F2 Advanced Financial Reporting Question and Answers

The following information has been extracted from the financial records of DEF for the year ended 31 December 20X2.

  

What is the operating cycle of DEF at 31 December 20X1?

Assume there are 365 days in the year.

All workings should be rounded to whole days.

Give your answer in whole days.

 ?  days.

AB acquired its one subsidiary, CD, on 1 January 20X1.  At this date the fair value of CD's property, plant and equipment was found to be $40 million higher than its carrying value.  The relevant items had a remaining estimated useful life of 10 years from the date of acquisition.

At 31 December 20X4 AB and CD presented property, plant and equipment of $100 million and $50 million respectively in their individual financial statements.

The value of property, plant and equipment presented in AB's consolidated statement of financial position at 31 December 20X4 is:

Which of the following, in accordance with IFRS 2 Share-based Payments, are only applicable to the accounting treatment of cash settled rather than equity settled share-based payment schemes?

Select ALL that apply.

If you were asked to express the overall performance of an entity as a percentage of its total investment in net assets which of the following ratios would you calculate?

JJ's current share price is $1.80, with a dividend of $0.20 a share just about to be paid.

Dividends have increased at an average annual growth rate of 4.5% and this is expected to continue into the future.

What is JJ's cost of equity?

ST acquired 75% of the 2 million $1 equity shares of CD on 1 January 20X3, when the retained earnings of CD were S3,550,000. CD has no other reserves.

ST paid $5,600,000 for the shares in CD and the non controlling interest was measured at its fair value of S1,400,000 at acquisition.

At 1 January 20X3, the fair value of CD's net assets were equal to their carrying amount, with the exception of a building. This building had a fair value of $1,000,000 in excess of its carrying amount and a remaining useful life of 25 years on 1 January 20X3.

At 31 December 20X5, the retained earnings of ST and CD were $8,500,000 and $5,250,000 respectively.

What is the value of goodwill to be included in the consolidated statement of financial position of ST as at 31 December 20X5?

KL acquired 2 million $1 equity shares in MN on 18 July 20X0 for $1.65 a share and classified this investment as available for sale (AFS) in accordance with IAS 39 Financial instruments: Recognition and Measurement.

KL paid a 0.5% transaction fee to its broker on this transaction. MN's shares were trading at $1.78 on 31 December 20X0.

Which of the following journals records the subsequent measurement of this investment at 31 December 20X0?

AB and CD are separate entities that prepare financial statements to 31 May using international accounting standards. AB and CD provide technical support services to the financial services industry and operate in the same country. The financial statements are identical except for the following:

• AB purchased all operating equipment, paying $100,000, using a 5 year bank loan. The useful life of the equipment was 5 years.

• CD signed an operating lease agreement for all operating equipment for 5 years paying $20,000 per year.

Both entities charge all expenses relating to the equipment to cost of sales.

From the information provided, which of the following ratios would be reliably comparable for AB and CD? 

ST has sold its main office property, which had a carrying value of $360,000, to AB, a property management entity.

The property was sold for $400,000 which is equal to its fair value and was immediately leased back under an operating lease agreement. 

Which of the following journals will record this transaction?

GH is a listed entity which holds equity shares in one subsidiary and one associate.

Information extracted from the most recent financial statements is as follows:

What is the interest cover for the year?

FG granted share options to its 500 employees on 1 August 20X0. Each employee will receive 1,000 share options provided they continue to work for FG for the four years following the grant date. The fair value of the options at the grant date was $1.30 each. In the year ended 31 July 20X1, 20 employees left and another 50 were expected to leave in the following three years. In the year ended 31 July 20X2, 18 employees left and a further 30 were expected to leave during the next two years.

The amount recognised in the statement of profit or loss for the year ended 31 July 20X1 in respect of these share options was $139,750. 

Calculate the charge to FG's statement of profit or loss for the year ended 31 July 20X2 in respect of the share options.

