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  • Exam Name: F2 Advanced Financial Reporting
  • Last Update: Jun 22, 2024
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F2 Practice Exam Questions with Answers F2 Advanced Financial Reporting Certification

Question # 6

FG has a weighted average cost of capital of 12% based on its existing:

• level of gearing of 30% (measured as debt/(debt + equity)); and

• business operations.

This would be used as an appropriate discount factor to assess which of the following significant projects?

A.

A project in an industry in which FG does not currently operate, funded wholly by equity.

B.

A project to extend FG's existing operations, funded wholly by debt.

C.

A project in an industry in which FG does not currently operate, funded 30% with debt and 70% with equity.

D.

A project to extend FG's existing operations, funded 30% with debt and 70% with equity.

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Question # 7

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

  F2 question answer

At 30 April 20X9 the ordinary shares are trading at $4.75.

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

A.

15.83

B.

7.92

C.

10.56

D.

9.31

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Question # 8

How would KL account for its investment in MN in its consolidated financial statements for the year to 31 December 20X9?

A.

Joint venture

B.

Joint arrangement

C.

Financial asset

D.

Subsidiary

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Question # 9

MNO has calculated its return on capital employed ratio for 20X4 and 20X5 as 41% and 56% respectively.

Taking each statement in isolation, which would explain the movement in the ratio between the 2 years?

A.

In 20X5 the average interest rate on borrowing decreased compared to 20X4.

B.

In 20X4 an onerous contract was provided for and this provision did not change in 20X5.

C.

In 20X5 the increase in value of MNO's head office was reflected in the financial statements.

D.

In 20X4 an unused building was sold at a price in excess of its carrying value.

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Question # 10

In the year ended 31 December 20X7, FG leased a piece of machinery. The accountant of FG had prepared the financial statements for the year to 31 December 20X7 on the basis of the lease being an operating lease.

However, following the end of year audit it has been agreed that the machinery is in fact held under a finance lease and therefore the financial statements need to be corrected.

The correction will have which THREE of the following affects on the financial statements?

A.

Non-current assets will increase.

B.

Finance costs will increase.

C.

Current liabilities will increase.

D.

Non-current liabilities will decrease.

E.

Depreciation costs will decrease.

F.

Non-current assets will decrease.

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Question # 11

GG's gearing is currently 50% compared to the industry average of 40% (both measured as debt/equity). GG's debt is all in the form of a single bank loan that is repayable in five years' time. The directors of GG are seeking to raise finance for a new project and they are considering an additional bank loan from the same bank.

Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?

A.

A covenant on the existing bank loan that restricts the level of dividend that can be paid.

B.

A projected decrease in interest cover that would breach a covenant on the existing loan.

C.

The revaluation of GG's property that shows an increase in its value since the existing bank loan was taken out.

D.

A projected lack of profits to be able to claim tax relief on the additional interest arising from the new loan.

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Question # 12

Which of the following is NOT an example of an unconsolidated structured entity as defined in IFRS12 Disclosure of Interests in Other Entities?

A.

A post-employment benefit plan

B.

A securitisation vehicle

C.

An asset-backed financing scheme

D.

An investment fund

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Question # 13

ST acquired 75% of the 2 million $1 equity shares of CD on 1 January 20X3, when the retained earnings of CD were S3,550,000. CD has no other reserves.

ST paid $5,600,000 for the shares in CD and the non controlling interest was measured at its fair value of S1,400,000 at acquisition.

At 1 January 20X3, the fair value of CD's net assets were equal to their carrying amount, with the exception of a building. This building had a fair value of $1,000,000 in excess of its carrying amount and a remaining useful life of 25 years on 1 January 20X3.

At 31 December 20X5, the retained earnings of ST and CD were $8,500,000 and $5,250,000 respectively.

What is the value of goodwill to be included in the consolidated statement of financial position of ST as at 31 December 20X5?

A.

$450,000

B.

$1,450,000

C.

$950,000

D.

$570,000

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Question # 14

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

A.

Finance cost element of the lease payments

B.

