Test Bank For FINANCIAL REPORTING By LOFTUS, LEO

Testbank to accompany Financial Reporting by Loftus et al © John Wiley & Sons Australia, Ltd 2016   Chapter 3: Fair value measurement Multiple Choice Questions 1) Which of the following is not one of the key reasons given by the IASB for issuing a standard on fair value measurement: a) To establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application. b) To clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly. *c) To require the use of fair value when accounting for all non-financial assets. d) To enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values. Answer: c Learning Objective 1: Identify the reasons for needing an accounting standard on fair value measurement 2) Which of the following documents issued alongside AASB 13 do not form an integral part of the standard: I Basis for Conclusions II Illustrative Examples III Appendix A: Defined terms IV Appendix B: Application guidance *a) I and II b) II and III c) III and IV d) I and IV Answer: a Learning Objective 1: Identify the reasons for needing an accounting standard on fair value measurement 3) Which of the following is the definition of fair value per AASB 13: a) The amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. *b) The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. c) The price that would be received to sell an asset or paid to transfer a liability. d) A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale). Answer: b Learning Objective 2: Explain the definition of fair value 4) At which date is fair value determined? *a) The measurement date. b) The settlement date. c) The transaction date. d) The exchange date. Answer: a Learning Objective 2: Explain the definition of fair value 5) When determining the fair value of an asset its fair value is based on its: a) current use. b.) proposed use. *c) highest and best use. d) value in use. Answer: c Learning Objective 2: Explain the definition of fair value   6) Which of the following is not a valuation technique prescribed by AASB 13: *a) The fair value approach. b) The income approach. c) The cost approach. d) The market approach. Answer: a Learning Objective 3: Measure the fair value of non-financial assets 7) The market with the greatest volume and level of activity for the asset or liability is defined as the: a) active market. *b) principal market. c) liquid market. d) most advantageous market. Answer: b Learning Objective 3: Measure the fair value of non-financial assets 8) Valuation techniques that convert future amounts to a single current amount and determines the fair value on the basis of the value indicated by current market expectations about those future amounts is an example of: a) the fair value approach. *b) the income approach. c) the cost approach. d) the market approach. Answer: b Learning Objective 3: Measure the fair value of non-financial assets 9) Unobservable inputs for the asset or liability are an example of: a) a Level 1 input. b) a Level 2 input. *c) a Level 3 input. d) a Level 4 input. Answer: c Learning Objective 3: Measure the fair value of non-financial assets 10) Which of the following is not an example of a level 2 input: *a) A financial forecast of cash flow or earnings. b) Quoted prices for identical or similar assets or liabilities in markets that are not active. c) Inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves, volatilities, prepayment speeds, and credit risks. d) Inputs that are derived from or corroborated by observable market data by correlation or other means. Answer: a Learning Objective 3: Measure the fair value of non-financial assets 11) Trademarks would be measured primarily using which type of inputs? a) Level 1 inputs. b) Level 2 inputs. *c) Level 3 inputs. d) Level 4 inputs. Answer: c Learning Objective 3: Measure the fair value of non-financial assets 12) Which of the following steps is not relevant when valuing liabilities: a) The particular liability that is the subject of the measurement. *b) The valuation premise that is appropriate for the measurement. c) The principal (or most advantageous) market for the liability. d) The valuation technique(s) appropriate for the measurement, considering the availability of data with which to develop inputs that represent the assumptions that market participants would use when pricing the asset or liability and the level of the fair value hierarchy within which the inputs are categorised. Answer: b Learning Objective 4: Apply the fair value measurement principles to liabilities   13) When measuring the fair value of a liability, which of the following is assumed: a) The liability is settled by the holder. *b) The liability will be settled by the market participant. c) The liability will not be settled. d) The liability is settled with the counterparty on measurement date. Answer: b Learning Objective 4: Apply the fair value measurement principles to liabilities 14) Where a liability is held as a corresponding asset by another entity the fair value of the liability is determined by: a) applying a present value technique to measure the liability. b) applying the cost approach to