AB acquired an investment in a debt instrument on 1 January 20X5 at its nominal value of $25,000, which it intends to hold until maturity. The instrument carried a fixed coupon interest rate of 5%, payable in arrears. Transactions costs of $5,000 were paid in respect of this investment.  The effective interest rate applicable to this instrument was estimated at 9%.  

Calculate the value of this investment that AB will include in its statement of financial position at 31 December 20X5.

Give your answer to the nearest whole number. 

$ ?  

EF has redeemable 10% bonds which are currently trading at $94.00 for each $100 of nominal value. The bonds can be redeemed at par in five years' time. The corporate income tax rate is 22%.

The present value of the cash flows associated with $100 nominal value of these bonds at a discount rate of 7% is $9.28.

Calculate the post tax cost of debt.

Give your answer as a percentage to one decimal place.

   %

Mr D, a CIMA qualified accountant, is working on the preparation of a long term profit forecast required by the local stock market prior to a new share issue of equity shares. At the most recent board meeting the directors requested that the forecast be inflated. In Mr D's view this would grossly overestimate the forecast profit. The board intends to publish the revised inflated forecast.

Which THREE of the following are the ethical options available to Mr D in this situation?

JK has calculated its inventory holding period:

Which THREE of the following would have contributed to the above movement in inventory holding period?

The following information is extracted from the financial statements of RS for the year ended 30 June 20X7:

RS has no other liability balances and has no associate investments.

Calculate return on capital employed for RS at 30 June 20X7.

Give your answer to the nearest whole %.

 ?  %

Information from the financial statements of an entity for the year to 31 December 20X5:

  

 The gearing ratio calculated as debt/equity and interest cover are:

RST sells computer equipment and prepares its financial statements to 31 December.

On 30 September 20X5 RST sold computer software along with a two year maintenance package to a customer. The customer is given the right to return the goods within six months and claim a full refund if they are not satisfied with the computer software. The risk of return is considered to be insignificant for RST.

How should the revenue from this transaction and the right of return be recognised in the financial statements for the year ended 31 December 20X5?

As at 31 October 20X7 TU's financial statements show the entity having profit after tax of $600,000 and 900,000 $1 ordinary shares in issue. There have been no issues of shares during the year. At 31 October 20X7 TU have 300,000 share options in issue, which allow the holders to purchase ordinary shares at $2 a share in 3 years' time. The average price of the ordinary shares throughout the year was $5 a share.

What is the diluted earnings per share for the year ended 31 October 20X7?

AB and CD are competitors supplying components to the car manufacturing industry. AB operates in Country X and CD operates in Country Y. Both entities were incorporated on the same day, are the same size and prepare financial statements to 31 March each year using international accounting standards.

Which of the following statements taken individually would limit the usefulness of the comparison of the return on capital employed ratio between the two entities?

FG's statement of profit or loss account for year ended 31 December 20X1 is:

  

What is the operating profit margin for FG for the year ended 31 December 20X1?

Give your answer to the nearest whole %.

 ?  %

ST has in issue unquoted 7% debentures which were issued at par and are redeemable in 1 year's time.  These debentures cannot be traded. The yield to maturity on these debentures has been calculated at 5%.

Which of the following would explain why the yield to maturity is lower than the coupon?

Which THREE of the following statements are true in relation to financial assets designated as fair value through profit or loss under IAS 39 Financial Instruments: Recognition and Measurement?

The tax benefit on a company's asset is £180,000 and the useful life on that asset is five years. The company creates a deferred tax provision to spread this benefit over the asset's useful life.

What entry is needed to reduce this deferred tax provision in the company's year two accounts?

A group presents its financial statements in A$.

The goodwill of its only foreign subsidiary was measured at B$100,000 at acquisition. There have been no impairments to this goodwill.

Exchange rates (where A$/B$ is the number of B$'s to each A$) are as follows:

  

The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

On 1 January 20X4 EF grants each of its 125 employees 500 share options on the condition that they remain in employment for 3 years. During the year to 31 December 20X4 10 employees left and It is expected that a further 25 will leave before the end of the vesting period.

