CBE-Style Question Practice for F7 Introduction This collection of questions is designed to allow you to practice answering questions in an environment similar to that of the live exams, even when you cannot access ACCA’s online support resources. 1.This interactive PDF will allow you to answer Objective Test (OT) and OT Case questions similar to the styles that appear in sections A and B in the live exam. 2.Questions in the style of the constructed response (CR) questions that appear in section C in the live exam can be accessed in the accompanying spreadsheet. 3. These documents can be saved and submitted for marking. 4. The questions are organised into broad topic areas, as indicated on the Contents page. Some important points to note are as follows: •These documents cannot replicate the exact functionality of the live exam environment but will provide a similar experience •The questions are presented in a way which closely mirrors, but is not the same as the live exam •If you have not done so already, please refer to the full specimen exam and other resources available at www.accaglobal.com/uk/en/student/exam-support-resources.html • The full specimen exam has been prepared by ACCA’s examining team and reflects the live exam experience in terms of its structure, range of questions and functionality, and these resources should be a key part of your preparation for the exam. The content for this F7 question pack has been provided by BPP Learning Media and may feature in the BPP Q&A banks. Contents TOPICS OT/OT CASE QUESTIONS CONSTRUCTED RESPONSE QUESTIONS* PAGE 1 The conceptual and regulatory frameworks 1-8 3-4 2 Accounting for assets 9-23 5-10 3 Accounting for income 24 - 28 11-12 4 Consolidated financial statements (1) 29 13 5 Consolidated financial statements (2) 30 14 6 Financial instruments and leasing 31-35 15-16 7 Provisions, inventories, biological assets and taxation 36-40 17-18 8 Financial statements 41 19 9 Interpretation of financial statements 42 20 10 Statements of cash flows, inflation and specialised entities 43 21 *See related spreadsheet file for constructed response questions Topic 1 – The conceptual and regulatory frameworks QUESTION 1 How does the Conceptual Framework define an asset? A resource owned by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. A resource over which an entity has legal rights as a result of past events and from which economic benefits are expected to flow to the entity. A resource controlled by an entity as a result of past events and from which future economic benefits are expected to flow to the entity. A resource to which an entity has a future commitment as a result of past events and from which future economic benefits are expected to flow from the entity. QUESTION 2 Which of the following would be classified as a liability? Dexter’s business manufactures a product under licence. In 12 months’ time the licence expires and Dexter will have to pay $50,000 for it to be renewed. Reckless purchased an investment 9 months ago for $120,000. The market for these investments has now fallen and Reckless’s investment is valued at $90,000. Carter has estimated the tax charge on its profits for the year just ended as $165,000. Expansion is planning to invest in new machinery and has been quoted a price of $570,000. QUESTION 3 Which of the following would correctly describe the net realisable value of a two year old asset? The original cost of the asset less two years’ depreciation. The amount that could be obtained from selling the asset, less any costs of disposal. The cost of an equivalent new asset less two years’ depreciation. The present value of the future cash flows obtainable from continuing to use the asset. QUESTION 4 Which of the following is the underlying assumption in preparing financial statements identified in the Conceptual Framework? G oing concern M ateriality Substance over form A ccruals 3 QUESTION 5 The Conceptual Framework identifies four enhancing qualitative characteristics of financial information. For which of these characteristics is disclosure of accounting policies particularly important? Verifiability T imeliness C omparability U nderstandability QUESTION 6 Which of the following is NOT a purpose of the IASB’s Conceptual Framework? To assist the IASB in the preparation and review of IFRS. To assist auditors in forming an opinion on whether financial statements comply with IFRS. To assist in determining the treatment of items not covered by an existing IFRS. To be authoritative where a specific IFRS conflicts with the Conceptual Framework. QUESTION 7 Recognition is the process of including within the financial statements items which meet the definition of an element according to the IASB’s Conceptual Framework for Financial Reporting. Which of the following items should be recognised as an asset in the statement of financial position of a company? A skilled and efficient workforce which has been very expensive to train. Some of these staff are still in the employment of the company. A highly lucrative contract signed during the year which is due to commence shortly after the year end. A government grant relating to the purchase