Financial Accounting & Corporate Reporting

Test-I: IAS-16, IAS-23, IAS-20

Marks-40 Dated: October 23, 2024 Course Instructor: Muhammad Waseem Sikhani (ACMA)

1. An entity purchased property for $6 million on 1 July 20X3. The land element of the purchase was $1 million.
The expected life of the building was 50 years and its residual value nil. On 30 June 20X5 the property was
revalued to $7 million, of which the land element was $1.24 million and the buildings $5.76 million. On 30 June
20X7, the property was sold for $6.8 million.

What is the gain on disposal of the property that would be reported in the statement of profit or loss for the year
to 30 June 20X7?

A Gain $40,000 B Loss $200,000 C Gain $1,000,000 D Gain $1,240,000

2. A manufacturing entity receives a grant of $1m towards the purchase of a machine on 1 January 20X3. The
grant will be repayable if the entity sells the asset within 4 years, which it does not intend to do. The asset has a
useful life of 5 years.
What is the deferred income liability balance at 30 June 20X3?
$_____________ ,000

3. On 1 January 20X1 Sty received $1m from the local government on the condition that they employ at least
100 staff each year for the next 4 years. Due to an economic downturn and reduced consumer demand on 1
January 20X2, Sty no longer needed to employ any more staff and the conditions of the grant required full
repayment.

What should be recorded in the financial statements on 1 January 20X2?

A Reduce deferred income balance by $750,000

B Reduce deferred income by $750,000 and recognise a loss of $250,000
C Reduce deferred income by $1,000,000
D Reduce deferred income by $1,000,000 and recognise a gain of $250,000

4. During the current year an entity had in place $1 million of 6% loan finance and $2 million of 9% loan finance.
It constructed a new factory which cost $600,000 and this was funded out of the existing loan finance. The
factory took 8 months to complete.

To the nearest thousand, what borrowing costs should be capitalised?

$_____________ ,000

5. Which of the following statements is correct?

Statement 1: If the revaluation model is used for property, plant and equipment, revaluations must subsequently
be made with sufficient regularity to ensure that the carrying amount does not differ materially from the fair value
at each reporting date.
Statement 2: When an item of property, plant and equipment is revalued, there is no requirement that the entire
class of assets to which the item belongs must be revalued.
Statement 1 Statement 2
True :
False :
6. Which TWO of the following items should be capitalised within the initial carrying amount of an item of plant?

A Cost of transporting the plant to the factory

B Cost of installing a new power supply required to operate the plant
C A deduction to reflect the estimated realisable value D Cost of a three‐year maintenance agreement
E Cost of a three‐week training course for staff to operate the plant
7. Tibet acquired a new office building on 1 October 20X4. Its initial carrying amount consisted of:
$000
Land 2,000
Building structure 10,000
Air conditioning system 4,000
–––––––
16,000
–––––––
The estimated lives of the building structure and air conditioning system are 25 years and 10 years
respectively.
When the air conditioning system is due for replacement, it is estimated that the old system will be dismantled
and sold for $500,000. Depreciation is time‐apportioned where appropriate.

At what amount will the office building be shown in Tibet’s statement of financial position as at 31 March 20X5?

A $15,625,000 B $15,250,000 C $15,585,000 D $15,600,000

8. The following trial balance extract relates to a property which is owned by Veeton as at 1 April 20X4.
Dr Cr
$000 $000
Property at cost (20 year original life) 12,000
Accumulated depreciation as at 1 April 20X4 3,600
On 1 October 20X4, following a sustained increase in property prices, Veeton revalued its property to $10.8
million.

What will be the depreciation charge in Veeton’s statement of profit or loss for the yearended 31 March 20X5?
$_____________ ,000

9. How should a government grant related to assets be accounted for under IAS 20?

A) Recognize it as income immediately when received

B) B) Defer it and recognize as income over the useful life of the asset
C) Offset it against the related asset’s cost in the balance sheet D) Recognize it as a liability until the asset is sold

10. Which of the following is a type of government grant according to IAS 20?

A) A loan given to a company at a market interest rate B) A tax incentive to promote exports
C) A government loan at below-market interest rates D) A dividend distribution from government-owned shares

11. Under IAS 20, when can a government grant be recognized in the financial statements?

A) When it is probable that the company will comply with the conditions attached to the grant
B) When the grant is received from the government C) When the application for the grant is approved
D) When the company incurs expenses related to the grant

12. How should non-monetary government grants, such as land or equipment, be measured under IAS 20?

A) At the nominal amount B) At the fair value of the non-monetary asset

C) At the cost to the government D) At the company’s carrying value of similar assets

13. ABC Ltd. received a government grant of $500,000 for purchasing machinery. The machinery has a useful
life of 10 years. How much of the grant should be recognized as income each year under IAS 20?

A) $50,000 B) $25,000 C) $500,000 D) $100,000

14. XYZ Ltd. received a government grant of $200,000 for research and development costs. The grant
conditions require XYZ to spend $400,000 on research activities. If XYZ has incurred $300,000 in qualifying
expenses by year-end, how much of the grant should be recognized as income?

A) $150,000 B) $200,000 C) $100,000 D) $50,000

15. ABC Ltd. received a government loan at a 3% interest rate when the market interest rate for similar loans
is 8%. The loan amount is $1,000,000. According to IAS 20, what is the amount of the government grant
embedded in this loan?

A) $50,000 B) $80,000 C) $30,000 D) $100,000

16. A company received a government grant of $400,000 to support the purchase of a building costing
$1,000,000. The grant should be spread over the building’s useful life of 20 years. What is the annual
depreciation expense and grant income recognized per year?

A) $50,000 depreciation, $20,000 grant income B) $50,000 depreciation, $10,000 grant income
C) $25,000 depreciation, $10,000 grant income D) $50,000 depreciation, $40,000 grant income

17. A government grant of $250,000 was received to offset operating costs over 5 years. If the company incurs
$80,000 in operating expenses in the first year, how much of the grant can be recognized as income in the
first year?

A) $50,000 B) $80,000 C) $40,000 D) $25,000

18. A company has taken a loan of $10,000,000 at an interest rate of 9% per annum. It is constructing a
qualifying asset for which it incurred $6,000,000 of expenditures during the year. If the company’s
capitalization rate is 7%, what is the borrowing cost to be capitalized for the year?

A) $540,000 B) $630,000 C) $420,000 D) $490,000

19. DEF Ltd. borrowed $5,000,000 on January 1, 2023, at an interest rate of 7% to finance the construction of a
new plant. The construction began on March 1, 2023, and was completed on September 1, 2023. What amount
of borrowing costs should be capitalized for the year 2023?

A) $262,500 B) $350,000 C) $175,000 D) $150,000

20. A company is constructing an asset that takes 2 years to complete. Total borrowings amount to
$12,000,000 at an average interest rate of 5%. The company incurs $4,000,000 of construction expenditure in
year one and $8,000,000 in year two. What is the total borrowing cost eligible for capitalization over the two-
year period?

A) $400,000 B) $600,000 C) $800,000 D) $1,000,000

“GoodLuck”