valuing the liability. *c) measuring the fair value of the corresponding asset. d) determining the amount required to settle the present obligation. Answer: c Learning Objective 4: Apply the fair value measurement principles to liabilities 15) In which circumstance will it be necessary to determine the fair value of an entity’s own equity instruments? a) Where the entity is preparing for listing. *b) Where the entity undertakes a business combination and issues its own equity instruments in exchange for a business. c) Where the entity undertakes a share buy-back. d) Where there is a change in the shareholding of the entity. Answer: b Learning Objective 5: Discuss the measurement of the fair values of an entity’s own equity instruments   16) Which of the following is not assumed when measuring the fair value of an equity instrument: a) The market participant transferee will take on the rights and responsibilities associated with the instrument. *b) An entity’s own equity instruments are transferred to a market participant at transfer date. c) An entity’s own equity instrument would remain outstanding. d) The instrument would not be cancelled or otherwise extinguished on the measurement date. Answer: b Learning Objective 5: Discuss the measurement of the fair values of an entity’s own equity instruments 17) Where a market has both a bid and an ask process, the price used in measuring fair value is: a) the bid price. b) the ask price. c) the bid-ask spread. *d) the most representative price for the transaction. Answer: d Learning Objective 6: Explain some of the issues relating to financial instruments 18) An entity holding both financial assets and liabilities is allowed to offset and determine fair value on the net position as long as: I they hold a net long position II they hold a net short position III they have a documented risk management strategy IV the manage the group of net financial assets and liabilities on a net exposure basis V transactions are conducted in an orderly market a) I and III. b) II and IV. *c) III and IV. d) II and V. Answer: c Learning Objective 6: Explain some of the issues relating to financial instruments   19) Which of the following disclosures are not required under AASB 13: a) The valuation techniques used to measure fair value. b) The inputs used to measure fair value. c) The level of the fair value hierarchy within which the fair value measurements are categorised. *d) Quantitative information about all unobservable inputs used in the fair value measurement. Answer: d Learning Objective 7: Appreciate the disclosures required where assets, liabilities or equity is measured at fair value 20) Which are the two most common measures used in Accounting Standards? a) Fair value less costs to sell and cost. b) Value in use and cost. *c) Cost and fair value. d) Net realisable value and fair value. Answer: c Learning Objective 1: Identify the reasons for needing an accounting standard on fair value measurement 21) Which of the following is the definition of exit price per AASB 13: a) A transaction that assumes exposure to the market for a period before the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets or liabilities; it is not a forced transaction (e.g. a forced liquidation or distress sale). b) The amount for which an asset could be exchanged or a liability settled, between knowledgeable, willing parties in an arm’s length transaction. c) The price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. *d) The price that would be received to sell an asset or paid to transfer a liability. Answer: d Learning Objective 2: Explain the definition of fair value   22) Which of the following is not a characteristic of a market participant under AASB 13: a) Buyers and sellers that are able to enter into a transaction for the asset or liability. b) Buyers and sellers that are willing to enter into a transaction for the asset or liability. *c) Buyers and sellers that are dependent on each other. d) Buyers and sellers that are knowledgeable, having a reasonable understanding about the asset or liability and the transaction using all available information. Answer: c Learning Objective 2: Explain the definition of fair value 23) Which of the following is an indication of an active market: a) There are few recent transactions. b) Price quotations vary substantially over time. c) Price quotations vary substantially among market-makers. *d) Price quotations are based on current market information. Answer: d Learning Objective 3: Measure the fair value of non-financial assets. 