Depreciation of the leased asset

C.

Lease payments paid

D.

Lease payments payable

E.

Capital repayment element of the lease payments

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Question # 15

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?

A.

Increase in the deferred tax asset.

B.

Increase in the deferred tax liability.

C.

Decrease in the deferred tax asset.

D.

Decrease in the deferred tax liability.

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Question # 16

KL sells luxury leather handbags and has 3 stores in exclusive shopping areas. Following years of static revenues and margins, in August 20X6 KL opened a fourth store at a busy airport terminal which is proving to be successful.

The revenue and gross profit of KL for the years ended 31 March 20X7 and 20X6 are as follows:

  F2 question answer

Which of the following would be a contributing factor to the movement in the gross profit margin of KL?

A.

A worldwide shortage of leather resulting in increased prices from suppliers.

B.

The opportunity to sell handbags in the airport store at a premium price.

C.

KL locating a new supplier prepared to supply handbags at a cheaper price.

D.

KL locating a new supplier closer to the warehouse, reducing distribution costs.

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Question # 17

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?

A.

Increase in the deferred tax asset.

B.

Increase in the deferred tax liability.

C.

Decrease in the deferred tax asset.

D.

Decrease in the deferred tax liability.

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Question # 18

JK has calculated its inventory holding period:

F2 question answer

Which THREE of the following would have contributed to the above movement in inventory holding period?

A.

JK's main supplier offered a significant one-off discount for purchases made in March 20X8.

B.

In January 20X8 a major competitor entered the market in which JK operates.

C.

A substantial contract is due to be dispatched early in April 20X8.

D.

JK is enforcing stringent inventory control techniques following management instructions.

E.

JK suffered industrial action by its production staff in the period December 20X7 to February 20X8.

F.

It has been difficult to obtain one of JK's main components due to import issues with its overseas supplier.

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Question # 19

LM has made the following share purchases during the year:

• Purchased 55% of the equity share capital of OP.

• Purchased 45% of the equity share capital of QR. LM have the power to appoint the majority of board members on the QR board.

• Purchased 30% of the equity share capital of ST. LM is represented by one director on the main board of ST which has five members in total. The other 70% of ST's equity share capital is owned by a single company, UV.

The Managing Director has told you that OP has performed well, but both QR and ST have not performed as expected. He is therefore pleased that OP will be included as a subsidiary and that QR and ST will only be included as investments in the group financial statements.

In accordance with the ethical principle of professional competence and due care how should the investments in OP, QR and ST be treated in the group financial statements?

A.

OP and QR should be consolidated and ST should be equity accounted.

B.

OP should be consolidated and QR and ST should be equity accounted.

C.

OP should be consolidated, QR should be equity accounted and ST should be valued at cost.

D.

OP and QR should be equity accounted and ST should be valued at cost.

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Question # 20

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?

A.

Bonus issue from the share premium account.

B.

Revaluation of investment property to an increased fair value. 

C.

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

D.

Issue of redeemable preference shares at par.

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Question # 21

UV entered into a five year non-cancellable operating lease for an asset two years ago. Lease payments are settled annually in arrears.

At the year end, UV no longer requires this leased asset as they have decided to discontinue the product line that it was used for.

At this date UV had made two out of the five lease payments.

Which of the following statements about the unavoidable lease payments is true in accordance with IAS 37 Provisions, Contingent Liabilities and Assets?

A.

A provision should be recognised for the unavoidable lease payments with a corresponding charge to profit or loss.

B.

A provision should be recognised for the unavoidable lease payments with a corresponding charge to other comprehensive income.

C.

The amount of the unavoidable lease payments should be disclosed in the financial statements with no corresponding accounting entry.

D.

The amount of the unavoidable lease payments should be ignored in the financial statements.

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Question # 22

In recent years EBITDA has been adopted by large entities as a key measure of performance. The following figures have been extracted from the financial statements of UV for the year ended 30 November 20X9:  

What is EBITDA for UV for the year ended 30 November 20X9?

Give your answer to the nearest $'000.

