Q1. A defined benefit plan has assets of CU 5,000,000 and an obligation of CU 4,200,000, a surplus of CU 800,000. The employer cannot obtain a refund, and can benefit only through lower future contributions with a present value of CU 500,000. What asset does it recognise? Incorrect

A) An asset of CU 500,000, with CU 300,000 of the surplus not recognised
B) An asset of CU 300,000, being the amount of the surplus above the benefit
C) No asset, because a plan in surplus can never be shown as an asset
D) An asset of CU 800,000, being the whole of the surplus in the plan

Your answer: C  |  Correct answer: A

A net defined benefit asset is measured at the lower of the surplus and the asset ceiling, which is the present value of the economic benefits available as refunds or reductions in future contributions (IAS 19.64, IFRIC 14). The surplus is CU 800,000, but the benefit available is CU 500,000, so the asset is CU 500,000. The effect of the ceiling, CU 300,000, is recognised in other comprehensive income.

IAS 19.57(c), 19.64-65, IFRIC 14

Q2. A company's accounting profit before tax is CU 1,000,000 after charging client entertaining of CU 69,000 (CU 60,000 plus CU 9,000 of blocked input VAT), a staff party of CU 40,000 (its input VAT was recovered) and a VAT default surcharge of CU 5,000. Assume income tax rules disallow client entertaining and penalties but allow staff party costs. What is taxable profit before any other adjustments? Correct

A) CU 1,065,000: add back entertaining of CU 60,000 and the surcharge, treating the blocked VAT of CU 9,000 as an allowable cost
B) CU 1,069,000: add back entertaining of CU 69,000 only, treating the surcharge as part of the allowable VAT cost
C) CU 1,114,000: add back entertaining of CU 69,000, the surcharge and the staff party, treating all three as disallowed
D) CU 1,074,000: add back the entertaining of CU 69,000 including its blocked VAT, and the CU 5,000 default surcharge penalty

Your answer: D  |  Correct answer: D

Irrecoverable VAT is part of the cost of the item to which it relates and takes the same tax treatment. Client entertaining is disallowed, so the whole CU 69,000 charged, including the blocked VAT of CU 9,000, is added back. The default surcharge is a penalty and is also disallowed, adding CU 5,000. The staff party is allowable. Taxable profit is CU 1,000,000 + CU 69,000 + CU 5,000 = CU 1,074,000. Adding back only the net cost of the entertaining leaves the VAT deducted, and adding back the staff party disallows an allowable cost.

IAS 12, VAT law (irrecoverable VAT and tax deductibility)

Q3. At 31 December 20X5 an entity has a CU 800,000 bank loan repayable in 20X9. A covenant requires net debt not to exceed 3.0 times EBITDA, tested on 30 June and 31 December each year. The ratio was met at 31 December 20X5, but the entity forecasts net debt of CU 1,700,000 and EBITDA of CU 500,000 at 30 June 20X6, and the lender could then demand repayment. How is the loan presented at 31 December 20X5? Incorrect

A) Non-current, with the covenant disclosed only if the breach actually occurs before the financial statements are authorised for issue
B) Non-current with no disclosure, as covenants tested after the year end are a future matter outside the financial statements for 20X5 itself
C) Non-current, as compliance is tested only after year end, with disclosure of the covenant, the carrying amount and the forecast 3.4 ratio
D) Current, as the forecast breach of 3.4 times at 30 June means the entity has no substantive right to defer settlement for twelve months

Your answer: B  |  Correct answer: C

A right to defer settlement for at least twelve months must exist at the reporting date, and covenants that the entity has to comply with only after that date do not affect that right (IAS 1.72B). The covenant was met at 31 December 20X5, so the loan stays non-current. The entity must still disclose information that lets users understand the risk, including the covenants, the carrying amount and facts indicating possible difficulty, such as the forecast ratio of 1,700,000 / 500,000 = 3.4 against the 3.0 limit (IAS 1.76ZA). A forecast breach is not itself a reason to reclassify, and waiting for an actual breach would deny users the warning.

