MCQs on FINANCIAL REPORTING UNDER INDIAN ACCOUNTING STANDARDS (IND AS) Part No. 1

Q.1:- On 1 January 2014, a company buys Rs. 50,000 of 7% loan stock for Rs. 47,865. Interest is received on 31 December each year and the stock will be redeemed at a premium of 10% on 31 December 2017. The effective interest rate is 10.5% per annum. Calculate the amortised cost of the loan stock at 31 December 2014.

• Rs. 51,526
• Rs. 51,750
• Rs. 49,391
• Rs. 50,000

Q.2:- Which of the following best describes the higher of an asset's net selling price and its value in use?

• Recoverable amount
• Revalued amount
• Carrying value
• Depreciable amount

Q.3:- On 1 January 2005, ABC SpA, lessee, enters into an operating lease for new equipment valued at € 1.5 million. Terms of the lease agreement include five annual lease payments of € 125,000 to be made by ABC to the leasing company. During the first year of the lease, ABC will record which of the following?

• No entry is required
• An increase in rent expense of € 125,000 and a decrease in cash of € 125,000
• An increase in leased assets € 125,000 and a decrease in cash of € 125,000. The income statement is not affected
• Initially, an increase of leased assets of € 625,000 and an increase in trade payables of € 625,000. At year-end, a decrease in trade payables of € 125,000 and a decrease in cash of € 125,000

Q.4:- Mr Miller buys a car for € 10,000. He is advised to trade it in for a new car in three year's time when it will probably fetch € 4,000. He decides to depreciate on this basis. The annual depreciation expense, based on a straight line basis, will be:

• € 2,000 per annum
• € 3,000 per annum
• € 1,500 per annum
• € 1,000 per annum

Q.5:- Which of the following is not an internal indication of the fact that an impairment loss has now decreased or no longer exists?

• A favourable change has occurred to the extent to which the asset will be used
• The asset's market value has increased significantly
• A favourable change has occurred to the manner in which the asset will be used
• There is evidence that the economic performance of the asset will be better than expected

Q.6:- Which of the following is not an external indication of impairment?

• An adverse technological change
• An unexpected decline in the asset's market value
• An adverse change in the market in which the entity operates
• The asset becoming idle

Q.7:- If there is no reason to believe that an asset’s value in use materially exceeds its fair value less costs of disposal, the asset’s fair value less costs of disposal may be used as its recoverable amount.

• True/ False
• True
• False
• None of the above

Q.8:- Ind AS 36 shall be applied in accounting for the impairment of all assets, other than:

• contract assets and assets arising from costs to obtain or fulfill a contract that are recognised in accordance with Ind AS 115,
• deferred tax assets
• Inventories
• All the above

Q.9:- While calculating value in use in your cash flow estimations, you shall include:

• Projections of cash outflows to generate the cash inflows from continuing use of the asset and can be directly attributed, or allocated on a reasonable and consistent basis, to the asset.
• Net cash flows to be received (or paid) for the disposal of the asset at the end of its useful life
• Projections of cash inflows from the continuing use of the asset.
• All the above

Q.10:- An asset's recoverable amount is equal to:

• The higher of the asset's value in use and its carrying amount
• The lower of the asset's fair value less costs of disposal and its value in use
• The higher of the asset's fair value less costs of disposal and its value in use
• The lower of the asset's value in use and its carrying amount

Q.11:- An asset is expected to generate cash inflows of £20,000 per annum for each of the next three years and then to be scrapped. These cash inflows will occur at the end of each year. The asset will generate no cash outflows. Using a discounting rate of 10% per annum, what is the asset's value in use?

• £49,720
• £60,000
• £54,540
• £54,000

Q.12:- An enterprise sells on 1 January 2005 a van which it bought on 1 January 2002 for € 3,000, and has been depreciating the van each year at 25% per annum on a straight line basis. It trades this van in for a new van costing € 5,000 and pays the supplier € 4,600 cash. What is the gain or loss on the disposal of the old van?

