entity changes the useful lives of some of its non-current assets due to recent introduction of a new technology

For which category of financial liabilities are transaction costs excluded from the initial value, and instead expensed to profit or loss

• Financial Liabilities at amortised cost

• Financial Liabilities at fair value through profit or loss

Which of the following is a change in accounting policy in accordance with IAS8

• An entity changes the warranty provisions, based upon more up-to-date information about claims frequency and value

• An entity previously depreciated vehicles using the reducing balance method at 40% pa. It now uses the straight-line method over a period of five years

• An entity previously charged interest incurred in connection with the construction of tangible non-current assets to the statement of profit or loss. Following the revision of IAS23 Borrowing Cost, and in accordance with the revised requirements of that standard, it now capitalizes this interest

• Reducing the value of inventory from cost to net relisable value due to a valid adjusting event after the reporting period.

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

• 1 and 3 only

• 2 & 3 only

• 1 and 2 only

• All three

A company issues 4% convertible bonds at their nominal value of $5 million. Interest is payable annually in arrears. Each $1,000 bond is convertible at any time up to maturity into 400 ordinary shares. Alternatively the bonds will be redeemed at par after 3 years. The market rate applicable to non-convertible bonds is 6%

Which TWO of the followings are incorrect:

• At issuing date, the company recognized a financial liability at $ 5 million

• The bonds are recorded as both liability and equity

• The company recognized interest expense at market rate of 6%.

• The company recognized interest expense at coupon rate of 4%.

Contract between Customer and Supplier requires Supplier to transport a specified quantity of goods by using a specified type of rail car in accordance with a stated timetable for five years. Supplier has large pool of similar items and none are specified in the contract. Alternatives are readily available at minimal cost. Supplier benefits economically by using its pool of available rolling stock in the most efficient manner. Is it a lease

• Yes

• No