$ ? 000

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Question # 23

F has profit before interest and tax of $400,000 for the year to 30 June 20X4.

Extracts from F's statement of financial position at 30 June 20X4 are as follows:

  F2 question answer

Calculate the gearing (debt:equity) ratio at 30 June 20X4.

Give your answer to the nearest whole percentage.

 ?  %

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Question # 24

Mr. Rodgers is an accountant for JK Pic. He is asked to record a particular share-based payment in the company's accounts and obliges by debiting as an expense the first relevant account and crediting the

corresponding double-entry as a liability.

Which type of share-based payment has Mr. Rodgers recorded?

A.

Cash-settled in the future

B.

Cash-settled immediately

C.

Equity-settled immediately

D.

Equity-settled in the future

E.

Neither cash nor equity-settled

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Question # 25

XYZ had 600,000 ordinary shares in issue on 1 July 20X4. On 1 January 20X5, the entity made a 1 for 2 bonus issue. The profit attributable to ordinary shareholders for the year ended 30 June 20X5 was $2,925,000.

What is the basic earnings per share for the year ended 30 June 20X5?

A.

$3.25

B.

$4.88

C.

$1.63

D.

$3.90

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Question # 26

Which of the following principles are the basic principles followed by the consolidated income statement?

Select ALL that apply.

A.

Include all of the parent's income and expenses plus all of the subsidiaries' income and expenses

B.

Ignore investment income from subsidiary to parent (e.g. dividend payments or loan interest)

C.

After profit for the period, show the profit split between amounts attributable to the parent's shareholders and other shareholders

D.

Include all of the parent's income and expenses minus all of the subsidiaries' income and expenses

E.

Include investment income from subsidiary to parent (e.g. dividend payments or loan interest)

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Question # 27

Which of the following defines the calculation of interest cover?

A.

Profit before interest and tax divided by finance costs

B.

Finance costs divided by profit before interest and tax

C.

Profit after tax divided by finance costs

D.

Finance costs divided by profit after tax

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Question # 28

UV has raised $100,000 through the issue of two irredeemable financial instruments:

•  6% debentures with a current market value of $101.50 per $100 nominal value; and

•  8% preference shares with a current share price of $2.20 each.

The corporate income tax rate is 20% 

What is the post tax cost of debt for each of these instruments?

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Question # 29

RST sells computer equipment and prepares its financial statements to 31 December.

On 30 September 20X5 RST sold computer software along with a two year maintenance package to a customer. The customer is given the right to return the goods within six months and claim a full refund if they are not satisfied with the computer software. The risk of return is considered to be insignificant for RST.

How should the revenue from this transaction and the right of return be recognised in the financial statements for the year ended 31 December 20X5?

A.

Recognise 100% of the revenue from both the sale of goods and the maintenance contract and create a provision for the anticipated level of returns.

B.

Do not recognise any revenue from the sale of goods or the maintenance contract and do not create a provision for the anticipated level of returns.

C.

Recognise 12.5% of the revenue from both the sale of goods and the maintenance contract and do not create a provision for the anticipated level of returns.

D.

Recognise 100% of the revenue from the sale of goods,12.5% of the revenue from the maintenance contract and create a provision for the anticipated level of returns.

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Question # 30

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:

  F2 question answer

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?

A.

Increase in the deferred tax asset.

B.

Increase in the deferred tax liability.

C.

Decrease in the deferred tax asset.

D.

Decrease in the deferred tax liability.

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Question # 31

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 and CD? 

A.

Gross profit margin

B.

Return on capital employed

C.

Non current asset turnover

D.

Profit before tax margin

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Question # 32

On 1 September 20X3, GH purchased 200,000 $1 equity shares in QR for $1.20 each and classified this investment as held for trading.

GH paid a 1% transaction fee to its broker on this transaction. QR's equity shares had a fair value of $1.35 each on 31 December 20X3.

Which of the following journals records the subsequent measurement of this financial instrument at 31 December 20X3?

F2 question answer

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 33

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

A.

Finance cost element of the lease payments

B.

Depreciation of the leased asset

C.