The fair value of each share option is $30 on 1 January 20X4 and $45 on 31 December 20X4.

What is the journal entry in respect of these share options in EF's financial statements for the year ended 31 December 20X4?

XY's investments enable it to exercise control over AB and have significant influence over FG and JK.

The Managing Director of XY is a non-executive director of LM.  XY does not hold any investment in LM.

XY is preparing its consolidated financial statements for the year ended 30 September 20X9.

Which of the following transactions during the year will be disclosed in these financial statements in accordance with IAS 24 Related Party Disclosures?

Mr. Rodgers is an accountant for JK Pic. He is asked to record a particular share-based payment in the company's accounts and obliges by debiting as an expense the first relevant account and crediting the

corresponding double-entry as a liability.

Which type of share-based payment has Mr. Rodgers recorded?

W and Y are very similar entities with the same level of profit before interest and tax.  However, W has gearing of 95% and Y has gearing of 30%.

Which of the following statements is true?

JK is seeking to raise finance for a project and the directors would prefer to take out a fixed rate bank loan repayable over the next 5 years.  The project will increase the profit of JK even after taking into account the additional interest costs.

Which of the following statements about the use of a bank loan in this situation is true?

FG acquired 75% of the equity share capital of HI on 1 September 20X3. 

On the date of acquisition, the fair value of the net assets was the same as the carrying amount, with the exception of a contingent liability disclosed by HI and relating to a pending legal case. At 1 September 20X3, the contingent liability was independently valued at $1.2 million.

At the current year end, 31 March 20X5, the legal case is still outstanding. The fair value of the liability has now been estimated at $1.4 million, and the case is expected to be resolved in the forthcoming financial year.

How should this contingent liability be recorded in the consolidated financial statements for the year ended 31 March 20X5?

AB acquired 10% of the equity share capital of XY on 1 January 20X7 for $180,000 when the fair value of XY's net assets was $190,000.  On 1 January 20X9 AB purchased a further 50% of the equity share capital for $550,000 when the fair value of XY's net assets was $820,000.  

The original 10% investment had a fair value of $200,000 at the date control of XY was gained.  The non controlling interest in XY was measured at its fair value of $300,000 at 1 January 20X9.

Which of the following represents the correct value of goodwill arising on the acquisition of XY that would have been included by AB when it prepared its consolidated financial statements at 31 December 20X9?

FG has a weighted average cost of capital of 12% based on its existing:

• level of gearing of 30% (measured as debt/(debt + equity)); and

• business operations.

This would be used as an appropriate discount factor to assess which of the following significant projects?

AB acquired a financial investment on 1 January 20X9, incurring $5,000 related agency fees.  AB initially classified the investment as held for trading, in accordance with IAS 32 Financial Instruments: Presentation.

Which of the following statements reflects the accounting treatment that AB adopted in respect of this investment when it prepared its financial statements to 31 December 20X9?

LM acquired 80% of the equity shares of ST when ST's retained earnings were $50 million.  The fair value of the net assets of ST included a contingent liability with a fair value of $100 million at the date of acquisition and a fair value of $40 million at 31 December 20X6. No other fair value adjustments were required at the date of acquisition.

LM and ST had retained earnings of $200 million and $80 million respectively at 31 December 20X6. 

The consolidated retained earnings of LM at 31 December 20X6 were:

Following the impairment review of the investment in BC, what would be the carrying value of this associate in KL's consolidated statement of financial position at 31 December 20X9?

GH granted 100 share options to each of its 1,000 employees on 1 January 20X8.  The fair value of each option was $7 on 1 January 20X8 and had risen to $8 at 31 December 20X8.

Which of the following statements represents the treatment that GH adopted to account for the related expense of these share options in its financial statements for the year ended 31 December 20X8, in accordance with IFRS 2 Share-based Payments?