• € 750 gain
• € 750 loss
• € 350 loss
• € 350 gain

Q.13:- According to IAS 38 - 'Intangible assets', which one of the following criteria are relevant in determining the useful life of an intangible asset?

• The expected usage of the asset
• The residual value of the asset
• Amortisation period
• None of the above

Q.14:- Which one of the following statements best describes 'value in use'?

• The higher of an asset's NRV and its recoverable amount
• The present value of estimated future cash flows expected to arise from the continuing use of an asset and from its ultimate disposal
• The net amount an enterprise expects to obtain for an asset at the end of its useful life
• The amount of cash or cash equivalents that could currently be obtained by selling an asset in an orderly disposal

Q.15:- Which of the following is NOT an indicator of impairment?

• An increase in interest rates which increases the discount rate an entity uses
• The estimated net realisable value of inventory has been reduced due to fire damage although this value is greater than its carrying amount
• Advances in the technological environment in which an asset is employed have an adverse impact on its future use
• The carrying amount of an entity’s net assets is higher than the entity’s number of shares in issue multiplied by its share price

Q.16:- Redeemable preference shares should be classified (from the issuing company's point of view) as

• A financial liability
• A compound financial instrument
• A financial asset
• An equity instrument

Q.17:- A share broking company is dealing in sale/purchase of shares for its own account and therefore is having inventory of shares purchased by it for trading. The company is covered under Phase II of Ind AS roadmap. *

• Such shares held as stock-in trade to be accounted in accordance with Ind AS 32 (Inventories)
• shares held as stock-in trade to be accounted in accordance with Ind AS 32,107 and 109
• Such shares held as stock-in trade to be accounted in accordance with Ind AS 2 (Inventories)
• Such shares held as stock-in trade to be accounted in accordance with Ind AS 107 (Inventories)

Q.18:- Entity S lends CU10 million to Entity T. The terms of the loan require Entity T to repay CU10 million in 3 years and the loan is not prepay able. The interest rate on the loan is based on LIBOR plus 2 percent on CU10 million payable in arrears at the anniversary date of the lending. The rate of LIBOR is determined in advance, i.e. at the start of each annual period. There are no other features in the contractual terms that result in any variability in the contractual cash flows.

• the contractual cash flows characteristics test is met
• the contractual cash flows characteristics test is met
• None of the above
• A and B

Q.19:- Company A purchased 100% interest of Company B. Company B is being sued over a personal injury allegedly caused by a faulty product. The claimant is suing for CU1 million in damages. The acquiree’s management acknowledge that the product was faulty and may have caused injury. However, they strongly dispute the level of damages being claimed. The acquiree’s legal advisers estimate such claims are usually settled for between 100,000 and 250,000.

• Company A will need to estimate the fair value of the liability which may involve weighting possible outcomes within the expected range using their associated probabilities.
• The obligation need be recognised
• The obligation need not be recognised
• All the above

Q.20:- Investor A holds 70% of the voting rights of Investee C, with Investor B holding the remaining 30% of the voting rights as well as an option to acquire half of the voting rights of Investor A. The option can be exercised over the next two years but is exercisable at a fixed price that is currently deeply out of the money, and the option is expected to remain out of the money over the course of the three-year period. *

• Both have control on each other
• Investor A holds control over Investor B
• Investor B holds control over Investor A
• None of the above

Q.21:- In accordance with IAS 36, which of the following would definitely NOT be an indicator of the potential impairment of an asset (or group of assets)?

• A significant change in the technological environment in which an asset is employed making its software effectively obsolete
• An unexpected fall in the market value of one or more assets
• The carrying amount of an entity’s net assets being below the entity’s market capitalisation
• Adverse changes in the economic performance of one or more assets

Q.22:- ‘Most advantageous market’ (Ind AS 113 Appendix A) is defined as:

• The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, before taking into account transaction costs and transport costs.
• The market that maximises the amount that would be received to sell the asset or minimises the amount that would be paid to transfer the liability, after taking into account transaction costs and transport costs.
• None of the above
• A and B

Q.23:- Option pricing model is a

• Example of market approach of valuation technique
• Example of income approach or valuation technique
• Example of cost approach of valuation technique
• All of the above

Q.24:- The ______ reflects the amount that would be required currently to replace the service capacity of an asset:

• Market approach
• Cost approach
• Income approach
• Fair value approach

Q.25:- Which of the following is not a characteristic of the market participants in the fair value measurement?