Lease payments paid

D.

Lease payments payable

E.

Capital repayment element of the lease payments

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Question # 34

Following a wedding in October 20X0 ten people contracted food poisoning from eating food cooked by the wedding caterer PQ. At 31 December 20X0 PQ was advised by its legal advisors that a liability was possible but not probable and the incident was disclosed as a contingent liability at that date.

As the result of developments in the case, which is still not settled, PQ was advised that it is now probable, as at 31 December 20X1, that they will be found liable and will therefore have to pay damages of unknown value.

Which of the following would indicate that in the financial statements of PQ for the year ended 31 December 20X1 this should still be recognised as a contingent liability rather than a provision?

A.

There is no reliable estimate of the cost.

B.

A present obligation exists as a result of a past event.

C.

It is probable that there will be an outflow of economic resources to settle the case.

D.

The case has not yet been settled.

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Question # 35

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?

A.

23.8 cents

B.

36.8 cents

C.

26.3 cents

D.

29.4 cents

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Question # 36

ST has in issue unquoted 7% debentures which were issued at 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?

A.

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

B.

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

C.

The debentures will be redeemed at their par value.

D.

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

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Question # 37

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?

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Question # 38

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?

A.

Associate

B.

Joint venture

C.

Joint arrangement

D.

Financial asset

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Question # 39

GH's financial statements show the following:

  

What is the value of the dividend received from the associate to be included in GH's consolidated statement of cash flows for the year?

Give your answer to the nearest $000.

 $ ? 000

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Question # 40

AB acquired 10% of the equity share capital of XY on 1 January 20X7 for $180,000 when the fair value of XY's net assets was $190,000.  On 1 January 20X9 AB purchased a further 50% of the equity share capital for $550,000 when the fair value of XY's net assets was $820,000.  

The original 10% investment had a fair value of $200,000 at the date control of XY was gained.  The non controlling interest in XY was measured at its fair value of $300,000 at 1 January 20X9.

Which of the following represents the correct value of goodwill arising on the acquisition of XY that would have been included by AB when it prepared its consolidated financial statements at 31 December 20X9?

A.

$230,000

B.

$30,000

C.

$210,000

D.

$40,000

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Question # 41

AB acquired a financial investment on 1 January 20X9, incurring $5,000 related agency fees.  AB initially classified the investment as held for trading, in accordance with IAS 32 Financial Instruments: Presentation.

Which of the following statements reflects the accounting treatment that AB adopted in respect of this investment when it prepared its financial statements to 31 December 20X9?

A.

Agency fees were recorded as an expense and the gain/loss on the remeasurement of the investment at the year end was recorded in profit or loss for the year.

B.

Agency fees were recorded as an expense and the gain/loss on the remeasurement of the investment at the year end was recorded in other comprehensive income.

C.

Agency fees were added to the cost of the investment and the gain/loss on the remeasurement of the investment at the year end was recorded in profit or loss for the year.

D.

Agency fees were added to the cost of the investment and the gain/loss on the remeasurement of the investment at the year end was recorded in other comprehensive income.

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Question # 42

LM are just about to pay a dividend of 20 cents a share. Historically, dividends have grown at a rate of 5% each year.

The current share price is $3.05.

The cost of equity using the dividend valuation model is:

A.

12.4%

B.

11.9%

C.

7.4%

D.

6.9%

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Question # 43

The following information is extracted from the financial statements of RS for the year ended 30 June 20X7:

F2 question answer

RS has no other liability balances and has no associate investments.

Calculate return on capital employed for RS at 30 June 20X7.

Give your answer to the nearest whole %.

 ?  %

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Question # 44

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?

A.

17.6%

B.

16.1%

C.

12.5%

D.

11.1%

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Question # 45

EF has redeemable 10% bonds which are currently trading at $94.00 for each $100 of nominal value. The bonds can be redeemed at par in five years' time. The corporate income tax rate is 22%.

The present value of the cash flows associated with $100 nominal value of these bonds at a discount rate of 7% is $9.28.

Calculate the post tax cost of debt.