IAS 1.72B, IAS 1.76ZA

Q4. A company issues a convertible loan note denominated entirely in a foreign currency (both principal and periodic coupon payments are fixed amounts of that foreign currency), with a conversion feature that separately satisfies the fixed-for-fixed test in that same foreign currency, so a compound instrument split between a liability component and an equity component is appropriately performed at initial recognition. After the split, how are the two resulting components subsequently treated for foreign currency translation purposes? Correct

A) Both the liability component and the equity component are retranslated at the closing rate at each subsequent reporting date, since the whole instrument is denominated in a foreign currency
B) Neither component is ever translated at all, with the whole instrument carried permanently at its original foreign currency face value with no functional currency conversion
C) The entire instrument, including both components, is treated as non-monetary and never retranslated after initial recognition
D) The liability component, being a monetary item (a fixed contractual amount of foreign currency to be delivered), continues to be retranslated at the closing rate at each subsequent reporting date, with exchange differences recognised in profit or loss; the equity component, once recognised at its own translated amount at initial recognition (translated into the entity's functional currency at that date), is a non-monetary item and is not subsequently retranslated for later exchange rate movements

Your answer: D  |  Correct answer: D

IAS 21 classifies items as monetary (a right to receive, or obligation to deliver, a fixed or determinable number of units of currency) or non-monetary. The liability component of a foreign-currency-denominated compound instrument represents a fixed contractual amount of foreign currency the entity is obliged to deliver, and remains a monetary item, retranslated at the closing rate at each subsequent reporting date with exchange differences in profit or loss. The equity component, once separated and recognised within equity at its own translated amount on initial recognition, is not itself a monetary item requiring settlement in a fixed amount of currency - it is a residual equity interest - and, consistent with the general treatment of equity balances, is not subsequently retranslated for later movements in the exchange rate.

IAS 21 The Effects of Changes in Foreign Exchange Rates / IAS 32 Financial Instruments: Presentation - monetary versus non-monetary treatment of a compound instrument's components

Q5. Which of the following statements correctly distinguishes the 'elements' of financial statements as defined in the IFRS Conceptual Framework? Incorrect

A) An asset is a present economic resource controlled by the entity as a result of past events, where an economic resource is a right that has the potential to produce economic benefits; a liability is a present obligation of the entity to transfer an economic resource as a result of past events; equity is the residual interest in the assets after deducting all liabilities; income and expenses are defined in terms of changes in assets and liabilities that result in increases or decreases in equity, other than contributions from, or distributions to, holders of equity claims
B) Equity is defined as the total of share capital and share premium only, excluding retained earnings and other reserves
C) Assets and liabilities are defined independently of an entity's rights and obligations; income and expenses are defined as residual balancing figures with no independent definition
D) Income and expenses are elements defined entirely independently of changes in assets and liabilities

Your answer: —  |  Correct answer: A

The 2018 Conceptual Framework revised these definitions to be asset/liability-led: income and expenses are now explicitly defined by reference to changes in assets and liabilities (excluding transactions with holders of equity claims), rather than being defined as independent, free-standing concepts. Option A inverts this relationship, option D denies the linkage the Framework establishes, and option B is a definitionally incomplete description of equity.

IFRS Conceptual Framework, Chapter 4 (2018 revision)

Q6. The Conceptual Framework describes the statement of profit or loss as the primary source of information about an entity's financial performance for the period, while permitting some income and expense items to be presented in other comprehensive income (OCI) only in limited circumstances specified by individual Standards. What principle governs when a Standard may require or permit an item to bypass profit or loss and be presented in OCI instead? Incorrect

A) OCI and profit or loss are entirely interchangeable, with no conceptual basis for preferring one location over the other for any item
B) Management may freely choose, for any income or expense item, whether to present it in profit or loss or in OCI, based purely on its own preference
C) An item is presented in OCI, rather than profit or loss, only where a specific Standard requires or permits this AND doing so, in that specific circumstance, results in the statement of profit or loss providing more relevant information about the entity's financial performance for the period, since profit or loss remains the default location for income and expense and OCI is treated as the exception, not an equally weighted alternative
D) All income and expense items must always be presented in OCI first, with only a final net summary figure ever appearing in profit or loss