24) Quoted prices (unadjusted) in active markets for identical assets or liabilities that the entity can access at the measurement date are an example of: a) a Level 2 input. *b) a Level 1 input. c) a Level 3 input. d) a Level 4 input. Answer: b Learning Objective 3: Measure the fair value of non-financial assets 25) Non-performance risk refers to the risk that: a) a market participant will not fulfil an obligation. *b) the holder of the liability will not fulfil an obligation. c) the counterparty will not fill an obligation. d) the holder of a corresponding asset will not fulfil an obligation. Answer: b Learning Objective 4: Apply the fair value measurement principles to liabilities   26) Which of the following is an example of a liability where there is no corresponding asset: *a) A provision for decommissioning. b) A debenture issued by a listed company. c) A loan owing to a financial institution. d) A provision for warranties. Answer: a Learning Objective 4: Apply the fair value measurement principles to liabilities 27) In measuring an equity instrument at fair value the objective is to estimate an exit price at measurement date from the perspective of: a) the issuer of the equity instrument. b) the party to whom the instrument will be transferred. c) the party who intends to repurchase the instrument. *d) a market participant who holds the instrument as an asset. Answer: d Learning Objective 5: Discuss the measurement of the fair values of an entity’s own equity instruments 28) The fair value of an equity instrument is based on determining a/an _________ price which may relate to the price paid for an entity to repurchase its shares. a) transfer b) settlement c) entry *d) exit Answer: d Learning Objective 5: Discuss the measurement of the fair values of an entity’s own equity instruments   29) Which of the following disclosures are required under AASB 13: a) The valuation techniques used to measure fair value. b) The level of the fair value hierarchy within which the fair value measurements are categorised. c) Quantitative information about the significant unobservable inputs used in the fair value measurement. *d) All of the options are correct. Answer: d Learning Objective 7: Appreciate the disclosures required where assets, liabilities or equity is measured at fair value Testbank to accompany Financial Reporting by Loftus et al Prepared by Belinda Luke © John Wiley & Sons Australia, Ltd 2016   Chapter 5: Property, plant and equipment Multiple Choice Questions 1) Property, plant and equipment are assets that: a) are expected to be used up within the current financial period. b) are held for resale within the current period. *c) are physical in nature. d) have a remaining productive life of less than one financial year. Answer: c Learning Objective 1: Discuss the nature of property, plant and equipment 2) Property, plant and equipment includes items that are: a) intangible. b) held for resale. c) expected to be used up during the current period. *d) held for rental to others. Answer: d Learning Objective 1: Discuss the nature of property, plant and equipment 3) The cost of property, plant and equipment is only recognised as an asset if it is probable that the future economic benefits will flow to the entity and: *a) the cost can be reliably measured. b) the asset has been fully paid for in cash. c) the asset has been received by the purchaser. d) it is a tangible asset. Answer: a Learning Objective 2: Outline the recognition criteria for initial recognition of property, plant and equipment   4) Jackson Limited acquired a bundle of assets for a cash consideration of $200 000. The fair values of the assets on date of acquisition was as follows: building $132 000, furniture $88 000. The appropriate journal entry to record this acquisition is: a) DR Property, plant and equipment $200 000 CR Cash $200 000 b) DR Property, plant and equipment $220 000 CR Cash $220 000 *c) DR Building $120 000 DR Furniture $ 80 000 CR Cash $200 000 d) DR Building $132 000 DR Furniture $ 88 000 CR Cash $220 000 Answer: c Learning Objective 3: Explain how to measure property, plant and equipment on initial recognition 5) Costs that may be included in the cost of acquisition of property, plant and equipment assets include: I II III IV Site preparation Yes Yes Yes No Initial delivery and handling costs Yes No Yes No Installation and assembly costs Yes Yes No No Testing whether the asset is functioning Yes Yes No No *a) I. b) II. c) III. d) IV. Answer: a Learning Objective 3: Explain how to measure property, plant and equipment on initial recognition   6) After an item of property, plant and equipment has been initially recognised at cost it may be measured using the following measurement method: a) liquidation value. b) accrual. *c) revaluation. d) realisable value. Answer: c Learning Objective 4: Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition 7) Under the cost model, after initial recognition of a property, plant and equipment asset the item must be carried at its: a) residual value. *b) cost less accumulated depreciation and less accumulated impairment losses. c) initial cost. d) net present value. Answer: b Learning Objective 5: Explain the cost model of measurement and understand the nature and calculation of depreciation 8) Wilson Limited applied the straight-line method of depreciation to its non-current assets. The cost of the buildings was $640 000, the depreciable amount is $560 000, the residual value is $80 000 and the useful life is 8 years. The annual depreciation charge is: a) $80 000. b) $75 000. *c) $70 000. d) $60 000. Answer: c Learning Objective 5: Explain the cost model of measurement and understand the nature and calculation of depreciation   9) Replicator