THEORY OF ACCOUNTS

EASY

1. PAS 24 requires disclosure of compensation of key management personnel. Which of the following
would not be considered "compensation" for this purpose?
A. Short-term benefits
B. Share-based payments
C. Termination benefits
D. Reimbursement of out-of-pocket expenses

Answer: D
As enumerated in PAS 24, Related Party Disclosures, paragraph 9, compensation includes:
a) short-term employee benefits, such as wages, salaries and social security contributions,
paid annual leave and paid sick leave, profit-sharing and bonuses (if payable within
twelve months of the end of the period) and non-monetary benefits (such as medical care,
housing, cars and free or subsidised goods or services) for current employees;
b) post-employment benefits such as pensions, other retirement benefits, post-employment
life insurance and post-employment medical care;
c) other long-term employee benefits, including long-service leave or sabbatical leave,
jubilee or other long-service benefits, long-term disability benefits and, if they are not
payable wholly within twelve months after the end of the period, profit-sharing, bonuses
and deferred compensation;
d) termination benefits; and
e) share-based payment.

Reimbursement of out-of-pocket expenses is not included.

2. Under a royalty agreement with another company, Wand Co. will pay royalties for the assignment of
a patent for three years. The royalties paid should be reported as expense
A. In the period paid.
B. In the period incurred.
C. At the date the royalty agreement began.
D. At the date the royalty agreement expired.

Answer: B
Under accrual accounting, events that change an entity’s financial position are recorded in the
period in which the events occur. This means revenues are recognized when earned rather than
when cash is received, and expenses are recognized when incurred rather than when cash is paid.
Therefore, when the royalties are paid, Wand should debit an asset account (prepaid royalties)
rather than an expense account. The royalties paid should be reported as expense in the period
incurred (by debiting royalty expense and crediting prepaid royalties).

3. In 2011, Brighton Co. changed from the individual item approach to the aggregate approach in
applying the lower of FIFO cost or market to inventories. The change should be reported in
Brighton’s financial statements as a

A. Change in estimate on a prospective basis.

B. Cumulative effect of change in accounting principle on the current year income statement.
C. Retrospective application to the earliest period presented if practicable.
D. Prior period adjustment with a separate disclosure.

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 Answer: C
A change in inventory method no longer receives cumulative effect treatment on the income
statement. The accounting change is given retrospective application to the earliest period
presented, if practicable.

4. Upon first-time adoption of IFRS, an entity may elect to use fair value as deemed cost for
A. Biological assets related to agricultural activity for which there is no active market.
B. Intangible assets for which there is no active market.
C. Any individual item of property, plant, and equipment.
D. Financial liabilities that are not held for trading.

Answer: C
The requirement is to identify the assets for which the entity may use fair value as deemed cost
upon adoption of IFRS. Answer C is correct because the entity may use fair value as deemed cost
for any individual item of property plant and equipment.

5. Under PFRS 8, Operating Segments, entity-wide disclosures include the following except:
A. Information about intersegment sales or transfer
B. Information about major customers
C. Information about geographical areas
D. Information about products and services

Answer: A
IFRS 8 Operating Segments paragraphs 32 – 34, entity-wide disclosures do not include
information about intersegment sales or transfer.

AVERAGE

1. In the case of grants related to income, which of these accounting treatments is prescribed by
PAS 20?
A. Credit the grant to "general reserve" under shareholders' equity
B. Present the grant in the income statement as "other income" or as a separate line item, or
deduct it from the related expense
C. Credit the grant to "retained earnings" on the balance sheet
D. Credit the grant to sale or other revenue from operations in the income statement

Answer: B
Paragraph 29 of PAS 20, Accounting for Government Grants and Disclosure of Government
Assistance, states that ‘Grants related to income are presented as part of profit or loss, either
separately or under a general heading such as ‘Other income’; alternatively, they are deducted in
reporting the related expense’.

2. Which statement is incorrect concerning internally generated intangible asset?

A. To assess whether an internally generated intangible asset meets the criteria for recognition,
an entity classifies the generation of the asset into a research phase and a development phase.
B. The cost of an internally generated asset comprises all directly attributable costs necessary to
create, produce and prepare the asset for its intended use.
C. Internally generated brands, mastheads, publishing titles, customer lists and items similar in
substance shall be recognized as intangible assets.
D. Internally generated goodwill shall not be recognized as an intangible asset.