Your answer: D  |  Correct answer: C

The Conceptual Framework establishes profit or loss as the primary, default source of information about an entity's financial performance for the period, with the general presumption that income and expense are included there. It permits an item to instead be presented in OCI only in the specific circumstances identified by individual Standards, and its own guidance indicates that this exception is generally appropriate where doing so enhances the relevance of the profit or loss statement itself for that period (for example, by excluding a remeasurement that would otherwise distort the picture of the period's ongoing operating performance, such as certain pension remeasurements or particular fair value changes on specific financial instruments). This reflects that OCI is treated as a bounded, Standard-specific exception rather than a co-equal, freely available alternative location for any income or expense item. Option B incorrectly grants management unrestricted, standard-agnostic discretion over presentation location, which is not consistent with the Framework's approach (individual Standards, not free management choice, determine which specific items may or must go to OCI). Option D incorrectly and unrealistically inverts the general position, when profit or loss - not OCI - is the default and primary location. Option A incorrectly denies any conceptual basis for the distinction, when the Framework specifically frames profit or loss as primary and OCI as a limited, Standard-specified exception.

Conceptual Framework for Financial Reporting, Chapter 7 - presentation in profit or loss and other comprehensive income

Q7. A telecom company invoices its customers a combined monthly bill comprising a fixed standing charge (payable regardless of usage) plus a variable usage-based charge for calls and data actually consumed, all as part of a single standard mobile phone contract taxed at the same VAT rate. How should VAT be applied to the combined invoice? Incorrect

A) VAT is charged twice, once on the fixed charge and separately again on the combined total
B) Since both elements form part of a single, indivisible telecom service contract taxed at a uniform standard rate, VAT is simply applied to the total combined invoice amount as a single composite supply, with no apportionment required; apportionment only becomes necessary where genuinely different elements attract different VAT treatments (such as an exempt or zero-rated element bundled alongside a standard-rated one)
C) The fixed and variable elements must always be separately apportioned and disclosed as distinct supplies, each with its own tax point
D) Only the fixed standing charge is subject to VAT, since the usage charge is a pass-through of network costs

Your answer: —  |  Correct answer: B

Where a fixed standing charge and a variable usage charge are both part of the SAME single supply taxed at the same rate (an ordinary standard-rated telecom contract), there is no need to apportion them separately for VAT purposes -- VAT simply applies to the combined total invoiced. Apportionment between elements is only required where a single invoice genuinely bundles elements with DIFFERENT VAT treatments that need to be identified and taxed separately.

VAT legislation (composite vs mixed supplies)

Q8. Draft profit is CU 60,000. Errors found: (1) a credit sale of CU 8,000 was never recorded anywhere; (2) insurance of CU 3,600 was debited to rates; (3) wages of CU 5,400 were paid but debited to wages as CU 4,500, the bank being credited correctly; (4) owner's cash drawings of CU 2,500 were debited to sundry expenses; (5) a customer receipt of CU 1,500 was debited to the customer and credited to bank. What is the corrected profit? Incorrect

A) CU 61,600: the omitted sale is ignored because it affects no trial balance total, with -900 for wages and +2,500 for drawings
B) CU 69,600: sale +8,000, wages transposition -900 and drawings +2,500; the commission error and reversal do not affect profit
C) CU 71,400: sale +8,000, the wages transposition treated as an overstated expense +900, and drawings +2,500 added back
D) CU 64,600: sale +8,000 and wages -900 as correct, but drawings treated as a further expense of 2,500 and deducted

Your answer: —  |  Correct answer: B

Only errors that misstate an income or expense account change profit. The omitted sale adds CU 8,000, although it never affected the trial balance. The transposition understates wages by CU 900, so profit falls by that amount. Drawings are not an expense, so removing them adds CU 2,500. The insurance posted to rates is a reclassification between expenses and the reversed receipt only affects the bank and receivables, so neither changes profit: 60,000 + 8,000 - 900 + 2,500 = CU 69,600.

