Applied Skills

Financial
Reporting

Mock Exam 2 – Questions

Time allowed: 3 hours

This examination is divided into three sections:
Section A
 15 objective test (OT) questions, each worth 2 marks
 30 marks in total
Section B
 Three OT cases, containing a scenario which relates to five OT
questions, each worth 2 marks
 30 marks in total
Section C
 Two constructed response questions, each containing a
scenario which relates to one or more requirement(s)
 Each constructed response question is worth 20 marks in total
 40 marks in total

©2022 ACCA All rights reserved

Section A
This section of the exam contains 15 objective test (OT) questions.
Each question is worth 2 marks and is compulsory.
This exam section is worth 30 marks in total.
1 A draft statement of cash flows contains the following calculation of net cash inflow from
operating activities:
$m
Operating profit 13
Depreciation 2
Decrease in inventories (3)
Decrease in trade and other receivables 5
Decrease in trade payables 4
–––
Net cash inflow from operating activities 21

Which TWO of the following corrections need to be made to the calculation?

Depreciation should be deducted, not added

Decrease in inventories should be added, not deducted

Decrease in receivables should be deducted, not added

Decrease in payables should be deducted, not added

2 Hood Co has a five-year contract to construct a new road for a government agency. The
contract meets the requirements of IFRS® 15 Revenue from Contracts with Customers for
revenue to be recognised over time. Revenue is recognised using an input method, based
on costs. The sales price of the contract is $5m and Hood Co estimates the total cost of
the contract to be $4m. Hood Co incurred costs of $500,000 in year 1, $1m in each of
years 2 and 3 and $750,000 in each of years 4 and 5. These costs do not meet
capitalisation criteria.
What amount of profit would Hood Co recognise on the contract in year 4?
 $187,500
 $200,000
 $812,500
 $1,000,000

3 Identify, by clicking on the relevant box in the table below, whether each of the
following topics is included in or excluded from the IFRS Conceptual Framework
for Financial Reporting?

The objective of general purpose financial reporting INCLUDED EXCLUDED

Concepts of capital maintenance INCLUDED EXCLUDED
Regulatory bodies governing financial statements INCLUDED EXCLUDED
Measurement of the elements of financial statements INCLUDED EXCLUDED

 2022 ACCA FR-Mock 2-Questions 3

4 Austen Co has owned 80% of Kipling Co and 30% of Dickens Co for many years. At
31 December 20X6, the trade receivables and trade payables shown in the individual
companies’ statements of financial position were as follows:
Austen Co Kipling Co Dickens Co
$000 $000 $000
Trade receivables 50 30 40
Trade payables 30 15 20
–––– –––– ––––
Trade payables comprised
Amounts owing to
Austen Co – – –
Kipling Co 2 – 4
Dickens Co 3 – –
Other suppliers 25 15 16
–––– –––– ––––
30 15 20
–––– –––– ––––
The intra-group accounts agreed after taking into account the following:
(1) An invoice for $3,000 posted by Kipling Co on 31 December 20X6 was not
received by Austen Co until 2 January 20X7
(2) A cheque for $2,000 posted by Austen Co on 30 December 20X6 was not
received by Dickens Co until 4 January 20X7
What amount should be shown as trade receivables in the consolidated
statement of financial position of the Austen group?

$ 000

5 Recognition is the process of capturing for inclusion in the financial statements an item
that meets the definition of one of the elements of financial statements.
Identify, by clicking on the relevant boxes in the table below, which of the
following elements should be recognised in the financial statements in the
manner described.

As a non-current liability: a provision for possible NOT

hurricane damage to property located in a high risk RECOGNISED
RECOGNISED
hurricane area

In equity: irredeemable preference shares NOT

RECOGNISED RECOGNISED
As a trade receivable: $10,000 due from a customer NOT
which has been sold (factored) to a finance company RECOGNISED
RECOGNISED
with no recourse to the seller
In revenue: the entire proceeds from the sale of an NOT
item of plant which has to be maintained by the seller RECOGNISED
RECOGNISED
for three years as part of the sale agreement

 2022 ACCA FR-Mock 2-Questions 4

6 The draft accounts of Swan Co for the year ended 31 December 20X6 include the
following:
Revenue $240m
Gross profit $60m

It was subsequently discovered that the revenue was overstated by $30m and the closing
inventory understated by $10m.
What will the gross profit percentage be after the correction of the above errors?
 9.5%
 14.3%
 19.0%
 29.2%

7 GY Co made a number of changes during the financial year to 30 September 20X6.

Classify each of the following in accordance with IAS® 8 Accounting Policies,
Changes in Accounting Estimates and Errors, by clicking on the relevant boxes.