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 Answer: C
According to PAS 38, Intangible Assets, paragraph 63, Internally generated brands, mastheads,
publishing titles, customer lists and items similar in substance shall not be recognised as
intangible assets.

3. When an owner-occupied property becomes an investment property to be carried at fair value, the
resulting increase in carrying amount is:
A. treated to the extent that the increase reverses a previous impairment loss, the increase is
recognized in other comprehensive income.
B. treated as part of other comprehensive income or revaluation surplus within equity, if no
previous impairment has been recorded.
C. recognized directly to profit or loss.
D. None of the above.

Answer: B

Paragraph 62 of PAS 40 Investment Property

TRANSFERS
Up to the date when an owner-occupied property becomes an investment property carried at fair
value, an entity depreciates the property and recognizes any impairment losses that have
occurred. The entity treats any difference at that date between the carrying amount of the property
in accordance with IAS 16 and its fair value in the same way as a revaluation in accordance with
IAS 16. In other words:

(a) any resulting decrease in the carrying amount of the property is recognized in profit or loss.
However, to the extent that an amount is included in revaluation surplus for that property, the
decrease is recognised in other comprehensive income and reduces the revaluation surplus
within equity.
(b) any resulting increase in the carrying amount is treated as follows:
(i) to the extent that the increase reverses a previous impairment loss for that property,
the increase is recognized in profit or loss. The amount recognized in profit or loss does not
exceed the amount needed to restore the carrying amount to the carrying amount that would
have been determined (net of depreciation) had no impairment loss been recognized.
(ii) any remaining part of the increase is recognized in other comprehensive income and
increases the revaluation surplus within equity. On subsequent disposal of the investment
property, the revaluation surplus included in equity may be transferred to retained earnings.
The transfer from revaluation surplus to retained earnings is not made through profit or loss.

4. Under PAS 11, contract costs comprise of costs that relate directly to the specific contract. These
include:
I. site labor costs, including site supervision
II. costs of moving plant, equipment and materials to and from the contract site
III. claims from third parties
IV. costs of hiring plant and equipment
A. I
B. II and III
C. I, II and IV
D. I, II, III and IV

Answer: D

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 Paragraph 16 and 17 of PAS 11 Construction Contracts
16 Contract costs shall comprise:
a) costs that relate directly to the specific contract;
b) costs that are attributable to contract activity in general and can be allocated to the
contract; and
c) such other costs as are specifically chargeable to the customer under the terms of the
contract.
17 Costs that relate directly to a specific contract include:
a) site labour costs, including site supervision;
b) costs of materials used in construction;
c) depreciation of plant and equipment used on the contract;
d) costs of moving plant, equipment and materials to and from the contract site;
e) costs of hiring plant and equipment;
f) costs of design and technical assistance that is directly related to the contract;
g) the estimated costs of rectification and guarantee work, including expected warranty
costs; and
h) claims from third parties.

5. Deferred tax assets are the amount of income taxes recoverable in future periods in respect of:
A. Permanent differences
B. Carryforward of unused tax losses only
C. Taxable temporary differences and carryforward of unused tax losses
D. Deductible temporary differences and carryforward of unused tax credits.

Answer: D
Paragraph 5 of PAS 12 Income taxes:

Deferred tax assets are the amounts of income taxes recoverable in future periods in respect of:
(a) deductible temporary differences;
(b) the carryforward of unused tax losses; and
(c) the carryforward of unused tax credits.

DIFFICULT

1. An entity shall disclose a single amount on the face of the income statement comprising the total of
A. The post-tax profit or loss of discontinued operations and the pre-tax gain or loss recognized
on the measurement to fair value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operations.
B. The post-tax profit or loss of discontinued operations and the post tax gain or loss recognized
on the measurement to fair value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operations.
C. The pre-tax profit or loss of discontinued operations and the post tax gain or loss recognized
on the measurement to fair value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operations.
D. The pre-tax profit or loss of discontinued operations and the pre-tax gain or loss recognized
on the measurement to fair value less costs to sell or on the disposal of the assets or disposal
group(s) constituting the discontinued operations.

Answer: B

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 As stated in paragraph 33 of IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, an entity shall disclose:
a) a single amount in the statement of comprehensive income comprising the total of:
i. the post-tax profit or loss of discontinued operations and
ii. the post-tax gain or loss recognised on the measurement to fair value less costs
to sell or on the disposal of the assets or disposal group(s) constituting the
discontinued operation.

