Question 1

LM acquired an asset under a 5-year non-cancellable operating lease agreement on 1 January 20X8. Under the terms of the agreement, LM paid nothing for the first year and then made fourpayments of $50,000 in each subsequent year. LM adopted the provisions of IAS 17 Leases when accounting for this agreement.

Which of the following is correct in respect of this operating lease in LM's financial statements for the year to 31December 20X8?

Options :

A : An accrual of $40,000 was recognised.

B : An accrual of $50,000 was recognised.

C : A prepayment of $10,000 was recognised.

D : An expense of $50,000 was recognised.

Answer: A

Question 2

On 1 January 20X7 GH purchased plant and equipment at a cost of $400,000. The temporary differences in respect of this plant and equipment at 31 December 20X7 and 20X8 have been calculated as follows:

Assume that there are no other temporary differences in the periods and that the corporate income tax rate is 25%. GH is expected to have significant taxable profits in the future.

Which of the following is the correct impact in GH's statement of financial position at 31 December 20X8 in respect of deferred tax?

Options :

A : Increase in the deferred tax asset.

B : Increase in the deferred tax liability.

C : Decrease in the deferred tax asset.

D : Decrease in the deferred tax liability

Answer: A

Question 3

The dividend yield of ST hasfallen in theyear to 31 May 20X5, compared to the previous year.

The share price on 31 May 20X4 was $4.50 and on 31 May 20X5 was $4.00. There were no issues of share capital during the year.

Whichof the following should explain the reduction in the dividend yield for the year to 31 May 20X5 compared to the previous year?

Options :

A : The dividend paid in the year was reduced in order to pay for new assets.

B : Surplus cash was used to pay a special dividend in additionto the normal dividend in the year.

C :

The profit for the year fell significantly and the dividend per share stayed the same.

D : To compensate investors for thereduction in share price a higher dividend per share was paid.

Answer: A

Question 4

AB and FGincorporated on 1 January 20X1 in the same country and had similar investment in net assets. Both entities are financed entirely by equity. In the year to31 December 20X1 both entitiesgenerated the same volume of sales.

Which of the following, takenindividually, would explainwhy AB's return on capital employed ratio was lower than that of FG?

Options :

A : AB revalued its non current assets upwards on 31 December 20X1; FG-s non current assets were stated at historic cost.

B : FG issuedbonds on 31 December 20X1; AB remains ungeared.

C : AB paid a lower dividend to its shareholders than FG in the year.

D : AB-s deferred tax provision at the year end ishigher than that of FG.

Answer: A

Question 5

AB and EF are located in the same country and prepare their financial statements to 31 October in accordance with International Accounting Standards. EF supplies AB with a component that is vital to AB's product range. AB is considering acquiring a controlling interest in EF by 31 December 20X4 in order to guarantee future supply. The Board of EF has indicated that such an approach would be postively considered. AB would use its control to make AB the sole customer of EF.

The Finance Director of AB has been granted access to EF's management accounts and has conducted some initial analysis from the financial press. The results togther with comparisons for AB for the year to 31 October 20X4 are presented below:

AB and EF are forecasting revenues of S1,500,000 and $700,000 respectively for the year ended 31 October 20X5.

Which of the followingindependent optionswouldexplainthe differencebetween thegearingratios of AB and EF at 31 October 20X4?

Options :

A : EF-s average cost of borrowing is significantly lower than that of AB and EF has taken advantage of that.

B : EF has a policy of revaluing non current assetswhereas AB does not.

C : EF made a bonus issue of shares from retained earnings during the year whereas AB did not.

D : EF-s market value of sharesat 31 October 20X4 is lower than that of AB.

Answer: A

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