Give your answer as a percentage to one decimal place.

   %

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Question # 46

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?

A.

17.6%

B.

16.1%

C.

12.5%

D.

11.1%

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Question # 47

XY has a weighted average cost of capital (WACC) of 10% based on its gearing level (measured as debt/debt+equity) of 40%.  It is considering a signficant new project. 

In which of the following situations would it be appropriate to appraise this project using XY's existing WACC of 10%?

A.

The project is in a different industry to XY's current operations and funded entirely by equity.

B.

The project is an extension of XY's current operations and is funded 40% by debt and 60% by equity.

C.

The project is an extension of XY's current operations and is funded by equal amounts of debt and equity.

D.

The project is in a different industry to XY's current operations and is funded by equal amounts of debt and equity.

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Question # 48

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?

A.

$25,000

B.

$125,000

C.

$100,000

D.

$0

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Question # 49

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.

A$75,758.

B.

A$66,667.

C.

A$150,000.

D.

A$132,000.

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Question # 50

The yield to maturity of a redeemable bond is calculated as the internal rate of return of the relevant cash flows associated with the bond. 

Which TWO of the following are considered relevant cash flows in this calculation?

A.

The annual interest payments net of tax relief.

B.

The redemption value of the bond at the date of redemption.

C.

The market value of the bond now.

D.

The nominal value of the bond now.

E.

The value of the conversion premium on conversion to equity shares.

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Question # 51

The consolidated statement of profit or loss for VW for the year ended 30 September 20X7 includes the following:

What is VW's interest cover for the year ended 30 September 20X7?

A.

4.5

B.

3.3

C.

4.1

D.

5.1

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Question # 52

CD reported a balance of $3,000,000 for property, plant and equipment in its individual financial statements at 31 December 20X8.

Calculate the value of the property, plant and equipment that will be included in CD's consolidated statement of financial position. 

Give your answer to the nearest $000.

 $?  000

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Question # 53

XY owned 80% of the equity share capital of AB at 1 January 20X5.  XY disposed of 20% of AB's equity share capital on 31 December 20X5 for $200,000.  The non controlling interest was measured at $140,000 immediately prior to the disposal.  

What was the amount of the credit to retained earnings that XY will process in respect of this disposal when it prepares its consolidated financial statements at 31 December 20X5?

A.

$60,000

B.

$140,000

C.

$200,000

D.

$80,000

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Question # 54

LM is preparing its consolidated financial statements for the year ended 30 April 20X5. During the year LM acquired 30% of the equity shares of AB giving it significant influence over AB.

LM conducted ratio analysis comparing the financial performance of the group for 30 April 20X4 and 20X5.

Which of the following ratios would not be comparable as a result of the acquisition of AB? 

A.

Operating profit margin.

B.

Return on capital employed.

C.

Earnings per share.

D.

Interest cover.

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Question # 55

LM is a car dealer that is supplied inventory by car manufacturer SQ. Trading between LM and SQ is subject to a contractual agreement. This agreement states the following:

• Legal title of the cars remains with SQ until they are sold by LM to a third party. 

• Upon notification of sale to a third party by LM, SQ raises an invoice at the price agreed at the original date of delivery to LM. 

• LM has the right to return any car at any time without incurring a penalty. 

• LM is responsible for insuring all of the cars on its property.

When considering how these cars should be accounted for, which THREE of the following statements are true?

A.

The most significant risks attached to the cars are held by LM.

B.

The most significant risks attached to the cars are held by SQ.

C.

SQ should recognise the cars as inventory in their financial statements.

D.

LM should recognise the cars as inventory in their financial statements.

E.

SQ should recognise revenue when the cars are delivered to LM.

F.

When LM sells a car to a third party, SQ should recognise the revenue associated with that sale.

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Question # 56

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.

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

B.

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.

C.

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

D.

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

E.

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

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Question # 57

At 31 October 20X1 RS has in issue 10% debentures 20X8 with a carrying value of $350,000.