IAS 8

Q9. A factory is forced to close for two weeks due to severe flood damage from a natural disaster, an event entirely outside the control of both the employer and the employees. Under the applicable employment law, employees remain entitled to their normal pay during this closure period since the closure was caused by the employer's own operational circumstances rather than the employees' own choice not to work. How does this differ from the treatment of unworked days during a period of industrial action (a strike) by employees? Incorrect

A) During the force majeure closure, ordinary wages continue to be accrued and recognised as staff cost expense for the closure period since the employees remain ready and willing to work but are prevented by circumstances outside their control, whereas during a strike, no ordinary wages are accrued for the unworked days since the employees themselves have deliberately withheld their labour
B) Employees are entitled to pay during a strike but not during a force majeure closure, the reverse of the correct position
C) Both scenarios require the employer to recognise a termination benefits liability for all affected employees
D) There is no difference; employees are never entitled to pay for days not actually worked, whether the cause is a natural disaster closure or a strike

Your answer: —  |  Correct answer: A

The key distinction lies in whether the employee remains ready and willing to work. During a force majeure closure caused by circumstances entirely outside the control of both parties (such as a natural disaster), where the employer's own operational inability to provide work is the reason no work occurs, ordinary wages continue to be accrued and recognised as staff cost, consistent with the applicable employment law entitlement described. During a strike, by contrast, the employees themselves have deliberately withheld their labour, and no ordinary wages accrue for the unworked days, reflecting the fundamentally different cause of the absence from work.

General principles of employee remuneration recognition under differing causes of unworked time (IAS 19 Employee Benefits, by analogy)

Q10. A subsidiary's individual financial statements for the year ended 31 December 20X5 were authorised for issue on 10 March 20X6. The parent's consolidated statements were authorised on 25 April 20X6. On 5 April 20X6 the subsidiary's main customer, whose severe difficulties existed at 31 December, went into liquidation owing CU 200,000. The subsidiary had provided CU 50,000 against this balance at the year end. How should the event be treated? Incorrect

A) Not adjusted in the subsidiary's issued statements, but the consolidated statements are adjusted for an additional CU 150,000 loss
B) Adjusted in both sets of statements, with the subsidiary's issued statements reopened for the additional CU 150,000 loss
C) Adjusted in the subsidiary's statements for CU 150,000 only, as the consolidated statements follow the subsidiary's authorised figures
D) Not adjusted in either set, as the liquidation took place after the reporting date and is disclosed as a non-adjusting event

Your answer: —  |  Correct answer: A

Events after the reporting period are those occurring between the reporting date and the date the particular financial statements are authorised for issue (IAS 10.3). The subsidiary's statements were authorised on 10 March, so the April event falls after that date and does not adjust them. The consolidated statements were authorised on 25 April, so the same event falls inside their window and, as the liquidation confirms a condition that existed at 31 December, it is an adjusting event requiring a further loss of 200,000 - 50,000 = CU 150,000. Treating it as non-adjusting ignores that the customer's difficulties already existed at the year end.

IAS 10.3-7

Q11. A government ministry receives two types of external development-partner financing during the year: a recurrent grant intended to support ongoing operational salaries, and a capital grant tied to a specific infrastructure construction project. Both are received in cash into the ministry's own bank account. How should these two grants be classified differently within the government's budget documentation and public accounts? Incorrect

A) Only the capital grant appears in the public accounts at all; the recurrent grant is treated as an off-budget item
B) The classification depends solely on which development partner provided the funds, not on the nature of the expenditure being financed
C) The recurrent grant is classified within the recurrent (operating) budget, financing ongoing operational expenditure such as salaries, while the capital grant is classified within the capital (development) budget, financing asset-creating infrastructure expenditure; this distinction mirrors the broader recurrent-versus-development budget classification applied to domestically-funded expenditure
D) Both grants are classified identically as general budget support, with no distinction made between recurrent and capital financing sources