Up to 30 September 20X5, GY Co CHANGE IN CHANGE IN PRIOR

measured inventory on a FIFO basis. It ACCOUNTING ACCOUNTING PERIOD
now uses a weighted average basis as this POLICY ESTIMATE ERROR
is more widely used in GY Co’s industry
sector
Depreciation of vehicles was changed from CHANGE IN CHANGE IN PRIOR
straight line to reducing balance from 1 ACCOUNTING ACCOUNTING PERIOD
October 20X5 POLICY ESTIMATE ERROR
On 1 March 20X6, GY Co changed an CHANGE IN CHANGE IN PRIOR
output method for measuring the progress ACCOUNTING ACCOUNTING PERIOD
of the satisfaction of a performance POLICY ESTIMATE ERROR
obligation to an input method
GY Co identified that loan interest relating CHANGE IN CHANGE IN PRIOR
to a qualifying asset had been expensed to ACCOUNTING ACCOUNTING PERIOD
profit or loss in 20X4, rather than POLICY ESTIMATE ERROR
capitalised

8 On 1 January 20X5, Dupont Co issued $6m 6% convertible debt at par. Interest is payable
annually in arrears on 31 December each year. The debt is redeemable at a premium of
10%, at the option of the holder, in four years’ time, on 31 December 20X8. An
equivalent loan without the conversion rights would have an interest rate of 12%.
The present values $1 receivable at the end of each year, based on discount rates of 6%,
10% and 12% are:
6% 10% 12%
End of year 1 0.943 0.909 0.893
2 0.890 0.826 0.797
3 0.840 0.751 0.712
4 0.792 0.683 0.636

Present value of an annuity factor after four years 3.465 3.169 3.038

What will be the value of the debt in Dupont Co’s statement of financial position
at 31 December 20X6 (to the nearest $000)?
 $6,600,000
 $5,874,000
 $5,566,000
 $5,291,000

 2022 ACCA FR-Mock 2-Questions 5

9 Welbeck Co owns two properties, property 1 and property 2. As economic circumstances
have worsened recently, Welbeck Co has carried out an impairment review of its
properties. The values calculated during the review as at 31 October 20X6 are as follows:
Carrying amount Fair value less Value in use
costs of disposal
$000 $000 $000
Property 1 1,650 1,500 1,400
Property 2 2,500 2,300 2,600

Match the carrying amounts of the properties in the statement of financial

position of Welbeck Co as at 31 October 20X6, after any impairment loss has
been recognised in accordance with IAS 36 Impairment of Assets.

Carrying amount Property 1 Property 2

$1,400,000

$1,500,000

$2,300,000

$2,500,000

$2,600,000

10 For the year ended 30 April 20X6, Hop Co and its 90% subsidiary Skip Co had the
following trading accounts:
Hop Co Skip Co
$ $
Revenue 100,000 46,000
Cost of sales (70,000) (34,500)
––––––– –––––––
Gross profit 30,000 11,500
––––––– –––––––
Notes:
(1) Goods purchased by Skip Co at a cost of $9,000 were sold to Hop Co at a mark-
up of 50%.
(2) Hop Co had sold two-thirds of these goods by the year end.
What will the revenue figure be in the consolidated statement of profit or loss for
the year ended 30 April 20X6?