• They are dependent on each other
• They are able to enter into transaction for the asset or liability.
• They are knowledgeable
• They are not compelled to enter into the transaction

Q.26:- The highest and best use of a________ might provide maximum value to market participants through its use in combination with other assets as a group (as installed or otherwise configured for use) or in combination with other assets and liabilities (e.g. a business)

• Technology asset
• Intangible assets
• Non-financial asset for use
• Financial asset

Q.27:- The Objectives of the Indian Accounting Standard (Ind AS) 113:

• Sets out a framework for measuring fair value
• Requires disclosures about fair value measurements
• Defines fair value
• All of the Above

Q.28:- Interest rate swap is a _______ input would be an adjustment to a mid-market consensus price for the swap developed using data that are not directly observable and cannot otherwise be corroborated by observable market data:

• Level 2
• Level 3
• Level 4
• Level 1

Q.29:- Single valuation technique will be appropriate:

• Valuing a cash generating it
• Valuing an assets and liability using quoted price in an active market for identical assets or liabilities.
• All of the these
• Valuing a start-up entity

Q.30:- The price in the principal market used to measure the fair value of an asset or a liability should be adjusted for:

• Brokerage expenses
• Pack in charges
• Transportation Cost
• Transaction cost

Q.31:- Which of the following is not a method of valuation as per IFRS13?

• Market
• Cost
• Fair value
• Income

Q.32:- ____describes the accounting principles, the valuation technique, and the method of applying the principles of accountancy in preparation and presentation of financial position in the most appropriate manner.

• Standards on business valuation
• Auditing standards
• Accounting standards
• All of the above.

Q.33:- Highest and best use (HBU) relates to non-financial assets only. This is because, unlike other items (such as liabilities and financial assets), non- financial assets can be used or exploited within several different models, for example:

• Leased to others
• Sold
• Held for own use
• All of the above.

Q.34:- This Standard applies to assets that are carried at revalued amount in accordance with the revaluation model in Ind AS 16, Property, Plant and Equipment.

• FALSE
• TRUE
• None of the above
• True/ False

Q.35:- While calculating value in use in your cash flow estimations, you shall include:

• Cash outflows from payables.
• Cash outflows expected to arise from future restructurings to which an entity is not yet committed.
• Cash inflows from receivables.
• None of the above

Q.36:- The carrying value of equipment at 1 January 2005 was € 19,720 (cost € 25,670 and accumulated depreciation € 5,950). In 2005 equipment costing € 5,670 was purchased. The depreciation policy is to charge depreciation at 25% on all equipment held at the year end using the diminishing-balance method. The depreciation expense for the year ended 31 December 2005 would be:

• € 7,835
• € 6,347
• € 9,322
• € 6,417

Q.37:- A machine costing € 55,000 has an expected useful life of 10 years and an estimated residual value of € 3,000. Depreciation is calculated on the diminishing balance method at the rate of 25%. In year 5 the machine was actually disposed of for € 15,000. (Depreciation is charged in all years 1 - 5). The resulting gain or loss arising on the disposal, to the nearest euro, is:

• € 1,948 gain
• € 14,000 loss
• € 15,000 gain
• € 13,052 loss

Q.38:- In accordance with IAS 36 Impairment of Assets, which of the following explains the impairment of an asset and how to calculate its recoverable amount?

