12 Which TWO of the following statements about IAS 20 Accounting for Government Grants and Disclosure of Government Assistance are true? A A government grant related to the purchase of an asset must be deducted from the carrying amount of the asset in the statement of financial position. B A government grant related to the purchase of an asset should be recognised in profit or loss over the life of the asset. C Free marketing advice provided by a government department is excluded from the definition of government grants. D Any required repayment of a government grant received in an earlier reporting period is treated as prior period adjustment. 4 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 5 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 $250,000 220 At 1 January 20X0 Casey had government grants held in deferred income of $900,000. During the year, Casey released $100,000 to the statement of profit or loss. At 31 December 20X0, the remaining deferred income balance was $1,100,000. Select the TWO amounts to be included in the statement of cash flows for Casey. The following scenario relates to questions 237, 240 Shawler constructed a furnace on 1 April 20X3, causing significant environmental damage which must be repaired at the end of the asset’s useful life of ten years. The present value of this is estimated to be $4 million. Shawler has a cost of capital of 8%. On 1 October 20X3, Shawler received a government grant of $1.2 million relating to the cost of plant with a five year life. Shawler accounts for grants using the deferred credit method. On 1 October 20X3, Shawler also acquired land for 12 million dinars. The land was used to construct a factory during the year. Shawler’s functional currency is the dollar ($). On 1 October 20X3 the exchange rate was 4 Dinars: $1. At 31 March 20X4 the exchange rate was 2 Dinars:$1 and the average rate for the year was 3 Dinars:$1. 237 What is the non-current liability in respect of the government grant to be shown in Shawler’s statement of financial position as at 31 March 20X4? A $840,000 B $1,080,000 C $960,000 D $720,000 240 In the following year it was discovered that Shawler had breached the conditions relating to the government grant and therefore the grant had to be repaid. Which TWO of the following describe the correct accounting treatment to record the repayment of the grant? A Remove all deferred income balances B Record an expense in the statement of profit or loss C Increase the cost of plant D Make an adjustment to the prior year financial statements 59 According to IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, how should a material error in the previous financial reporting period be accounted for in the current period? A By making an adjustment in the financial statements of the current period through the statement of profit or loss, and disclosing the nature of the error in a note. B By making an adjustment in the financial statements of the current period as a movement on reserves, and disclosing the nature of the error in a note. C By restating the comparative amounts for the previous period at their correct value, and disclosing the nature of the error in a note. D By restating the comparative amounts for the previous period at their correct value, but without the requirement for a disclosure of the nature of the error in a note. 61 Which of these changes would be classified as ‘a change in accounting policy’ as determined by IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors? A Increased the allowance for irrecoverable receivables from 5% to 10% of outstanding debts B Changed the method of valuing inventory from FIFO to average cost C Changed the depreciation of plant and equipment from straight line depreciation to reducing balance depreciation D Changed the useful life of motor vehicles from six years to four years 62 In which TWO of the following situations can a change in accounting policy be made by an entity? A If the change is required by an IFRS Standard B If the entity thinks that a new accounting policy would be easier to report C If a new accounting policy would show more favourable results D If a new accounting policy results in more reliable and relevant presentation of events or transactions 60 Which of the following statements regarding IFRS 13 Fair Value Measurement is not true? A Level 1 inputs are likely to be used without adjustment. B Level 3 inputs are based on the best information available to market participants and are therefore regarded as providing the most reliable evidence of fair value. C Level 2 inputs may include quoted prices for similar (but not identical) assets and liabilities in active markets. D Level 1 inputs comprise quoted prices in active markets for identical assets and liabilities at the reporting date. 42 Which of the following explains the value that relevant information contains? A Instructive value B Fair value C Confirmatory value D Approximate value 88 An entity issues 3,000 convertible bonds at the start of year 1 at par. They have a three year term and a face value of $1,000 per bond. Interest is payable annually in arrears at 7% per annum. Each bond is convertible at any time up to maturity into 250 common shares. When the bonds are issued the prevailing market interest rate for similar debt without conversion options is 9%. The relevant discount factors are shown below. How is this initially recorded between the debt and equity elements? Debt element Equity element A $2,988,570 $11,430 B $2,826,570 $173,430 C $528,570 $2 ,471,430 D $3,000,000 $Nil 89 For a debt investment to be held under amortised cost, it must pass two tests. One of these is the contractual cash flow characteristics test. What is the other test which must be passed? A The business model test B The amortised cost test C The fair value test D The purchase agreement test 90 What is the default classification for an equity investment? A Fair value through profit or loss B Fair value through other comprehensive income C Amortised cost D Net proceeds 91 ABC purchased 10,000 shares on 1 September 20X4, making the election to use the alternative treatment under IFRS 9 Financial Instruments. The shares cost $3.50 each. Transaction costs associated with the purchase were $500. At 31 December 20X4, the shares are trading at $4.50 each. What is the gain to be recognised on these shares for the year ended 31 December 20X4? $____________ 92 DEF purchased 15,000 shares in KMH Co on 1 August 20X6 at a cost of $6.50 each. Transaction costs on the purchase amounted to $1,500. At the year-end 30 September 20X6, these shares are now worth $7.75 each. Select the correct gain and the place it will be recorded. 93 For which category of financial instruments are transaction costs excluded from the initial value, and instead expensed to profit or loss? A Financial liabilities at amortised cost B Financial assets at fair value through profit or loss C Financial assets at fair value through other comprehensive income D Financial assets at amortised cost 94 On 1 October 20X3, Bertrand issued $10 million convertible loan notes which carry a coupon rate of 5% per annum. The loan notes are redeemable on 30 September 20X6 at par for cash or can be exchanged for equity shares. A similar loan note, without the conversion option, would have required Bertrand to pay an interest rate of 8%. How much would be recorded in equity in relation to the loan notes? $_______________ 95 Wonder issued $10 million 5% loan notes on 1 January 20X9, incurring issue costs of $400,000. The loan notes are redeemable at a premium, giving them an effective interest rate of 8%. What expense should be recorded in relation to the loan notes for the year ended 31 December 20X9? $______________ ,000 96 For each of the financial instruments below, match them to the appropriate accounting treatment.