11 IAS 16 Property, Plant and Equipment deals with the recognition and measurement of
tangible non-current assets. One of the issues covered by IAS 16 is the depreciation of
those non-current assets.
Which of the following statements best describes the purpose of depreciating
non-current assets?
 To set aside funds for the eventual replacement of non-current assets
 To determine the current value of non-current assets
 To measure the fall in value of the non-current asset during the current period
 To allocate the cost of a non-current asset over that asset’s useful life

 2022 ACCA FR-Mock 2-Questions 6

12 HA Co acquired 80% of SB Co’s equity shares on 1 September 20X6 for $185,000. The
values of SB Co’s assets at that date were:
Carrying amount Fair value
$000 $000
Property 100 115
Plant and equipment 75 70

On 1 September 20X6, all other assets and liabilities had a fair value approximately equal
to their carrying amounts.
Non-controlling interest is measured at fair value at the date of acquisition at $42,000 in
accordance with group policy.
SB Co’s equity at 1 September 20X6 was:
$000
$1 equity shares 150
Share premium 15
Retained earnings (20)

What was the value of goodwill on the acquisition of SB Co?

 $61,000
 $67,000
 $72,000
 $82,000

13 The objective of IAS 23 Borrowing Costs is to prescribe the accounting for costs associated
with the borrowing of funds.
Which of the following statements in respect of IAS 23 is correct?
 Capitalisation of borrowing costs is not allowed even if the costs are directly
attributable to the acquisition, construction or production of a qualifying asset
 Capitalisation of borrowing costs is optional for costs that are directly attributable
to the acquisition, construction or production of a qualifying asset
 Capitalisation of borrowing costs is mandatory if the costs are directly
attributable to the acquisition, construction or production of a qualifying asset
 Capitalisation of borrowing costs is mandatory at all times

14 Identify, by clicking on the relevant box in the table below, whether each of the
following material matters should be adjusted or not in a company’s financial
statements for the year ended 30 June 20X6, which are to be authorised for issue
in September 20X6.

The sale in August 20X6 for $520,000 of inventory ADJUSTED NOT ADJUSTED
carried in the statement of financial position at
$500,000. The normal selling price for these items
was $700,000
Serious fire damage to a factory with a carrying ADJUSTED NOT ADJUSTED
amount of $3m in July 20X6. The factory resumed
production by August 20X6 but its value was reduced
to $2m
The company issued one million equity shares in ADJUSTED NOT ADJUSTED
August 20X6
The determination in July 20X6 of management’s ADJUSTED NOT ADJUSTED
profit sharing bonus for which no provision had been
made as at 30 June 20X6

 2022 ACCA FR-Mock 2-Questions 7

15 At 30 November 20X6, the carrying amount of the non-current assets of Reynard Co was
$3,570,000 and the tax written down value was $2,450,000. The liability balance for
deferred tax at 1 December 20X5 was $250,000.
The tax rate is 22%.
For the year ended 30 November 20X6 what should be reported in the profit or
loss in respect of deferred tax?

Select… 
$3,600 credit
$3,600 debit
$246,400 credit
$246,400 debit

 2022 ACCA FR-Mock 2-Questions 8

Section B
This section of the exam contains three OT cases.
Each OT case contains a scenario which relates to five OT questions.
Each question is worth 2 marks and is compulsory.
This exam section is worth 30 marks in total.

The following scenario relates to questions 16–20.

On 1 October 20X6, Pluto Co acquired 80% of Saturn Co’s equity shares by means of a share
exchange of three new shares in Pluto Co for every four acquired shares in Saturn Co. In addition,
Pluto Co agreed to pay a further $8.8m in cash on 1 October 20X7. Pluto Co’s cost of capital is
10%.
The market value of Pluto Co’s shares at 1 October 20X6 was $3 each share, and the market value
of Saturn Co’s share on the same date was $1.60 per share.
The fair value of an item of Saturn Co’s machinery was $2m in excess of its carrying amount on 1
October 20X6. On that date, the machine had a remaining useful life of four years.
On 1 January 20X7 Pluto Co paid $7.25m to acquire 30% of the share capital of Aries Co, this
holding allowed Pluto Co to exert significant influence over Aries Co.
Extracts of the statements of financial position of the three companies as at 31 March 20X7 are:
Pluto Co Saturn Co Aries Co
$000 $000 $000
Non-current assets
Property, plant and equipment 59,300 27,100 30,600
–––––– –––––– ––––––
Equity shares of $1 each 50,000 40,000 20,000
Retained earnings/(losses) – at 1 April 20X6 22,200 (1,000) 6,300
– for year ended 31 March 20X7 7,400 9,000 3,200

Earnings accrued evenly throughout the year ended 31 March 20X7.