Extracts from its statement of profit or loss for the year ending 31 October 20X7 are as follows:

  F2 question answer

What is the interest cover for RS for the ended 31 October 20X7?

A.

9.0 times

B.

11.1 times

C.

10.0 times

D.

8.0 times

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Question # 58

Which of the following would cause a deferred tax balance to be included in the statement of financial position for an entity?

A.

Expenses in the statement of profit or loss which are not allowable for tax creating a permanent difference.

B.

The acquisition of land for which there is no tax depreciation.

C.

The acquisition of plant and equipment a year ago where the tax depreciation rate is different to the accounting depreciation rate.

D.

Impairment of goodwill that arose on the acquisition of a subsidiary entity.

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Question # 59

Which TWO of the following are relevant ethical considerations when selecting an accounting policy?

A.

It shows faithful representation of the financial statements.

B.

It shows a favourable view of performance.

C.

It is in accordance with International Financial Reporting Standards.

D.

It is straightforward to implement.

E.

It maximises shareholder wealth.

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Question # 60

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

A.

Credit rating agencies assign risk categories to bond issues.

B.

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

C.

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

D.

All bonds have the same terms and conditions when issued.

E.

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

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Question # 61

FGH plans to issue a large number of shares to the public via an IPO.

It is considering either an offer for sale at a fixed price or an offer for sale by tender.

Which of the following would be an advantage to FGH of using the offer for sale by tender compared to the fixed price offer?

A.

The shares will be sold to different investors at differing values thus maximising the capital raised.

B.

There would be more certainty over the issue price of the shares.

C.

There is potential for reaching a higher share price thus maximising capital raised.

D.

Tenders are more attractive to less sophisticated investors thus maximising potential investment.

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Question # 62

The following information relates to DEF for the year ended 31 December 20X7:

• Property, plant and equipment has a carrying value of $3,500,000 and a tax written down value of $2,500,000.

• There are unused tax losses to carry forward of $1,250,000. These tax losses have arisen due to poor trading conditions which are not expected to improve in the foreseeable future.

• The corporate income tax rate is 25%.

In accordance with IAS 12 Income Taxes, the financial statements of DEF for the year ended 31 December 20X7 would recognise deferred tax balances of:

F2 question answer

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 63

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.

F2 question answer

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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Question # 64

Which of the following statements are incorrect regarding identifiable assets? Select ALL that apply.

A.

Deferred tax assets and liabilities are not classed as identifiable assets

B.

Contingent assets and liabilities are examples of exceptions to the rules governing identifiable assets

C.

To be identifiable assets must be separable from the subsidiary

D.

Assets can also be identifiable if they arise from contractual or legal rights

E.

Net assets must be identifiable at acquisition

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Question # 65

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?

A.

Associate

B.

Joint venture

C.

Joint arrangement

D.

Financial asset

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Question # 66

PQ entered into a $300,000 contract on 1 January 20X9 to provide computer hardware to WX with support services for the 3 years from the date of installation.

The contract is made up as follows: 

F2 question answer

The hardware was delivered to WX on 1 January 20X9 and installed immediately. WX paid the full value of the contract on 30 June 20X9.

What journal entry records PQ's revenue from this contract for the year ended 31 December 20X9?

F2 question answer

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 67

ST has in issue unquoted 7% debentures which were issued at 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?

A.

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

B.

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

C.

The debentures will be redeemed at their par value.

D.

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

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Question # 68

The dividend yield of ST has fallen in the year to 31 May 20X5, compared to the previous year.

The share price on 31 May 20X4 was $4.50 and on 31 May 20X5 was $4.00.  There were no issues of share capital during the year.

Which of the following should explain the reduction in the dividend yield for the year to 31 May 20X5 compared to the previous year?

A.

The dividend paid in the year was reduced in order to pay for new assets.

B.

Surplus cash was used to pay a special dividend in addition to the normal dividend in the year.

C.

The profit for the year fell significantly and the dividend per share stayed the same.

D.

To compensate investors for the reduction in share price a higher dividend per share was paid.

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Question # 69

XY purchased $100,000 of quoted 8% bonds in the current year which it intends to hold until redemption.