• An asset is impaired when the recoverable amount exceeds its carrying amount and the recoverable amount is the lower of its fair value less costs of disposal and its value in use.
• An asset is impaired when the carrying amount exceeds its recoverable amount and the recoverable amount is the lower of its fair value less costs of disposal and its value in use
• An asset is impaired when the carrying amount exceeds its recoverable amount and the recoverable amount is the higher of its fair value less costs of disposal and its value in use
• An asset is impaired when the recoverable amount exceeds its carrying amount and the recoverable amount is the higher of its fair value less costs of disposal and its value in use

Q.39:- The accounting principle applied by standard IND AS 109 when distinguishing between liabilities and equity is

• Substance over form
• Prudence
• Consistency
• Neutrality

Q.40:- A company issues Rs. 500,000 of 6.5% loan stock at a discount of 8%. Issue costs of Rs. 25,000 are incurred. The loan stock should be measured initially at:

• Rs. 435,000
• Rs. 475,000
• Rs. 500,000
• Rs. 460,000

Q.41:- Company P owns and operates restaurant groups in various metropolitan areas. P acquires from Company S a group of 10 restaurants located in a major city. The acquired set of activities and assets includes land, buildings, leased assets and leasehold improvements, equipment, and the rights to the trade name used by the restaurant group. P also offers employment to the restaurants' employees, including management-level employees, service staff and chefs. But P does not acquires S's procurement system used to purchase the food, drinks and other supplies necessary to operate the restaurants. State whether the acquisition will be accounted for as a business combination?

• No
• Yes
• None of the above
• Yes/ No

Q.42:- Company P owns and operates restaurant groups in various metropolitan areas. P acquires from Company S a group of 10 restaurants located in a major city. The acquired set of activities and assets includes land, buildings, leased assets and leasehold improvements, equipment, and the rights to the trade name used by the restaurant group. P also offers employment to the restaurants' employees, including management-level employees, service staff and chefs. But P does not acquires S's procurement system used to purchase the food, drinks and other supplies necessary to operate the restaurants. State whether the acquisition will be accounted for as a business combination?

• No
• Yes
• None of the above
• Yes/ No

Q.43:- Plush Tred Ltd the carpet shop traded its old delivery van in for a new one on 31 December 2004. The old van was purchased during the year ended 31 December 1997 for € 17,000, and has been depreciated using 15% straight line. (A full year depreciation is charged in the year of purchase, none in the year of sale). The purchase price of the new van is € 21,000 but Plush Tred Ltd only needed to pay € 20,300 following the trade in. The gain (loss) on disposal of the old van is:

• € 4,100 gain
• € 700 gain
• € 150 loss
• € 1,550 gain

Q.44:- The carrying amount of a CGU is £900,000. This consists of goodwill £250,000 and property, plant and equipment £650,000. The CGU has a recoverable amount of only £520,000. How is the impairment loss allocated between the assets of the CGU?

• Goodwill £nil, PPE £380,000
• Goodwill £130,000, PPE £250,000
• Goodwill £250,000, PPE £130,000
• Goodwill £190,000, PPE £190,000

Q.45:- Ind AS 36 shall be applied in accounting for the impairment of all assets, other than:

• Non-current assets (or disposal groups) classified as held for sale in accordance with Ind AS 105
• Assets arising from employee benefits
• Deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts
• All the above

Q.46:- Which one is not initially recognized on fair value basis?

• Acquisition of investment properly in exchange of receivable
• Acquisition of investment property for cash consideration
• Acquisition of investment property in exchange or other assets
• All of the above

Q.47:- The fair value of a financial liability with a demand feature i.e. a demand deposit is:

• Not less than the amount payable on demand, discounted from the first date that the amount could be requirled, to be aid
• Not less than the amount payable maturity, discounted from the first date that the amount could be required to be paid
• Not more than the amount payable on demand, discounted from the first date that the amount could be required to be paid.
• Not more than the amount payable on maturity, discounted from the first date that the amount could be required to be paid

Q.48:- The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for…………:

• Installation cost
• Transaction costs
• Transport cost
• All of the above

Q.49:- ..........................are buyers and sellers in the principal (or most advantageous) market for the asset or liability that are independent, knowledgeable, competent and willing to enter into a transaction:

• Market maker
• Market leader
• Market participant
• Two parties

Q.50:- A fair value measurement is for:

• A group of assets, a group of liabilities or a group or assets and liabilities
• A stand-alone asset or liability
• None of the above
• Both (a) and (b)