Following a wedding in October 20X0 ten people contracted food poisoning from eating food cooked by the wedding caterer PQ. At 31 December 20X0 PQ was advised by its legal advisors that a liability was possible but not probable and the
incident was disclosed as a contingent liability at that date.
As the result of developments in the case, which is still not settled, PQ was advised that it is now probable, as at 31 December 20X1, that they will be found liable and will therefore have to pay damages of unknown value.
Which of the following would indicate that in the financial statements of PQ for the year ended 31 December 20X1 this should still be recognised as a contingent liability rather than a provision?
A. There is no reliable estimate of the cost.
B. A present obligation exists as a result of a past event.
C. It is probable that there will be an outflow of economic resources to settle the case.
D. The case has not yet been settled.
Which of the following is NOT an example of an unconsolidated structured entity as defined in IFRS12 Disclosure of Interests in Other Entities?
A. A post-employment benefit plan
B. A securitisation vehicle
C. An asset-backed financing scheme
D. An investment fund
XY has in issue a 6% convertible bond which is redeemable at par or convertible into equity shares in one year's time. The conversion terms are 20 equity shares for each $100 of convertible bond. The conversion value in one year's time is expected to be $105 per $100 nominal of the bond based on the current share price of $5.25.
Which of the following statements about the bond is correct?
A. The yield to maturity of the convertible bond is a constant 6%.
B. The bond will be converted into equity shares in one year's time if the share price does not change.
C. XY's post tax cost of debt for the convertible bond will be higher than the yield to maturity.
D. If the bond is redeemed rather than converted that means that the investor will receive $105 for each $100 of nominal value.
Which of the following actions should XY's management take in order to reduce its investment in working capital?
A. Sell its long-term investments and use the proceeds to reduce its bank overdraft.
B. Extend credit terms with its trade customers.
C. Scrap its obsolete inventory and replace with new inventory.
D. Pay trade suppliers more quickly to take advantage of prompt payment discounts.
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?
A. 17.6%
B. 16.1%
C. 12.5%
D. 11.1%
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?
A. Sale of goods with a trade discount to a major customer of XY.
B. Sale of a motor vehicle from XY to a Director of AB's spouse at its current market value.
C. Sale of non current assets from XY to LM at their current market value.
D. Sale of goods from FG to JK at their current market value.
HJ is currently in dispute with an employee, who is claiming $400,000 in a legal case against them.
HJ's legal advisors have stated that it is probable that they will lose the case and will have to pay the amount claimed.
Also, HJ are claiming $250,000 from a supplier of defective goods and the legal advisors have stated that it is probable that HJ will be successful in this claim.
What is the correct accounting treatment for these two items in HJ's financial statements?
A. Provide for the $400,000 potential outflow and disclose the $250,000 potential inflow.
B. Provide for the $400,000 potential outflow and recognise the $250,000 potential inflow.
C. Disclose the $400,000 potential outflow and disclose the $250,000 potential inflow.
D. Disclose the $400,000 potential outflow and recognise the $250,000 potential inflow.
MS Group's total profit for period on their consolidated income statement is £31,000. This includes adjusting for their share of joint venture JV2. Calculate the share of joint venture MS Group received based on the following information.
MS operating profit £41,000
Dividend from JV2 £5,000
Finance cost £3,000
Tax £11,000
A. £4,000
B. £9,000
C. £1,000
D. £7,000
E. £6,000
F. £5,000
When consolidating for group accounts, a number of calculations and adjustments are required to properly combine the entities into a single group. Which of the following processes are involved in this consolidation method?
Select ALL that apply:
A. Add together the assets and liabilities of parent and subsidiary
B. Adjust for investment in subsidiaries
C. Adjustment for equity
D. Adjustment for profits
E. Adjustment for depreciation and amortisation
On 1 January 20X1 KL acquired 75% of the equity shares of PQ. Goodwill arising on the acquisition was $480,000. On 31 December 20X3 KL sold the full investment of PQ to XY Group for $2,000,000. On this date the net assets of PQ were $1,340,000 and the non- controlling interests stood at $410,000.
What is the gain on disposal to be recognised in the consolidated statement of profit or loss of KL?
A. $590,000
B. $180,000
C. $660,000
D. $635,000
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