2. Which of the following statements are true?

I. An intangible asset should be measured initially at cost
II. If payment for an intangible asset is deferred beyond normal credit terms, its cost is the
equivalent cash price
III. If an intangible asset is acquired in exchange for equity instruments of the reporting
enterprise, the cost of the asset is the fair value of the equity instruments issued, which is
equal to the fair value of the asset.
IV. The acquirer may recognise a group of complementary intangible assets as a single asset
provided the individual assets have similar useful lives.

A. I and II
B. I, II and III
C. II, III and IV
D. I, II, III and IV

Answer: D
I – IAS 38 Intangible Assets paragraph 24 states that ‘An intangible asset shall be measured
initially at cost’.
II – IAS 38 paragraph 32 says that ‘If payment for an intangible asset is deferred beyond normal
credit terms, its cost is the cash price equivalent. The difference between this amount and the total
payments is recognised as interest expense over the period of credit unless it is capitalised in
accordance with IAS 23 Borrowing Costs’.
III – IAS 38 paragraph 8 states that ‘Cost is the amount of cash or cash equivalents paid or the
fair value of other consideration given to acquire an asset at the time of its acquisition or
construction’.
IV - IAS 38 paragraph 37 states that ‘The acquirer may recognise a group of complementary
intangible assets as a single asset provided the individual assets have similar useful lives. For
example, the terms 'brand' and 'brand name' are often used as synonyms for trademarks and other
marks. However, the former are general marketing terms that are typically used to refer to a group
of complementary assets such as a trademark (or service mark) and its related trade name,
formulas, recipes and technological expertise’.

3. The ‘if-converted’ method of computing earnings per share (EPS) assumes conversion of convertible
securities as of the
A. Beginning of the earliest period reported (or at time of issuance, if later)
B. Beginning of the earliest period reported (regardless of time of issuance)
C. Middle of the earliest period reported (regardless of time issuance)
D. Ending of the earliest period reported (regardless of time of issuance)

Answer: A
Paragraph 36 of IAS 33 Earnings Per Share states that ‘Dilutive potential ordinary shares shall be
deemed to have been converted into ordinary shares at the beginning of the period or, if later,
the date of the issue of the potential ordinary shares’.

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4. A subsidiary’s fiscal year-end is June 30 and the parent’s fiscal year-end is December 31. The effect
of this difference is significant to the consolidated financial statements. In preparing consolidated
financial statements
A. The subsidiary should be consolidated using more recent interim financial statements.
B. The subsidiary should not be consolidated but its financial results are disclosed in the notes to
the consolidated financial statements.
C. The subsidiary should be consolidated using its June 30 annual financial statements
D. The subsidiary should not be consolidated but accounted for by the equity method in the
consolidated financial statements.

Answer: A

Appendix B of PFRS 10, paragraph B92-93 states that:

“B92 The financial statements of the parent and its subsidiaries used in the preparation of the
consolidated financial statements shall have the same reporting date. When the end of the
reporting period of the parent is different from that of a subsidiary, the subsidiary prepares, for
consolidation purposes, additional financial information as of the same date as the financial
statements of the parent to enable the parent to consolidate the financial information of the
subsidiary, unless it is impracticable to do so.
B93 If it is impracticable to do so, the parent shall consolidate the financial information of the
subsidiary using the most recent financial statements of the subsidiary adjusted for the effects
of significant transactions or events that occur between the date of those financial statements and
the date of the consolidated financial statements. In any case, the difference between the date of
the subsidiary's financial statements and that of the consolidated financial statements shall be no
more than three months, and the length of the reporting periods and any difference between the
dates of the financial statements shall be the same from period to period.”

Accordingly, the financial statements of the subsidiary should be adjusted at least as of

September 30.

5. Which of the following statements is true when the outcome of construction contract cannot be
estimated reliably?
I. Revenue shall be recognized only to the extent of contract costs incurred that it is probable
will be recoverable.
II. Contract costs shall be recognized as an expense in the period in which they are incurred.
III. An expected loss on the construction contract shall be recognized as an expense immediately.