Your answer: —  |  Correct answer: C

Government budget classification distinguishes expenditure (and the financing that supports it) by economic nature: recurrent (or revenue) budget items finance the ongoing, day-to-day costs of running government (such as salaries and routine operating costs), while capital (or development) budget items finance asset-creating expenditure (such as infrastructure construction). A grant received from a development partner is classified according to the nature of the expenditure it is intended to finance, consistent with the government's own broader recurrent-versus-development budget structure, so that budget documentation and public accounts present a coherent, economically meaningful classification regardless of whether the underlying financing is domestic or externally sourced. Option D incorrectly collapses a meaningful economic distinction. Option A incorrectly excludes a legitimately received grant from the public accounts. Option B incorrectly bases classification on the funding source's identity rather than the expenditure's economic nature.

Public financial management principles; budget classification of externally-financed recurrent and capital grants

Q12. A microfinance institution collects loan instalment repayments from rural borrowers through field agents who visit borrowers directly and collect cash, subsequently depositing the collected cash in bulk at the nearest branch, typically a few days after actual collection from borrowers due to travel logistics. From the institution's own perspective, at what point should a borrower's loan receivable be reduced for an instalment collected by a field agent - at the point the field agent physically collects the cash from the borrower, or only once the field agent deposits the cash at the branch? Incorrect

A) Only once the field agent deposits the cash at the branch, since the institution's own accounting records are updated based on branch-level bank deposits only
B) At the point the field agent actually collects the cash from the borrower (evidenced by the agent's own collection receipt/log, which the borrower retains as proof of payment), since this is the point the borrower has genuinely discharged their obligation and the institution (through its own agent) has taken custody of the cash, with the subsequent bulk deposit at the branch being merely the LOGISTICAL step of moving already-collected institutional cash into the bank, analogous to cash-in-transit for retail daily takings collected by a security company before banking
C) The receivable is never reduced for field-collected cash; instead a new, separate receivable from the field agent is recognised in place of the original borrower receivable, with the borrower's own account remaining unaffected until branch deposit
D) The receivable is reduced only once the funds actually clear in the branch's own bank account, several further days after the branch deposit itself

Your answer: —  |  Correct answer: B

Once a field agent, acting on the institution's own behalf, has physically collected cash from a borrower (evidenced by a collection receipt the borrower retains), the borrower has genuinely discharged their repayment obligation, and the borrower's loan receivable is reduced accordingly at that point; the field agent then holds institutional cash-in-transit pending its subsequent bulk deposit at the branch, mirroring the treatment of retail cash-in-transit collected by a third-party security company before banking - a logistical delay in physically banking already-collected institutional cash, not a delay in the underlying borrower's own repayment recognition.

General reconciliation principles - microfinance field agent collection, receivable reduced at collection, cash-in-transit to branch deposit

Q13. An entity presents expenses by nature. Revenue is CU 8,400,000; finished goods and work in progress rose by CU 150,000; raw materials used CU 3,200,000; employee benefits CU 2,100,000; depreciation CU 700,000; other operating expenses CU 900,000; and finance costs CU 100,000. What is profit before tax, and what applies if the cost of sales method were used? Incorrect

A) CU 1,550,000; the function method requires additional disclosure of depreciation, amortisation and employee benefits expense
B) CU 1,250,000, treating the CU 150,000 inventory increase as an expense; the function method requires the same additional disclosure
C) CU 1,400,000, omitting the inventory movement; the function method requires only extra disclosure of depreciation
D) CU 1,550,000; the function method needs no further disclosure because the total expense is identical under both methods

Your answer: —  |  Correct answer: A

Under the nature method, an increase in finished goods and work in progress is credited, because costs incurred in production were not yet expensed (IAS 1.102). Profit before tax = 8,400,000 + 150,000 - 3,200,000 - 2,100,000 - 700,000 - 900,000 - 100,000 = CU 1,550,000. An entity using the function (cost of sales) method must disclose additional information on the nature of expenses, including depreciation, amortisation and employee benefits expense (IAS 1.104). Deducting the inventory increase reverses its sign.