 2022 ACCA FR-Mock 2-Questions 9

16 What is the cost of investment in Saturn Co to be included in Pluto Co’s statement
of financial position?
 $98m
 $80.8m
 $80m
 $46.4m
17 What is the value of investment in associate at 31 March 20X7?

$ 000
18 What is the carrying amount of property, plant and equipment in Pluto Co’s
consolidated statement of financial position as at 31 March 20X7?
 $87,900,000
 $88,150,000
 $97,330,000
 $118,750,000

19 In addition to the current 30% shareholding in Aries Co, Pluto Co has an option to acquire
a further 30% equity shareholding in Aries Co that will be exercisable in 20X8.
Which of the following statements regarding how the options will affect the
assessment of control is correct?
 The options are relevant to an assessment of control only when they are
exercised
 Pluto Co will achieve control over Aries Co when the options become exercisable
in 20X8 even if they are not exercised
 Share options are never taken into account when assessing control by a parent
over a subsidiary
 An investor cannot have power over an investee if it does not hold a majority of
equity shares
20 Pluto Co is considering acquiring other subsidiary and estimates that transaction costs of
$3m would be incurred in this acquisition. These costs consist of $1m share issue costs
and $2m relating to due diligence work.
Which of the following is the correct treatment of the transaction costs?
 Expense $3m to profit or loss
 Add $3m to the cost of investment
 Expense $2m to profit or loss and debit $1m direct to equity
 Debit $3m to share premium

 2022 ACCA FR-Mock 2-Questions 10

The following scenario relates to questions 21–25.
On 1 January 20X6, Darton Co acquired a machine under the following terms:
$000
Manufacturer’s base price 935
Transport costs 10
Site preparation 5
Staff training in use of machine (incurred in January and February) 20
Purchase of a three-year service contract 12
Estimated residual value 50

Useful life 10 years

On 20 December 20X6, Darton Co purchased a crane hoist, from a foreign supplier, for Kr220,000
when the exchange rate was $1 = Kr2.25. At the 31 December, Darton Co had still not paid for the
crane hoist and the exchange rate on that date was now $1 = Kr2.30.
Darton Co held a property that originally cost $20m and had a carrying amount of $8m at 1 July
20X6. On 1 July 20X6, it vacated the property and rented it to another entity. The property now
meets the definition of investment property and its fair value at 1 July 20X6 was $9m.

 2022 ACCA FR-Mock 2-Questions 11

21 What is the total expense charged to profit or loss for the year ended 31
December 20X6 in respect of the machine acquired on 1 January 20X6?
 $122,000
 $114,000
 $94,000
 $90,000

22 At what cost should the crane hoist be recognised in the statement of financial
position at 31 December 20X6 (to the nearest $000)?

$ 000
23 How will the transfer from owner-occupied property to investment property be
measured at 1 July 20X6?
 At $8m
 At $9m with gain of $1m included in profit or loss
 At $8m with deferred income of $1m recognised over its remaining life
 At $9m with gain of $1m recognised in other comprehensive income

24 Darton Co has an asset that requires a major overhaul every four years, the estimated
cost of the overhaul is $10m.
Use the tokens to complete the following description in accordance with IAS 16
Property, Plant and Equipment.
To account for the overhaul cost, Darton Co
should when .

TOKENS

capitalise the present value the asset is put

of $10m into use

recognise a $10m the cost is incurred

provision of

25 Darton Co is about to take out a loan to finance the construction of a new office building
that will be occupied by administration staff; the building meets the definition of a
qualifying asset.
In accordance with IAS 23 Borrowing Costs when must Darton Co cease
capitalisation of any borrowing costs in respect of the office building?
 When the office is substantially complete and ready for occupation
 When the office starts to generate economic benefits
 When the borrowing has been repaid
 If construction of the office is suspended due to industrial action by the workforce

