CIMA Study Guide Real CIMAPRA19-F02-1-ENG Exam Questions For Preparation

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1. EF obtained a government licence, free of charge, to operate a silver mine in 20X7 and $5 million was spent on preparing the site. The mine commenced operation on 1 January 20X8. The licence requires that at the end of the mine's useful life of 20 years, the site above ground must be reinstated to its original position.

EF estimated that the cost in 20 years' time of this reinstatement will be $3 million, which has a present value of $1 million at 1 January 20X8.

Which THREE of the following describe how the cost of the reinstatement of the site should be treated in the financial statements of EF in the year ended 31 December 20X8?

The cost of the mine will be increased by $1 million on 1 January 20X8.

The cost of the mine will be increased by $3 million on 1 January 20X8.

There will be a credit to finance costs for the unwinding of the discount on the reinstatement provision.

There will be a debit to finance costs for the unwinding of the discount on the reinstatement provision.

Only the cost of the site preparation will be depreciated over the mine's useful economic life.

Depreciation will be charged over 20 years on the full cost of the mine including the reinstatement cost.

2. Which TWO of the following statements about bonds and their issue are true?

Credit rating agencies assign risk categories to bond issues.

Bonds are a form of loan capital, traded on stock exchanges.

Bonds are a risk-free form of investing because they will always be repaid.

All bonds have the same terms and conditions when issued.

A bond issue is never underwritten because the return is fixed and guaranteed.

3. LM acquired 80% of the equity shares of ST when ST's retained earnings were $50 million.

The fair value of the net assets of ST included a contingent liability with a fair value of $100 million at the date of acquisition and a fair value of $40 million at 31 December 20X6.

No other fair value adjustments were required at the date of acquisition.

LM and ST had retained earnings of $200 million and $80 million respectively at 31 December 20X6.

The consolidated retained earnings of LM at 31 December 20X6 were:

$164 million

$176 million

$272 million

$284 million

4. What figure will be presented in GHI's consolidated statement of changes in equity for the year ended 31 December 20X4, in respect of dividends paid to non-controlling interest?

$25,000

$125,000

$100,000

5. JJ's current share price is $1.80, with a dividend of $0.20 a share just about to be paid.

Dividends have increased at an average annual growth rate of 4.5% and this is expected to continue into the future.

What is JJ's cost of equity?

17.6%

16.1%

12.5%

11.1%

6. ST has in issue unquoted 7% debentures which were issuedat par and are redeemable in 1 year's time. These debentures cannot be traded. The yield to maturity on these debentures has been calculated at 5%.

Which of the following would explain why the yield to maturity is lower than the coupon?

ST will benefit from the tax relief on the interest payment.

The debentures will be redeemed at a discount to their par value.

The debentures will be redeemed at their par value.

The market value of the debentures must be higher than their par value.

7. Which TWO of the following are true in relation to IAS21.

The Effects of Changes in Foreign Exchange Rates when consolidating an overseas subsidiary?

A current period exchange gain or loss is shown within the consolidated statement of comprehensive income within other comprehensive income.

Goodwill is re-translated at the end of each reporting period and reflected at the period end exchange rate in the consolidated statement of financial position.

Assets and liabilities of the subsidiary are translated at each reporting date using the average exchange rate for the period.

Goodwill is reflected in the consolidated statement of financial position translated at the exchange rate on the date of acquisition.

The statement of profit or loss of the subsidiary is translated for the reporting period using the closing exchange rate.

8. Information from the financial statements of RST for the year ended 30 April 20X9 is as follows:

What is the price earnings (P/E) ratio for RST at 30 April 20X9?

15.83

7.92

10.56

9.31

9. ST has sold its main office property, which had a carrying value of $360,000, to AB, a property management entity.

The property was sold for $400,000 which is equal to its fair value and was immediately leased back under an operating lease agreement.

Which of the following journals will record this transaction?

Option A

Option B

Option C

Option D

10. An accountant acting under their Code of Ethics would do which THREE of the following?

Resist pressure from the directors to recognise revenue on sales where the risks and rewards have not transferred to the customer.

Report material conflicts of interest to a more senior level.

Reject a justified change to a depreciation policy that increases profitability.

Accept a recommendation from the audit committee to increase segregation of duties within the finance department.

Make a provision for a liability of uncertain timing or amount, requested by the directors, where there is NOT a present obligation.