IAS 1.99-105

Q14. A company issues loan notes with detachable warrants attached, entitling holders to subscribe for a fixed number of the company's own shares at a fixed price. Immediately following issue, these warrants themselves become separately, actively traded on a public stock exchange, providing a directly observable, reliable market fair value for the warrants alone; no similarly reliable, directly observable fair value exists for a comparable loan note without the attached warrants. How should the proceeds from this combined issue be split between the liability (loan note) and equity (warrant) components? Incorrect

A) The liability component is measured first at the fair value of a similar loan note without conversion rights, with the equity component being whatever residual amount remains, exactly as in the more typical scenario where only the liability's fair value is reliably measurable
B) Both components are measured independently at their own separately observed fair values, with any difference between their combined total and the actual total proceeds received recognised immediately as a gain or loss in profit or loss
C) Since the warrants themselves have their own directly observable, reliably measurable market fair value, that fair value is used to measure the equity (warrant) component first, with the liability (loan note) component instead measured as the residual amount, being the total proceeds less the warrants' own directly observed fair value, reversing the more typical order applied when only the liability's fair value is reliably measurable
D) The full proceeds are allocated entirely to the liability component, with the warrants recognised at a value of nil, since warrants are always treated as having no separately measurable value at initial recognition

Your answer: —  |  Correct answer: C

The general approach to splitting a compound instrument's proceeds between its liability and equity components is a residual method, but which component is measured directly, with the other treated as the residual, depends on which component's fair value can be more reliably measured. Ordinarily, the liability component (a loan note without its attached rights) is more reliably measurable using market interest rates for similar debt, with the equity component derived as the residual. However, where, as here, the warrants themselves have their own directly observable, actively traded market fair value, that more reliable, directly observed fair value is instead used to measure the equity (warrant) component first, with the liability (loan note) component measured as the residual amount, reversing the usual order specifically because the equity component's fair value is, in this case, the more reliably measurable of the two. Option A incorrectly applies the more typical approach even where a more reliable, direct measurement of the equity component is actually available. Option B incorrectly measures both components independently and forces an artificial profit or loss to reconcile them to total proceeds, when the residual method is specifically designed to avoid any such gain or loss by construction. Option D incorrectly and arbitrarily assigns no value to the warrants, ignoring the directly observable market evidence of their genuine value.

IAS 32 Financial Instruments: Presentation, paragraphs 31-32 (split accounting for compound instruments, residual method)

Q15. A company previously repurchased its own ordinary shares and held them as treasury shares, deducted directly from equity at their repurchase cost, with no formal cancellation. It later reissues those treasury shares to a new investor at a price below their original repurchase cost. How should the resulting shortfall be recognised? Incorrect

A) The shortfall is charged in full and only ever against retained earnings, regardless of whether any related share premium exists.
B) As a loss in profit or loss, since the company has effectively sold an asset for less than it paid, mirroring the accounting for a loss on disposal of any other asset.
C) The shortfall is charged first against any share premium previously recognised in connection with the same shares' original issuance or repurchase, and only any remaining excess is then charged against retained earnings, with no amount ever recognised in profit or loss.
D) No accounting entry at all is required for the shortfall; the shares are simply removed from treasury at their original repurchase cost with the difference left unrecorded.

Your answer: —  |  Correct answer: C

Because treasury shares are deducted directly from equity rather than recognised as an asset, their repurchase and reissue are transactions with owners in their capacity as owners and so are never recognised in profit or loss, regardless of whether the reissue price is above or below the original repurchase cost. A reissuance shortfall is absorbed within equity, conventionally charged first against any share premium specifically associated with those shares before being charged to retained earnings, keeping the entire treasury share cycle outside profit or loss.