Limited acquired an item of plant with an expected useful life of 5 years. Expected total production output over this period was: Year 1, 35 000 units; Year 2, 35 000 units; Year 3, 18 000 units; Year 4, 12 000 units. The asset cost $100 000 and associated installation costs amounted to $20 000 and residual value is $5000. The amount of depreciation charged in the first year is: *a) $40 250. b) $42 000. c) $35 000. d) $33 250. Answer: a Learning Objective 5: Explain the cost model of measurement and understand the nature and calculation of depreciation 10) When a company recognises a depreciation credit resulting from a review of the estimated residual value of a depreciable asset, the depreciation debit should be recognised in accumulated depreciation and the depreciation credit should be recognised: a) in the opening balance of retained earnings. *b) in the depreciation expense. c) directly in the depreciable asset account. d) as a gain in the current period. Answer: b Learning Objective 5: Explain the cost model of measurement and understand the nature and calculation of depreciation 11) A change in accounting policy from the revaluation model to the cost model requires a retrospective adjustment to the: a) revenue in the profit or loss statement. b) expenses in the profit or loss statement. *c) opening balance of retained earnings. d) other comprehensive income. Answer: c Learning Objective 4: Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition   12) A non-current property, plant and equipment asset is depreciated using the straight-line method. The asset was revalued upwards after four years of use. There is no change in the remaining useful life of six years or to the residual value. Which of the following relationships reflects the effect of the revaluation on the prospective depreciation of the asset: *a) Depreciation rate = Same; Annual depreciation expense = Higher. b) Depreciation rate = Same; Annual depreciation expense = Same. c) Depreciation rate = Higher; Annual depreciation expense = Higher. d) Depreciation rate = Higher; Annual depreciation expense = Same. Answer: a Learning Objective 6: Explain the revaluation model of measurement 13) Revaluations under AASB 116 Property, Plant and Equipment apply to: a) all assets on an individual basis. b) individual current assets only. c) individual non-current assets only. *d) assets on a class-by-class basis. Answer: d Learning Objective 6: Explain the revaluation model of measurement   14) Use the following information to answer this question. An extract of a company’s draft statement of financial position at 30 June 2012 discloses the following: Plant (at cost) $500 000 Less Accumulated depreciation 300 000 $200 000 On 30 June 2013, the company assessed the fair value of the plant to be $350 000. At 30 June 2014, the carrying amount of the plant was $250 000. The tax rate is 30%. Depreciation rates are 10% p.a. (accounting) and 12.5% p.a. (tax) using the straight-line method. The journal entries necessary to record the revaluation of plant (ignoring any tax effect) at 30 June 2013 in accordance with IAS 16 Property, Plant and Equipment is: *a) Accumulated depreciation — Plant Dr 300 000 Plant Cr 300 000 Plant Dr 150 000 Gain on revaluation — OCI Cr 150 000 b) Plant Dr 150 000 Gain on revaluation — OCI Cr 150 000 c) Gain on revaluation — OCI Dr 150 000 Asset revaluation surplus Cr 150 000 d) Plant Dr 150 000 Gain on revaluation — OCI Dr 150 000 Accumulated depreciation — Plant Cr 300 000 Answer: a Learning Objective 6: Explain the revaluation model of measurement   15) Use the following information to answer this question. An extract of a company’s draft statement of financial position at 30 June 2012 discloses the following: Plant (at cost) $500 000 Less accumulated depreciation 300 000 $200 000 On 30 June 2013 the company assessed the fair value of the plant to be $350 000. At 30 June 2014, the carrying amount of the plant was $250 000. The tax rate is 30%. Depreciation rates are 10% p.a. (accounting) and 12.5% p.a. (tax) using the straight-line method. The journal entries to adjust for the tax effect of the revaluation at 30 June 2013 is: a) Income tax expense — OCI Dr 45 000 Deferred tax liability Cr 45 000 b) Asset revaluation surplus Dr 45 000 Income tax expense — OCI Cr 45 000 c) Income tax expense — OCI Dr 45 000 Asset revaluation surplus Cr 45 000 *d) Income tax expense — OCI Dr 45 000 Deferred tax liability Cr 45 000 Gain on revaluation — OCI Dr 150 000 Income tax expense — OCI Cr 45 000 Asset revaluation surplus Cr 105 000 Answer: d Learning Objective 6: Explain the revaluation model of measurement 16) Troubadour Limited had an existing revaluation surplus in respect to an item of plant that had been derecognised. An appropriate journal entry to transfer the surplus to retained earnings would include: a) DR Gain on revaluation — OCI. b) CR Asset revaluation surplus. c) DR Retained earnings. *d) CR Retained earnings. Answer: d Learning Objective 6: Explain the revaluation model of measurement   17) When an asset is sold the resulting gain or loss is: a) reported in other comprehensive income, normally