Accept a director's instruction to remove one element of their remuneration from the directors' remuneration report.

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11. AB acquired its one subsidiary, CD, on 1 January 20X1. At this date the fair value of CD's property, plant and equipment was found to be $40 million higher than its carrying value. The relevant items had a remaining estimated useful life of 10 years from the date of acquisition.

At 31 December 20X4 AB and CD presented property, plant and equipment of $100 million and $50 million respectively in their individual financial statements.

The value of property, plant and equipment presented in AB's consolidated statement of financial position at 31 December 20X4 is:

$174 million

$190 million

$150 million

$134 million

12. GH acquired 3,000,000 of the 12,000,000 equity shares of JK. All shares carried equal voting rights and no other single shareholder of JK held more than 10% of the equity shares. GH has the power to participate in the financial and operating policy decisions but not control them.

Based on the information provided above, how would GH's investment in JK be accounted for in its consolidated financial statements?

Associate

Joint venture

Joint arrangement

Financial asset

13. On 1 January 20X4 JK had 1,500,000 ordinary shares in issue. On 1 September 20X4 JK issued 600,000 ordinary shares at the market value of $2.50 a share. For the financial year ended 31 December 20X4 the statement of profit or loss shows profit before tax of $625,000 and profit after tax of $500,000.

What is the earnings per share for the year ended 31 December 20X4?

23.8 cents

36.8 cents

26.3 cents

29.4 cents

14. PQ and WX are similar sized entities and operate in the same industry within Country X. Both operate from a single warehouse and have similar levels of non current asset resources.

The following ratios have been calculated at 31 October 20X8:

If considered individually, which of the following would limit the usefulness of these ratios in assessing the comparative financial performances of PQ and WX?

Depreciation of warehouses being charged to cost of sales by PQ and distribution costs by W

Operating lease rentals for plant and equipment being charged to administration expenses by PQ and distribution costs by W

Year end review of equipment resulting in WX charging an impairment loss while PQ's equipment is not impaired.

Increased prices for raw materials, which was passed on to customers by both entities.

15. AB and CD are competitors supplying components to the car manufacturing industry. AB operates in Country X and CD operates in Country

Y. Both entities were incorporated on the same day, are the same size and prepare financial statements to 31 March each year using international accounting standards.

Which of the following statements taken individually would limit the usefulness of the comparison of the return on capital employed ratio between the two entities?

The corporate tax rate is 25% in Country X and 40% in Country

The average rate of inflation is 3% in Country X and 10% in Country

The average rate of borrowing is 2% in Country X and 7% in Country

The currency is Dollar in Country X and Krona in Country

16. AB sold the majority of its operating equipment to LM for cash on 30 December 20X9 and then immediately leased it back under an operating lease.

AB used the cash proceeds from the sale to reduce its long term borrowings significantly.

No early repayment charge was levied by the lender.

Which of the following statements is true in respect of AB's ratios calculated at 31 December 20X9?

AB's return on capital employed would be lower as a result of this sale being recorded.

AB's current ratio would be lower as a result of this sale being recorded.

AB's non-current asset turnover would be lower as a result of this sale being recorded.

AB's gearing ratio would be lower as a result of this sale being recorded.

17. On 1 January 20X1 KL acquired 75% of the equity shares of PQ. Goodwill arising on the acquisition was $480,000. On 31 December 20X3 KL sold the full investment of PQ to XY Group for $2,000,000. On this date the net assets of PQ were $1,340,000 and the non-controlling interests stood at $410,000.

What is the gain on disposal to be recognised in the consolidated statement of profit or loss of KL?

$590,000

$180,000

$660,000

$635,000

18. Information from the financial statements of an entity for the year to 31 December 20X5:

The gearing ratio calculated as debt/equity and interest cover are:

gearing of 15% and interest cover of 6.

gearing of 16% and interest cover of 6.

gearing of 15% and interest cover of 4.

gearing of 16% and interest cover of 4.

19. A group presents its financial statements in A$.

The goodwill of its only foreign subsidiary was measured at B$100,000 at acquisition.

There have been no impairments to this goodwill.

Exchange rates (where A$/B$ is the number of B$'s to each A$) are as follows:

The value of goodwill to be included in the group's statement of financial position in respect of its foreign subsidiary for the year ended 31 December 20X4 is:

A$75,758.