IAS 32 Financial Instruments: Presentation, paragraph 33, treasury share principles

Q16. A company declares an ordinary dividend of CU 1,000,000. Under local law it must deduct 10% withholding tax from each shareholder's dividend and pay it to the tax authority. How does the company account for this? Incorrect

A) Debit retained earnings CU 1,000,000; credit CU 900,000 to dividends payable and CU 100,000 to withholding tax payable, with no income tax expense recognised
B) Debit retained earnings CU 1,000,000 and income tax expense CU 100,000, crediting cash CU 1,100,000, because the company bears the tax on top of the dividend
C) Debit retained earnings CU 900,000 and income tax expense CU 100,000, because the withholding tax is a cost of the company that is paid to the authority
D) Debit retained earnings CU 900,000 and credit dividends payable CU 900,000, with the withholding ignored because it is the shareholders' own responsibility

Your answer: —  |  Correct answer: A

The company acts as a collecting agent. The dividend declared is CU 1,000,000 and is deducted from equity in full; CU 100,000 is the shareholders' tax withheld on their behalf, creating a liability to the tax authority, and CU 900,000 is payable to shareholders. It is not the company's income tax, so no expense arises. Treating the withholding as a company expense, adding it on top or ignoring the liability misstates equity, expenses or liabilities.

IAS 12.65A, IAS 32.35

Q17. An RMG exporter receives a cash incentive from the Bangladesh government, paid as a fixed percentage of the FOB (free on board) value of its export shipments under an export promotion scheme. The incentive is not a reimbursement of any specific identified cost but is calculated purely by reference to export sales value. How should the cash received under this scheme be classified in the statement of cash flows? Incorrect

A) As an investing activity, since government incentive schemes relate to capital investment decisions
B) As an operating activity, since the incentive is directly linked to and calculated from ordinary export sales (revenue) transactions, consistent with the classification of a revenue-related government grant, even though its basis is sales value rather than reimbursement of a specific cost
C) As a financing activity, since the incentive is, in substance, government-provided capital support to the exporter
D) Excluded from the statement of cash flows entirely as a non-cash government transaction

Your answer: —  |  Correct answer: B

A cash incentive calculated as a percentage of export sales (FOB) value is directly linked to the entity's ordinary revenue-generating export sales activity. Consistent with the classification of a revenue-related government grant as an operating cash inflow, this incentive is presented within operating activities, even though its calculation basis is sales value rather than reimbursement of a specific identified operating cost.

IAS 7

Q18. A sole trader bought a van for CU 600,000 on 1 January two years ago, depreciating it over 5 years straight line to nil residual value. At the start of this year she re-estimates that it will last 4 more years. Opening capital was CU 700,000, drawings CU 90,000 and other closing net assets CU 480,000. What is the profit for the year? Incorrect

A) CU 170,000, because the new total life of 6 years was applied back to cost, giving a closing carrying amount of CU 300,000
B) CU 80,000, because cost of CU 600,000 was restarted over the 4 years, giving a charge of CU 150,000 and CU 210,000 remaining
C) CU 110,000, because the old charge of CU 120,000 continued, leaving a closing carrying amount of CU 240,000 for the van
D) CU 140,000, because the van is depreciated prospectively at CU 90,000 (360,000 / 4), leaving a carrying amount of CU 270,000

Your answer: —  |  Correct answer: D

A change in estimated useful life is a change in accounting estimate and is applied prospectively: the carrying amount at the start of the year, 600,000 - 2 x 120,000 = 360,000, is spread over the 4 remaining years, a charge of CU 90,000. Closing carrying amount = 360,000 - 90,000 = 270,000, so closing net assets are 480,000 + 270,000 = 750,000. Profit = 750,000 - 700,000 + 90,000 = CU 140,000. Prior years are not restated and the cost is not re-depreciated from the start.