with separate disclosure of income and the carrying amount of the asset. b) reported in other comprehensive income, normally on a net basis. c) reported in current period profit or loss, normally with separate disclosure of income and the carrying amount of the asset. *d) reported in current period profit or loss, normally on a net basis. Answer: d Learning Objective 7: Account for derecognition 18) Which of the following statements is NOT correct in relation to disclosure of property, plant and equipment balances: a) Paragraph 79 of IAS 16 contains disclosure that are encouraged, but not required in relation to property, plant and equipment. b) An entity must disclose the useful life estimates for each class of assets. c) A summary of movements in the revaluation surplus is required to be disclosed. *d) Information on assets carried at revalued amounts must be disclosed on an individual asset basis. Answer: d Learning Objective 8: Outline the disclosure requirements of AASB 116/IAS 16 19) AASB 116 requires disclosure, for each class of property, plant and equipment: a) the measurement bases used for determining the gross carrying amount. b) the deprecation methods used. c) the useful lives or the depreciation rates used. *d) all of the options are correct. Answer: d Learning Objective 8: Outline the disclosure requirements of AASB 116/IAB 16 20) The cost of an item of property, plant and equipment is only recognised if the cost of the item can be reliably measured and: a) it is not directly attributable to the asset. b) it has been paid for in cash. c) the item has been received by the acquirer. *d) it is probable that future economic benefits associated with the item will flow to the entity. Answer: d Learning Objective 2: Outline the recognition criteria for initial recognition of property, plant and equipment 21) An entity acquired an item of plant in exchange for an item of equipment. The equipment has a carrying value of $5000 and a fair value of $6000. The journal entry to record the acquisition of the plant will show: a) a loss on acquisition of $1000. b) proceeds on sale of equipment of $1000. *c) a gain on sale of $1000. d) proceeds on sale of plant of $1000. Answer: c Learning Objective 3: Explain how to measure property, plant and equipment on initial recognition 22) For the purposes of recognising a non-current property, plant and equipment asset the acquisition date is determined as the date: a) the contract to exchange assets is signed. b) on which the offer to acquire the asset becomes unconditional. c) the consideration is paid. *d) on which the acquirer obtains control of the asset. Answer: d Learning Objective 3: Explain how to measure property, plant and equipment on initial recognition 23) Subsequent to the initial recognition of an asset an entity has a choice on the measurement basis to be adopted. The choice is between: a) cash and accrual. *b) cost and revaluation. c) tax and accounting. d) current and non-current. Answer: b Learning Objective 4: Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition   24) When applying a revaluation measurement model to assets, the model: *a) applies to the entire class of non-current assets. b) may only be applied to current assets. c) is applied permanently and may not be changed. d) is applied to individual assets within a class of non-current assets. Answer: a Learning Objective 4: Explain the alternative ways in which property, plant and equipment can be measured subsequent to initial recognition 25) Depreciation is a process that is designed to: a) reduce the carrying amount of an asset to reflect the diminishing fair value of the asset. b) spread the cost of an asset across a period no greater than 5 years. c) reflect the change in value of an asset as a result of obsolescence. *d) allocate the cost of an asset across its useful life to an entity. Answer: d Learning Objective 5: Explain the cost model of measurement and understand the nature and calculation of depreciation 26) Under AASB 116, the depreciation charge for a period reflects: a) the fall in the fair value of the asset across the period. b) a change in the re-sale value of the asset that has occurred over the period. *c) the consumption of economic benefits over the period. d) a reduction in the estimated market value of the asset across the period. Answer: c Learning Objective 5: Explain the cost model of measurement and understand the nature and calculation of depreciation   27) ABC Limited acquired an item of plant on 1 July 2012 for $80 000. The estimated useful life of the plant at acquisition date was 5 years and the residual value $5000. The company sold the plant on 1 January 2016 for $30 000. The journal entry to reflect the sale is: a) DR Cash $30 000 DR Accumulated depreciation $56 000 CR Plant $80 000 CR Gain on sale $ 6 000 b) DR Cash $30 000 CR Proceeds on sale $30 000 DR Carrying amount of plant $27 500 CR Plant $27 500 c) DR Cash $30 000 DR Loss on sale $ 2 500 CR Plant $32 500 *d) DR Cash $30 000 DR Accumulated depreciation $52 500 CR Plant $80 000 CR Gain on sale $ 2 500 Answer: d Learning Objective 7: Account for derecognition