of an item of plant several years ago, which has a remaining life of four years. A receivable from a customer which has been sold (factored) to a finance company. The finance company has full recourse to the company for any losses. QUESTION 8 Comparability is identified as an enhancing qualitative characteristic in the IASB’s Conceptual Framework for Financial Reporting. Which of the following does NOT improve comparability? Restating the financial statements of previous years when there has been a change of accounting policy. Prohibiting changes of accounting policy unless required by an IFRS or to give more relevant and reliable information. Disclosing discontinued operations in financial statements. Applying an entity’s current accounting policy to a transaction which an entity has not engaged in before. 4 Topic 2 – Accounting for assets INFORMATION RELEVANT TO QUESTIONS 9-13. The draft financial statements of Plethora plc for the year to 31 December 20X9 are being prepared and the accountant has requested your advice on dealing with the following issues. (i) P lethora plc has an administration building which it no longer needs. On 1 July 20X9 Plethora plc entered into an agreement to lease the building out to another company. The building cost $600,000 on 1 January 20X0 and is being depreciated over 50 years, based on the IAS 16 cost model. Plethora plc applies the fair value model under IAS 40 Investment property and the fair value of the building was judged to be $800,000 on 1 July 20X9. This valuation had not changed at 31 December 20X9. (ii)Plethora plc owns another building which has been leased out for a number of years. It had a fair value of $550,000 at 31 December 20X8 and $740,000 at 31 December 20X9. (iii)Plethora plc owns a retail business which has suffered badly during the recession. Plethora plc treats this business as a separate cash generating unit. The carrying amounts of the assets comprising the retail business are: Building Plant and equipment Inventory Other current assets Goodwill $’000 900 300 70 130 40 An impairment review has been carried out as at 31 December 20X9 and the recoverable amount of the cash generating unit is estimated at $1.3m. QUESTION 9 What is the amount of the revaluation surplus that will be recognised in respect of the building in (i)? $ 200,000 $ 314,000 $ 308,000 N il QUESTION 10 In respect of the building in (ii), how will the increase in value from $550,000 to $740,000 be accounted for? Credited to profit or loss Credited to the revaluation surplus Credited to retained earnings Credited to an investment property reserve 5 QUESTION 11 When an impairment review is carried out, a potentially impaired asset is measured at what amount? Fair value Value in use Recoverable amount Carrying amount QUESTION 12 What will be the carrying amount of the inventory after the impairment loss in (iii) has been accounted for? $ 64,000 $ 70,000 N il $ 65,000 QUESTION 13 What will be the carrying amount of the building after the impairment loss has been accounted for? $ 900,000 $ 836,000 $ 795,000 $ 825,000 6 THE FOLLOWING SCENARIO RELATES TO QUESTIONS 14-18. Advent is a publicly listed company. Details of Advent’s non-current assets at 1 October 20X8 were: Land and Plant Telecommunications building licence $m $m $m Total $m Cost/valuation 280 150 300 730 Accumulated depreciation/amortisation (40) (105) (30) (175) Carrying amount 240 45 270 555 The following information is relevant: (i) T he land and building were revalued on 1 October 20X3 with $80 million attributable to the land and $200 million to the building. At that date the estimated remaining life of the building was 25 years. A further revaluation was not needed until 1 October 20X8 when the land and building were valued at $85 million and $180 million respectively. The remaining estimated life of the building at this date was 20 years. lant is depreciated at 20% per annum on cost with time apportionment where appropriate. On 1 April 20X9 (ii) P new plant costing $45 million was acquired. In addition, this plant cost $5 million to install and commission. No plant is more than four years old. (iii) T he telecommunications licence was bought from the government on 1 October 20X7 and has a ten-year life. It is amortised on a straight line basis. In September 20X9, a review of the sales of the products related to the licence showed them to be very disappointing. As a result of this review the estimated recoverable amount of the licence at 30 September 20X9 was estimated at only $100 million. There were no disposals of non-current assets during the year to 30 September 20X9. QUESTION 14 What is the carrying amount of the land and buildings at 30 September 20X9? $ 256m $ 265m $ 240m $ 271m QUESTION 15 What is the depreciation charge on the plant for the year ended 30 September 20X9? $ 30m $ 25m $ 20m $ 35m 7 QUESTION 16 Having revalued its property Advent is required to make certain disclosures in respect of the revaluation. Which one of the following is NOT one of these disclosures? Effective date of revaluation Professional qualifications of valuer Basis used to revalue assets Carrying amount of assets if