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CPA Australia Financial Reporting Practice Exam 2 (Knowledge Equity) (ANSWERS & WORKINGS)
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CPA Australia Financial Reporting Practice Exam 2
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1FR Practice Exam 2 Question 2
BuildIt Ltd is a property developer who sold a parcel of land
Question 1 to a customer for $250,000. While the ownership transfers
BuildIt Ltd is a property developer who sold a parcel of land immediately to the customer once the contract is signed, the
to a customer for $250,000. While the ownership transfers $250,000 payment is only required at the end of three years.
immediately to the customer once the contract is signed, the The effective interest rate applicable to this contract is 8%.
$250,000 payment is only required at the end of three years.
The effective interest rate applicable to this contract is 8%. In terms of IFRS 15, what are the journal entries relating to
the transaction at the end of three years?
In terms of IFRS 15, what is the standalone selling price of the
land that would have been payable by the customer if it was A. DR Bank $250,000 | CR Sales $250,000
paid on the date the contract was signed? B. DR Bank $250,000 | CR Sales $190,000 | CR Interest
Receivable $60,000
A. $190,000 C. DR Bank $250,000 | CR Accounts Receivable $198,450 |
B. $198,450 CR Interest Income $51,550
C. $250,000 D. DR Bank $314,750 | CR Accounts Receivable $250,000 |
D. $314,750 CR Interest Income $64,750
Answer: Answer:
B. $198,450 C. DR Bank $250,000 | CR Accounts Receivable $198,450 | CR
B is correct because the contract includes a significant financing Interest Income $51,550
component. We can calculate the standalone price by discounting
the $250,000 by 8% for a 3 year period. The discount rate is C is correct because according to IFRS 15, when there is a
1/(1.08)^3 = 0.7938. So, $250,000 x 0.7938 = $198,450. This significant financing component, this must be taken into account
indicates that $51,550 represents the 'financing portion' of the and treated separately.
contract.
We can calculate the standalone price by discounting the
A is incorrect because this adjusts the $250,000 by 8% each year $250,000 by 8% for a 3 year period. The discount rate is
for 3 years (8% x $250,000 x 3 years = $60,000 in interest). This is 1/(1.08)^3 = 0.7938. So, $250,000 x 0.7938 = $198,450. This is
not the correct calculation. the amount that the same would be recorded as on the date that
the contract is signed and the ownership transfers to the customer.
C is incorrect because this has not separated out the financing
component of the contract. So on this date, the journal would be:
D is incorrect because this has treated $250,000 as the present DR Accounts Receivable $198,450 CR Sales $198,450
value and increased it by 8% p.a. over 3 years (1.08^3 = 1.259).
This would only be valid if the $250,000 was the standalone However, the question asked for the journals after three years.
selling price at the date the contract was signed, but the $250,000 The interest component on this sale is $250,000 - $198,450 =
is paid in year 3. $51,550.
Module: 3 > Part: A > 3.1 Recognition of revenue > Step 3: So after three years, the journals would be as follows:
Determine the transaction price of the contract > Page: 127
DR Bank $250,000 (total amount to be received from the
customer)
CR Accounts Receivable $198,450 (settlement of the amount
owing by the customer)
CR Interest Income $51,550 (the residual amount).
Module: 3 > Part: A > 3.1 Recognition of revenue > Step 3:
Determine the transaction price of the contract > Page: 129
, 2
Question 3 Question 4
General purpose financial reporting is most likely focused on
meeting the needs of which of the following users?
A. Banks.
B. Regulators.
C. Government.
D. Individual creditors.
Answer:
D. Individual creditors.
D is correct because individual creditors are the least likely to
have power to demand information from the entity that is tailored
to their needs.
The definition of GPFS in IAS para 7 states: 'Financial statements
that are intended to meet the needs of users who are not in a
position to require an entity to prepare reports tailored to their
particular information needs.'
Which of the following is correct?
A, B and C are incorrect because these users are more likely to be
in a position to require the entity to prepare special tailored
A. Investor A has 25% ownership interest in Entity F.
reports.
B. Investor A has a 72% ownership interest in Entity E.
C. Investor A has an 40% ownership interest in Entity G.
Module: 1 > 1.1 The role and importance of financial reporting >
D. Investor A has a 63,75% ownership interest in Entity H.
The importance of financial reporting > Page: 3
Answer:
B. Investor A has a 72% ownership interest in Entity E.
B is correct because Investor A has control over Entity B. And
Entity B has control over Entity E. So Investor A's interest in Entity
E will be Investor A's interest in Entity B x Entity B's interest in
Entity E = 90% x 80% = 72%
Module: 5 > Part: A > 5.2 The acquisition method > Page: 226
, 3
Question 5 Question 6
Entity A Ltd controls Entity B Ltd. During the financial year On 1 July 20X4, Entity S Ltd purchased 25% of the shares in
ending 30 June 20X1, Entity A sold an item of inventory to Entity T for $85,000. Entity S has determined that it has
Entity B. The inventory cost the parent $60,000 and was sold significant influence over Entity T. Accordingly, Entity T is an
to the subsidiary for $80,000. At 30 June 20X1, Entity B still associate of Entity S. The carrying amount of the investment
had all of the inventory on hand. at the time of acquisition was $85,000.
Assume a tax rate of 30%. The following information was available in relation to the year
ended 30 June 20X5 in relation to Entity T:
What is the appropriate consolidation adjusting entry for the
year ended 30 June 20X1 (the year of the intra-group sale)? – Profit after tax was $40,000
A. DR Inventory $20,000 | DR Cost of sales $60,000 | CR – Entity T paid a dividend of $20,000
Sales $80,000 || DR Income tax expense $6,000 | CR
DTA $6,000 What is the carrying amount of the investment in the
B. DR Sales $80,000 | CR Cost of sales $60,000 | CR associate at 30 June 20X5?
Inventory $20,000 || DR DTA $6,000 | CR Income tax
expense $6,000 A. $20,000
C. DR Retained earnings (o/b) $20,000 | CR Inventory B. $90,000
$20,000 || DR Income tax expense $6,000 | CR Retained C. $95,000
earnings (o/b) $6,000 D. $105,000
D. DR Retained earnings (o/b) $20,000 | CR Inventory
$20,000 || DR Income tax expense $6,000 | CR Retained Answer:
earnings (o/b) $6,000 B. $90,000
Answer: B is correct because $85,000 + 25% of ($40,000 [profit after tax] –
B. DR Sales $80,000 | CR Cost of sales $60,000 | CR Inventory $20,000 [dividend paid]) = $85,000 + $5,000 = $90,000.
$20,000 || DR DTA $6,000 | CR Income tax expense $6,000
A is incorrect because it does not take into account the original
B is correct because total profit is $80,000 carrying value to Entity carrying amount of the investment and does not take into account
B less $60,000 carrying value to Entity A = $20,000 and the tax that the carrying amount of the investment is only increased by
effect on profit is $20,000 x 30% = $6,000. Profit or loss on sales 25%.
within the group are only recognised by the group when the
underlying asset is sold externally to the group. C is incorrect because this does not take into account the payment
of the dividend.
In this question, all of the inventory is still on hand at the end of
the year – accordingly there is an ‘unrealised’ profit on the sale of D is incorrect because this does not take into account that the
inventory that needs to be eliminated when preparing the carrying amount of the investment is only increased by 25%.
consolidated financial statements.
Module: 5 > Part: C > 5.13 Application of the equity method >
Module: 5 > Part: B > 5.8 Preparation of consolidated financial Recognising the investor's share of the associate post-acquisition
statements > Transactions within the group > Page: 258 other comprehensive income > Page: 291
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