IAS 16.51, IAS 8.36

Q19. A sole trader's records are destroyed, but he recalls that he prices his goods to achieve a gross profit of 25% of COST on every sale. His accountant instead applies 25% of SELLING PRICE (i.e. treats 25% as a margin rather than a mark-up) when reconstructing sales from a known cost of sales figure of Tk 800,000. What is the effect of this error, and what is the correctly reconstructed sales figure? Incorrect

A) No effect; a 25% mark-up on cost and a 25% margin on selling price produce the same reconstructed sales figure of Tk 1,000,000
B) The accountant's approach is definitionally identical to the mark-up approach and cannot produce an error
C) The error only affects the balance sheet and has no impact on reconstructed sales
D) The accountant's error understates sales; the correct mark-up-based sales figure is Tk 1,000,000 (cost Tk 800,000 plus 25% of cost = Tk 200,000), whereas the incorrect margin-based approach would derive a different, incorrect cost of sales from an assumed sales figure

Your answer: —  |  Correct answer: D

A 25% mark-up on cost means gross profit is 25% of cost of sales, so sales = cost of sales x 1.25 = Tk 800,000 x 1.25 = Tk 1,000,000, giving a gross profit percentage of 20% of sales (200,000/1,000,000). Applying 25% as though it were a margin (25% of selling price) is a different, larger gross profit percentage of sales and produces a different, incorrect sales figure if mechanically substituted for the mark-up. This mark-up/margin distinction is a common source of computational error in incomplete records reconstruction, since the same stated percentage produces materially different results depending on which base it is applied to.

Incomplete records reconstruction

Q20. A company operates a gratuity scheme under which employees who complete a minimum period of continuous service become entitled to a lump-sum payment on leaving employment (whether by retirement, resignation after the qualifying period, or termination), calculated with reference to their final salary and years of service. How should the company account for its obligation under this gratuity scheme DURING an employee's period of service, rather than only recognising an expense when an employee actually leaves and the lump sum is paid? Incorrect

A) No accounting entry at all is required until an employee actually leaves and the lump sum is paid in cash, since the obligation is contingent on a future, uncertain event and therefore has no earlier accounting consequence
B) The gratuity obligation is treated purely as a note disclosure item, with no corresponding liability or expense ever recognised within the body of the financial statements at any point
C) The full estimated future gratuity payment for all current employees is recognised immediately, in full, as a liability in the year the scheme is first introduced, with no further adjustment required in any later year
D) A gratuity scheme of this kind creates a genuine employee benefit obligation that builds up progressively as the employee renders service to the company -- the cost of providing this future benefit relates to service performed in EACH period, not merely to the period in which the employee eventually leaves. Consistent with the accruals concept, the company should recognise a PROVISION (a long-term employee benefit liability) for its accumulating gratuity obligation, with a corresponding staff cost expense recognised progressively over employees' service, rather than waiting to recognise the full cost as a single lump-sum expense only in the year an employee finally leaves -- which would badly mismatch the expense against the periods in which the related employee service was actually rendered, and would understate the liability in respect of employees still in service who have already earned part of their eventual entitlement

Your answer: —  |  Correct answer: D

A gratuity scheme is a form of long-term employee benefit: employees earn an entitlement to a future lump-sum payment progressively, as they render service year after year, even though the cash payment itself will not actually occur until, potentially, many years later when the employee eventually leaves. Recognising the entire cost only in the year of departure would badly violate the accruals concept, since the benefit being paid out at that point actually relates to service performed across the employee's entire period of employment, not merely their final year. The correct approach is instead to recognise a PROVISION -- a liability representing the company's accumulating obligation for gratuity benefits earned to date by current employees -- building it up progressively, with a corresponding staff cost expense recognised in each period as employees render the service that earns them their eventual entitlement. This approach ensures that the statement of financial position reflects, at any given reporting date, a reasonable estimate of what the company already owes employees still in service (in respect of gratuity already earned through service to date, even though not yet payable), and that the cost of providing the benefit is matched against the periods in which the employees actually worked to earn it, rather than being deferred and recognised as a single, lump-sum charge whenever an employee happens to leave.

Payroll accounting - provision for gratuity/end-of-service benefits as a long-term employee benefit obligation