no revaluation had taken place QUESTION 17 What is the amount of the impairment loss on the licence? $ 200m $ 170m $ 140m $ 60m QUESTION 18 Advent’s licence is now carried at its recoverable amount. How is recoverable amount measured? Higher of fair value less costs of disposal and value in use Lower of fair value less costs of disposal and value in use Higher of carrying amount and fair value less costs of disposal Lower of carrying amount and fair value less costs of disposal 8 THE FOLLOWING SCENARIO RELATES TO QUESTIONS 19-23. Systria is preparing its financial statements for the year ended 31 December 20X7 and has a number of issues to deal with regarding non-current assets. (i)Systria has suffered an impairment loss of $90,000 to one of its cash generating units. The carrying amounts of the assets in the cash-generating unit prior to adjusting for impairment are: Goodwill Patent Land and buildings Plant and machinery Net current assets $’000 50 10 100 50 10 The patent is now estimated to have no value. uring the year to 31 December 20X7 Systria acquired Dominica for $10 million, its tangible assets being (ii) D valued at $7 million and goodwill on acquisition being $3 million. Assets with a carrying amount of $2.5 million were subsequently destroyed. Systria has carried out an impairment review and has established that Dominica could be sold for $6 million, while its value in use is $5.5 million. (iii)A freehold property originally costing $100,000 with a 50-year life has accumulated depreciation to date of $20,000. The asset is to be revalued to $130,000 at 31 December 20X7. QUESTION 19 What is the post-impairment carrying amount of plant and machinery in (i) above? $ QUESTION 20 The Finance Director has been asked to report to the Board on the reasons for the impairment review on the cashgenerating unit. Which TWO of the following would be an internal indicator of impairment of an asset under IAS 36 Impairment of assets? The market value of the asset has fallen significantly. There are adverse changes to the use to which the asset is put. The asset is fully depreciated. The operating performance of the asset has declined. QUESTION 21 What is the carrying amount of the goodwill in (ii) following the impairment review? $ 9 QUESTION 22 Which set of double entries is required to record the revaluation in (iii)? DR Accumulated depreciation $20,000 / CR Revaluation surplus $20,000 DR Property at cost $50,000 / CR Revaluation surplus $50,000 DR Accumulated depreciation $20,000 DR Property at cost $30,000 / CR Revaluation surplus $50,000 DR Revaluation surplus $50,000 / CR Accumulated depreciation $20,000 CR Property at cost $30,000 QUESTION 23 What will be the depreciation charge on the asset in (iii) for the year ended 31 December 20X8? $ 2,000 $ 2,600 $ 3,250 $ 2,750 10 Topic 3 – Accounting for income THE FOLLOWING SCENARIO RELATES TO QUESTIONS 24-28. Derringdo is a broadband provider which receives government assistance to provide broadband to remote areas. Derringdo invested in a new server at a gross cost of $800,000 on 1 October 20X2. The server has an estimated life of ten years with a residual value equal to 15% of its gross cost. Derringdo uses straight-line depreciation on a time apportioned basis. The company received a government grant of 30% of its cost price of the server at the time of purchase. The terms of the grant are that if the company retains the asset for four years or more, then no repayment liability will be incurred. Derringdo has no intention of disposing of the server within the first four years. Derringdo’s accounting policy for capital-based government grants is to treat them as deferred credits and release them to income over the life of the asset to which they relate. QUESTION 24 What is the net amount that will be charged to operating expenses in respect of the server for the year ended 31 March 20X3? $ 10,000 $ 28,000 $ 22,000 $ 34,000 QUESTION 25 What amount will be presented under non-current liabilities at 31 March 20X3 in respect of the grant? $ 228,000 $ 216,000 $ 240,000 $ 204,000 QUESTION 26 Derringdo also sells a package which gives customers a free laptop when they sign a two-year contract for provision of broadband services. The laptop has a stand-alone price of $200 and the broadband contract is for $30 per month. In accordance with IFRS 15 Revenue from contracts with customers, what amount will be recognised as revenue on each package in the first year? $ 439 $ 281 $ 461 $ 158 11 QUESTION 27 Determining the amount to be recognised in the first year is an example of which step in the IFRS 15 5-step model? Determining the transaction price Recognising revenue when a performance obligation is satisfied Identifying the separate performance obligations Allocating the transaction price to the performance obligations QUESTION 28 Derringdo is carrying out a transaction on behalf of another entity and the finance director is unsure whether Derringdo should be regarded as an agent or a principal in respect of this transaction. Which of the following would indicate that Derringdo is acting as an agent? Derringdo is primarily responsible for fulfilling the contract. Derringdo is not exposed to credit risk for the amount due from the customer. Derringdo is responsible for negotiating the price for the contract. Derringdo will not be paid in the form of commission. 