Which of the following identifies the correct classification and subsequent measurement basis for this financial instrument?

A.

A loans and receivables financial asset subsequently measured at fair value with gains and losses in reserves.

B.

A held to maturity financial asset subsequently measured at amortised cost.

C.

A loans and receivables financial asset subsequently measured at amortised cost.

D.

A held to maturity financial asset subsequently measured at fair value with gains and losses in reserves.

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Question # 70

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 successful in this claim.

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

A.

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

B.

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

C.

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

D.

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

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Question # 71

XY has in issue a 6% convertible bond which is redeemable at par or convertible into equity shares in one year's time.  The conversion terms are 20 equity shares for each $100 of convertible bond. The conversion value in one year's time is expected to be $105 per $100 nominal of the bond based on the current share price of $5.25.

Which of the following statements about the bond is correct?

A.

The yield to maturity of the convertible bond is a constant 6%.

B.

The bond will be converted into equity shares in one year's time if the share price does not change.

C.

XY's post tax cost of debt for the convertible bond will be higher than the yield to maturity.

D.

If the bond is redeemed rather than converted that means that the investor will receive $105 for each $100 of nominal value.

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Question # 72

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 successful in this claim.

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

A.

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

B.

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

C.

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

D.

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

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Question # 73

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

  

At 30 April 20X9 the ordinary shares are trading at $4.75.

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

A.

15.83

B.

7.92

C.

10.56

D.

9.31

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Question # 74

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?

F2 question answer

A.

Option A

B.

Option B

C.

Option C

D.

Option D

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Question # 75

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?

A.

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

B.

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

C.

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

D.

The currency is Dollar in Country X and Krona in Country Y.

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Question # 76

GG's gearing is currently 50% compared to the industry average of 40% (both measured as debt/equity). GG's debt is all in the form of a single bank loan that is repayable in five years' time. The directors of GG are seeking to raise finance for a new project and they are considering an additional bank loan from the same bank.

Which of the following would prevent the bank from lending the finance for the project in the form of a new bank loan?

A.

A covenant on the existing bank loan that restricts the level of dividend that can be paid.

B.

A projected decrease in interest cover that would breach a covenant on the existing loan.

C.

The revaluation of GG's property that shows an increase in its value since the existing bank loan was taken out.

D.

A projected lack of profits to be able to claim tax relief on the additional interest arising from the new loan.

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Question # 77

Taking each statement individually, which of the following explains the movement in the gross profit margin from 20X4 to 20X5 as calculated by the analysts?

A.

Increase in the levels of closing inventory of raw materials.

B.

Reduction in the cost of raw materials NOT passed onto customers.

C.

Prompt payment discounts no longer offered to customers.

D.

Increase in the volume of sales over the year.

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Question # 78

CD granted 1,000 share options to its 100 employees on 1 January 20X8.To be eligible, employees must remain employed for 3 years from the grant date. In the year to 31 December 20X8, 15 staff left and a further 25 were expected to leave over the following two years.

The fair value of each option at 1 January 20X8 was $10 and at 31 December 20X8 was $15.

Which THREE of the following are true in respect of recording these share options in the year ended 31 December 20X8?

A.

The credit entry will be to equity.

B.

The credit entry will be to non-current liabilities.

C.

Fair value at 1 January 20X8 will be used to value the options.

D.

Fair value at 31 December 20X8 will be used to value the options.

E.

The calculation of the charge for the year will be adjusted for actual leavers only.

F.

The calculation of the charge for the year will be adjusted for actual and estimated leavers.

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Question # 79

On 30 November 20X9 OPQ acquires a financial asset that is classified as Available for Sale.

Which of the following describes the value of the financial asset on the date of acquisition?

A.

Fair value excluding transaction costs.

B.

Fair value including transaction costs.

C.

Present value including transaction costs.

D.

Present value excluding transaction costs.

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Question # 80

ST has in issue unquoted 7% debentures which were issued at 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?

A.

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

B.

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

C.

The debentures will be redeemed at their par value.

D.

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

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