A. I and III only

B. I and II only
C. II and III only
D. I, II and III

Answer: D

Paragraph 32 of PAS 11 Construction Contracts states that:

When the outcome of a construction contract cannot be estimated reliably:
(a) revenue shall be recognized only to the extent of contract costs incurred that it is probable will
be recoverable; and
(b) contract costs shall be recognized as an expense in the period in which they are incurred.
An expected loss on the construction contract shall be recognized as an expense immediately.

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CLINCHER

Difficult
1. On December 1, 2014, shares of authorized common stock were issued on a subscription basis at a
price in excess of par value. A total of 20% of the subscription price of each share was collected as a
down payment on December 1, 2014, with the remaining 80% of the subscription price of each share
due in 2015. Collectibility was reasonably assured. At December 31, 2014, the stockholders’ equity
section of the balance sheet would report additional paid-in capital for the excess of the subscription
price over the par value of the shares of common stock subscribed and
A. Should be recognized in full as revenue at the lease’s inception.
B. Should be recognized over the period of the lease using the straight-line method.
C. Should be recognized over the period of the lease using the interest method.
D. Does not arise.

Answer: D
When stock is sold on a subscription basis, the full price of the stock is not received initially, and the
stock is not issued until the full subscription price is received. On the subscription contract date of
December 1, 2014, the journal entry would be
Cash (amount received)
Subscriptions receivable (balance due)
Common stock subscribed (par)
Additional paid-in capital (plug)

Average
2. A company’s wages payable increased from the beginning to the end of the year. In the company’s
statement of cash flows in which the operating activities section is prepared under the direct method,
the cash paid for wages would be
A. Salary expense plus wages payable at the beginning of the year.
B. Salary expense plus the increase in wages payable from the beginning to the end of the year.
C. Salary expense less the increase in wages payable from the beginning to the end of the year.
D. The same as salary expense.

Answer: C
In a statement of cash flows in which the operating activities section is prepared using the direct
method, the cash paid for wages would be equal to the accrual-basis salary expense, plus/minus any
decrease/increase in the wages payable account. (The logic is essentially the same as an accrual-basis
to cash-basis adjustment.)

Difficult
3. The excess of the fair value of leased property at the inception of the lease over its cost or carrying
amount should be classified by the lessor as
A. Unearned income from a sales-type lease.
B. Unearned income from a direct-financing lease.
C. Manufacturer’s or dealer’s profit from a sales-type lease.
D. Manufacturer’s or dealer’s profit from a directfinancing lease.

Answer: C
The excess of the fair value of leased property at the inception of the lease over the lessor’s cost is
defined as the manufacturer’s or dealer’s profit. Answer A is incorrect because the unearned income
from a sales-type lease is defined as the difference between the gross investment in the lease and the
sum of the present values of the components of the gross investment. Answer B is incorrect because

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 the unearned income from a direct-financing lease is defined as the excess of the gross investment
over the cost (also the PV of lease payments) of the leased property. Answer D is incorrect because a
sales-type lease involves a manufacturer’s or dealer’s profit while a direct financing lease does not.

Easy
4. Bannon Corp. transferred financial assets to Chapman, Inc. The transfer meets the conditions to be
accounted for as a sale. As the transferor, Bannon should do each of the following, except
A. Remove all assets sold from the balance sheet.
B. Record all assets received and liabilities incurred as proceeds from the sale.
C. Measure the assets received and liabilities incurred at cost.
D. Recognize any gain or loss on the sale.

Answer: C
The transferor, Bannon, should measure the assets received and liabilities incurred at fair value, not at
cost. The transferee, Chapman, should record any assets obtained and liabilities incurred at fair value.

Easy
5. Santiago Corp. signs an agreement to lease land and a building for 20 years. At the end of the lease,
the property will not transfer to Santiago. The life of the building is estimated to be 20 years. Santiago
prepares its financial statements in accordance with IFRS. How should Santiago account for the
lease?
A. The lease is recorded as a finance lease.
B. The lease is recorded as an operating lease.
C. The land is recorded as an operating lease, and the building is recorded as a finance lease.
D. The land is recorded as a finance lease, and the building is recorded as an operating lease.

Answer: C
The requirement is to identify how Santiago should account for the lease. Answer (c) is correct
because IFRS provides that because land has an indefinite life, if title is not expected to pass by the
end of the lease term, then the substantial risks and rewards of ownership do not transfer.
Thus, the lease should be separated into two components. The land should be recorded as an
operating lease and the building should be recorded as a finance lease.