12 Topic 4 – Consolidated financial statements (1) QUESTION 29 *See related spreadsheet file for constructed response questions 13 Topic 5 – Consolidated financial statements (2) QUESTION 30 *See related spreadsheet file for constructed response questions 14 Topic 6 – Financial instruments and leasing THIS SCENARIO RELATES TO QUESTIONS 31-35. Bertrand issued $10 million convertible loan notes on 1 October 20X0 that carry a nominal interest (coupon) rate of 5% per annum. They are redeemable on 30 September 20X3 at par for cash or can be exchanged for equity shares in Bertrand on the basis of 20 shares for each $100 of loan. A similar loan note, without the conversion option, would have required Bertrand to pay an interest rate of 8%. The present value of $1 receivable at the end of each year, based on discount rates of 5% and 8%, can be taken as: End of year 1 2 3 cumulative 5% 0.95 0.91 0.86 2.72 8% 0.93 0.86 0.79 2.58 QUESTION 31 How should the convertible loan notes be accounted for? A s debt As debt and equity A s equity As debt until conversion, then as equity QUESTION 32 What is the amount that will be recognised as finance costs for the year ended 30 September 20X1? $ 500,000 $ 800,000 $ 735,000 N il QUESTION 33 What is the amount that should be shown under liabilities at 30 September 20X1? $ 9,425,000 $ 9,925,000 $ 9,690,000 N il 15 QUESTION 34 If Bertrand had incurred transaction costs in issuing these loan notes, how should these have been accounted for? Added to the proceeds of the loan notes Deducted from the proceeds of the loan notes Amortised over the life of the loan notes Charged to finance costs QUESTION 35 Later that year Bertrand purchased a debt instrument which will mature in five years’ time. Bertrand intends to hold the debt instrument to maturity to collect interest payments. How should this debt instrument be measured in the financial statements of Bertrand? As a financial liability at fair value through profit or loss As a financial liability at amortised cost As a financial asset at fair value through profit or loss As a financial asset at amortised cost 16 Topic 7 – Provisions, inventories, biological assets and taxation THE FOLLOWING SCENARIO RELATES TO QUESTIONS 36-40. The carrying amount of Julian’s property, plant and equipment at 31 December 20X3 was $310,000 and the tax written down value was $230,000. The following data relates to the year ended 31 December 20X4: (i)At the end of the year the carrying amount of property, plant and equipment was $460,000 and the tax written down value was $270,000. During the year some items were revalued by $90,000. No items had previously required revaluation. In the tax jurisdiction in which Julian operates revaluations of assets do not affect the tax base of an asset or taxable profit. Gains due to revaluations are taxable on sale. (ii)Julian began development of a new product during the year and capitalised $60,000 in accordance with IAS 38. The expenditure was deducted for tax purposes as it was incurred. None of the expenditure had been amortised by the year end. The corporate income tax rate is 30%. The current tax charge was calculated for the year as $45,000. QUESTION 36 Julian’s accountant is confused by the term ‘tax base’. What is meant by ‘tax base’? The amount of tax payable in a future period The tax regime under which an entity is assessed for tax The amount attributed to an asset or liability for tax purposes The amount of tax deductible in a future period QUESTION 37 What is the taxable temporary difference to be accounted for at 31 December 20X4 in relation to property, plant and equipment and development expenditure? Property, plant and equipment Development expenditure $270,000 $60,000 $270,000 Nil $190,000 $60,000 $190,000 Nil QUESTION 38 What amount should be charged to the revaluation surplus at 31 December 20X4 in respect of deferred tax? $ 60,000 $ 90,000 $ 18,000 $ 27,000 17 QUESTION 39 What amount will be shown as tax payable in the statement of financial position of Julian at 31 December 20X4? $ 45,000 $ 72,000 $ 63,000 $ 75,000 QUESTION 40 Deferred tax assets and liabilities arise from taxable and deductible temporary differences. Which one of the following is NOT a circumstance giving rise to a temporary difference? Depreciation accelerated for tax purposes Development costs amortised in profit or loss but tax was deductible in full when incurred Accrued expenses which have already been deducted for tax purposes Revenue included in accounting profit when invoiced but only liable for tax when the cash is received. 18 Topic 8 – Financial statements QUESTION 41 *See related spreadsheet file for constructed response questions 19 Topic 9 – Interpretation of financial statements QUESTION 42 *See related spreadsheet file for constructed response questions 20 Topic 10 – Statements of cash flows, inflation and specialised entities QUESTION 43 *See related spreadsheet file for constructed response questions 21