 2022 ACCA FR-Mock 2-Questions 12

The following scenario relates to questions 26–30.
The following information relates to transactions of ZeBe Co.
On 1 July 20X6, ZeBe Co classified a factory as held for sale in accordance with IFRS 5 Non-current
Assets Held for Sale and Discontinued Operations. At 1 January 20X6, the carrying amount of the
factory was $26,200 and annual depreciation was $4,000. At 1 July 20X6, the fair value of the
factory was $24,100 and costs to sell the asset were $3,100.
Inventory of ZeBe Co was counted on 4 January 20X7 and amounted to $27,400. Between 1
January and 4 January 20X7 the following transactions occurred:
Goods were purchased with a value of $6,300
Goods were sold for $3,565; ZeBe Co applies a mark-up of 15% to all goods sold.
On 1 January 20X5, ZeBe Co entered into a lease contract for an asset; the initial amount
recognised for the lease liability was $54,195. The agreement requires ZeBe Co to make four
annual payments in arrears of $16,000. The interest rate implicit in the lease is 7%.
26 What is the carrying amount of the held for sale factory at 1 July 20X6 after
applying IFRS 5 Non-current Assets Held for Sale and Discontinued Operations?

$
27 What is the value of Inventory included in ZeBe Co’s statement of financial
position at 31 December 20X6?
 $24,130
 $24,200
 $24,665
 $30,600

28 What is the total lease liability in ZeBe Co’s statement of financial position at 31
December 20X6?
 $41,989
 $30,048
 $28,928
 $26,610

29 ZeBe Co is about to lease an asset for a period of four months.

Identify, by clicking on the relevant boxes, whether or not the following
accounting treatments are allowed in accordance with IFRS 16 Leases.

Capitalise the right-of-use asset ALLOWED NOT ALLOWED

Recognise lease payments in profit or loss on a ALLOWED NOT ALLOWED
systematic basis
Recognise lease rentals in profit or loss when the ALLOWED NOT ALLOWED
lease contract is signed

30 In accordance with IFRS 5 Non-current Assets Held for Sale and Discontinued
Operations, which TWO of the following criteria must be met for a factory to be
classified as held for sale?

Management decide to abandon the factory

The sale of the factory is expected to take place in 18 months’ time

The factory has been advertised for sale in a national trade journal

Only minor changes are expected on the current disposal plans

 2022 ACCA FR-Mock 2-Questions 13

Section C
This section of the exam contains two constructed response questions.
Each question contains a scenario which relates to one or more requirement(s).
Each question is worth 20 marks and is compulsory.
This exam section is worth 40 marks in total.
31 This scenario relates to three requirements.
Heywood Bottles Co manufactures bottles for many different drinks companies.
The financial statements for the year ended 31 March 20X7 (and the comparative figures) are shown
below:
Statements of financial position as at 31 March
20X7 20X6
$m $m $m $m
Non-current assets
Land and buildings 5 5
Plant and equipment (note (1)) 58
___ 38
___

63 43
Current assets
Inventory 18 12
Receivables 94 25
Deferred expenditure 6 –
Bank –
___ 8
___
118
___ 45
___

Total assets 181

___ 88
___

Equity and liabilities

Equity shares of $1 each 25 25
Other components of equity 10 11
Retained earnings (12)
___ 8
___
(2)
___ 19
___

23 44
Non-current liabilities (note (2)) 32 19
Current liabilities
Trade payables 80 15
Others 12 10
Bank 34
___ –
___
126
___ 25
___

Total equity and liabilities 181 88

___ ___

The following notes are relevant:

(1) Plant and equipment is made up as follows:

At 31 March 20X7 20X6

$m $m
Owned plant 18 10
Right-of-use plant 40 28

(2) Non-current liabilities are leasing obligations.

 2022 ACCA FR-Mock 2-Questions 14

 Statements of profit or loss for the years ended 31 March
20X7 20X6
$m $m $m $m
Revenue 300 120
Manufacturing costs 261 83
Depreciation 9 7
___ ___
Cost of sales (270) (90)
___ ___
Gross profit 30 30
Other expenses 28 10
Interest 10
___ (38)
___ 2
___ (12)
___

Profit/(loss) before tax (8) 18

Income tax expense (4)
___ (6)
___

Profit/(loss) after tax (12) 12

___ ___

The directors were disappointed in the profit for the year to 31 March 20X6 and held a board
meeting in April 20X6 to discuss future strategy. The managing director was insistent that the way
to improve results was to increase sales and market share. As a result, the following actions were
implemented:
(i) An aggressive marketing campaign through trade journals that cost $12m. Due to
expected long-term benefits $6m of this has been included as a current asset in the
statement of financial position at 31 March 20X7;

(ii) A “price promise” to undercut any other supplier’s price was announced in the advertising
campaign;

(iii) A major contract with Koola Drinks was signed that accounted for a substantial proportion
of the company’s output. This contract was obtained through very competitive tendering.