A$66,667.

A$150,000.

A$132,000.

20. Entity A entered into a 3 year operating lease on 1 April 20X3. The rentals are £5,000 a year payable in advance with an additional payment of $1,800 payable on 1 April 20X3.

The rental expense to be included in the statement of profit or loss for the year ended 31 December 20X3 will be:

$4,200

$5,000

$6,800

$5,600

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21. HJ is currently in dispute with an employee, who is claiming $400,000 in a legal case against them.

HJ's legal advisors have stated that it is probable that they will lose the case and will have to pay the amount claimed.

Also, HJ are claiming $250,000 from a supplier of defective goods and the legal advisors have stated that it is probable that HJ will be successfulin this claim.

What is the correct accounting treatment for these two items in HJ's financial statements?

Provide for the $400,000 potential outflow and disclose the $250,000 potential inflow.

Provide for the $400,000 potential outflow and recognise the $250,000 potential inflow.

Disclose the $400,000 potential outflow and disclose the $250,000 potential inflow.

Disclose the $400,000 potential outflow and recognise the $250,000 potential inflow.

22. 1.JKL measure gearing as debt:equity, based on book values. At 31 December 20X5 the ratio is 2:3 and JKL would like this to be 2:5.

Which of the following transactions individually would achieve this?

Bonus issue from the share premium account.

Revaluation of investment property to an increased fair value.

Repayment of a 6 year term loan with the issue of 5 year redeemable debentures.

Issue of redeemable preference shares at par.

23. CORRECT TEXT

ST acquired 80% of the equity shares of AB on 1 January 20X7. AB acquired 60% of the equity shares of UV on 1 January 20X8. Profit for the year ended 31 December 20X9 for AB is $160,000 and for UV is $100,000.

Calculate the non-controlling interest figure to be included within ST's consolidated statement of profit or loss for the year ended 31 December 20X9.

Give your answer to the nearest whole number in $000s.

$ ?

24. The directors of AB want to reduce the entity's gearing ratio in the year to 31 December 20X9.

Which of the following independent actions could the directors take during 20X9 to achieve this?

Recognise the valuation surplus on AB's property, plant and equipment.

Issue cumulative preference shares.

Issue redeemable preference shares.

Switch AB's fixed interest bearing borrowing to a lower variable rate borrowing.

25. On 1 January 20X7 GH purchased plant and equipment at a cost of $400,000. The temporary differences in respect of this plant and equipment at 31 December 20X7 and 20X8 have been calculated as follows:

Assume that there are no other temporary differences in the periods and that the corporate income tax rate is 25%. GH is expected to have significant taxable profits in the future.

Which of the following is the correct impact in GH's statement of financial position at 31 December 20X8 in respect of deferred tax?

Increase in the deferred tax asset.

Increase in the deferred tax liability.

Decrease in the deferred tax asset.

Decrease in the deferred tax liability.

26. When accounting for a finance lease under IAS 17 Leases, which TWO of the following are recognised in the statement of profit or loss?

Finance cost element of the lease payments

Depreciation of the leased asset

Lease payments paid

Lease payments payable

Capital repayment element of the lease payments

27. AB and CD are separate entities that prepare financial statements to 31 May using international accounting standards. AB and CD provide technical support services to the financial services industry and operate in the same country.

The financial statements are identical except for the following:

• AB purchased all operating equipment, paying $100,000, using a 5 year bank loan. The useful life of the equipment was 5 years.

• CD signed an operating lease agreement for all operating equipment for 5 years paying $20,000 per year.

Both entities charge all expenses relating to the equipment to cost of sales.

From the information provided, which of the following ratios would be reliably comparable for AB andCD?

Gross profit margin

Return on capital employed

Non current asset turnover

Profit before tax margin

28. CORRECT TEXT

KL acquired 2 million $1 equity shares in MN on 18 July 20X0 for $1.65 a share and classified this investment as available for sale (AFS) in accordance with IAS 39 Financial instruments: Recognition and Measurement.

KL paid a 0.5% transaction fee to its broker on this transaction. MN's shares were trading at $1.78 on 31 December 20X0.

Which of the following journals records the subsequent measurement of this investment at 31 December 20X0?

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CIMA Study Guide Real CIMAPRA19-F02-1-ENG Exam Questions For Preparation

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