Question 1

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

On 30 September 20X5 RST soldcomputer 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 thefinancial statements for the year ended 31 December 20X5?

Options :

A : Recognise 100% of the revenue from both the sale of goods and the maintenance contract and create aprovision for the anticipated level of returns.

B : Do not recognise any revenue from the sale of goods or the maintenance contract and do not create aprovision for the anticipated level of returns.

C : Recognise 12.5% of the revenue from both the sale of goods and the maintenance contract and do not create aprovision for the anticipated level of returns.

D : Recognise 100% of the revenue from the sale of goods,12.5% of the revenue from the maintenance contract and create aprovision for the anticipated level of returns.

Answer: D

Question 2

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?

Options :

A : Investing in W carries a higher level of risk than investing in Y.

B : A greater proportion of profit will be available out of which to declare a dividend in W.

C : Investors in Y will expect a higher return than investors in W.

D : Y has a greater commitment to meet interest payments than W.

Answer: A

Question 3

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:

Options :

A : gearing of 15% andinterest cover of 6.

B : gearing of 16% and interest cover of 6.

C : gearing of 15% and interest cover of 4.

D : gearing of 16% and interest cover of 4.

Answer: A

Question 4

An entity undertakes an issue of new debt which has the effect of reducing the entity's weighted average cost of capital (WACC).

Which of the following would best explain why the WACC will have fallen?

Options :

A : The entity was 100% equity financed prior to the issue of the debt.

B : The risk to the shareholders has reduced leading to a fall in the cost of equity.

C : The new debt is being used to replace existing debt that had a lower cost.

D : The new debt is being used to replace existing debt that had the same cost.

Answer: A

Question 5

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale.

Which of the following describes the value of the financial asset on the date ofacquisition?

Options :

A : Fair value excluding transaction costs.

B : Fair value including transaction costs.

C : Present value including transaction costs.

D : Present value excluding transaction costs.

Answer: B

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