(iv) The credit period for customers was extended from two months to three months.
The board’s preliminary review of the accounts to 31 March 20X7 concluded that performance had
deteriorated rather than improved. There was particular concern over the prospect of renewing the
bank overdraft facility because the maximum agreed level of $30m had been exceeded.
Requirements:
(a) Calculate appropriate ratios and comment on the profitability, liquidity and
solvency of Heywood Bottles Co for the year ending 31 March 20X7. Your
analysis should consider the impact of the actions taken by the board during the
year.

Note: Six marks are available for ratio calculations. (14 marks)
(b) Explain what further information you might require to make your analysis more
meaningful. (3 marks)
(c) Due to the poor performance during the year, one of the directors suggested that the long-
term lease contracts should be converted into 12-month leases that could be renewed
each year. He stated that this would improve both return on capital employed and gearing
ratios.

Briefly comment on the director’s suggestion of converting the long-term leases

into short-term leases. (3 marks)

(20 marks)

 2022 ACCA FR-Mock 2-Questions 15

32 This scenario relates to three requirements.
The following list of account balances relates to Vincible Co at 31 December 20X6:
$000 $000
Sales revenue 473,300
Purchases 310,500
Operating expenses 48,400
Loan note interest 5,000
Dividends paid 15,500
Building at cost (note (ii)) 200,000
Plant and equipment at cost (note (ii)) 124,800
Deferred development expenditure (note (iii)) 75,000
Depreciation at 1 January 20X6 – building 56,000
– plant and equipment 48,800
Amortisation at 1 January 20X6 – development expenditure 15,000
Trade receivables 77,200
Inventory – 1 January 20X6 27,500
Bank 16,100
Trade payables 81,200
Equity shares of $0.25 each 100,000
10% loan notes – issued 20X4 100,000
Deferred tax at 1 January 20X6 (note (iv)) 12,400
Retained earnings at 1 January 20X6 13,300
––––––– –––––––
900,000 900,000
––––––– –––––––
The following notes are relevant:
(i) The cost of the inventory at 31 December 20X6 was $37.7m.
(ii) Non-current assets:
On 1 January 20X6, Vincible Co’s building was valued at $270m by an independent
surveyor. The useful life of the building was 25 years when Vincible Co acquired it, with
depreciation charged at $8m a year. The directors wish to incorporate the revalued
amount in Vincible Co’s financial statements. The revaluation reserve will be realised over
the remaining life of the building.
Plant is depreciated at 20% per year on the reducing balance basis.
All depreciation is charged to cost of sales.
(iii) The deferred development expenditure relates to a new product. The project was
successfully completed on 1 January 20X5 and sales of the new product commenced on
that date. The development costs are being depreciated on a straight-line basis over the
expected product life of five years. On 1 January 20X6, a review of the sales figures for
the new product showed that they were disappointing. In view of this Vincible Co has
estimated that the present value of the expected net future cash flows from sales of the
new product is $30m, however Vincible Co has been approached by a rival company with
an offer of $40m for the rights to the product. At this stage, Vincible Co intends to
continue to market and sell the product.
(iv) The directors have estimated the required provision for income tax for the year to 31
December 20X6 is $15m. The deferred tax provision at 31 December 20X6 is to be
adjusted to reflect the tax base of the company’s assets being $70m less than their
carrying amounts. $28.8m of this $70m is attributable to the revaluation of the leasehold.
Vincible Co’s rate of income tax is 25%.

 2022 ACCA FR-Mock 2-Questions 16

Requirements:
(a) Prepare the statement of profit or loss and other comprehensive income of
Vincible Co for the year ended 31 December 20X6. (8 marks)
(b) Prepare the statement of changes in equity of Vincible Co for the year to 31
December 20X6. (3 marks)
(c) Prepare the statement of financial position of Vincible Co as at 31 December
20X6. (9 marks)
Note: The notes to the financial statements are not required.
(20 marks)

End of Questions

 2022 ACCA FR-Mock 2-Questions 17