MIDTERM QUESTIONS

Question 1.
The recognition criteria that an asset must meet before it may be recognized and presented in
the financial statements include:
Select one:
a. that the information about the asset is neutral
b. that the recognition of the asset is relevant to user decision making
c. a likelihood that the cost of the asset is verifiable
d. probability that future economic benefits will flow to the entity
Question 2.
Which of the following assets do not qualify for capitalization of interest costs incurred during
construction of the assets?
Select one:
a. Assets financed through the issuance of long-term debt.
b. Assets not currently undergoing the activities necessary to prepare them for their
intended use.
c. Assets under construction for a company's own use.
d. Assets intended for sale or lease that are produced as discrete projects.
Question 3.
Wojtowicz Limited was involved in a mining exploration business. It commenced a project to
design more efficient gold detecting equipment. The following expenditures occurred during the
financial year ended 2013:
 Researcher's salary £5,000
 Research consumables £3,000
 Re-development of the detecting equipment £4,000
 Final adjustments to the detecting equipment £2,500.
The amount to be capitalized by this company as an intangible asset, for the 2013 financial
year, is:
Select one:
a. £6,500
b. £11,500
c. £14,500
d. £8,000
Question 4.
Which of the following costs should be excluded from research and development expense?
Select one:
a. Engineering activity required to advance the design of a product to the manufacturing
stage
b. Cost of marketing research for a new product
c. Acquisition of R & D equipment for use on a current project only
d. Modification of the design of a product
Question 5
On January 2, 2020, Q. Tong Inc. purchased equipment with a cost of $10,440,000, a useful life of 10
years and no salvage value. The company uses straight-line depreciation. At December 31, 2020 and
December 31, 2021, the company determines that impairment indicators are present. The following
information is available for impairment testing at each year end:
12/31/2020 12/31/2021
Fair value less costs to sell $9,315,000 $8,850,000
Value-in-use $9,350,000 $8,915,000
There is no change in the asset's useful life or salvage value. The 2021 income statement will report
Select one:
a. Recovery of Impairment Loss of $40,889.
b. no Impairment Loss or Recovery of Impairment Loss.
c. Impairment Loss of $435,000.
d. Recovery of Impairment Loss of $603,889.
Question 6
Capita had the following bank loans outstanding during the whole of 20X8:
$m
9% loan repayable 20X9 15
11% loan repayable 2012 24
Capita began construction of a qualifying asset on 1 April 20X8 and withdrew funds of $6 million on that
date to fund construction. On 1 August 20X8 an additional $2 million was withdrawn for the same
purpose. Calculate the borrowing costs which can be capitalized in respect of this project for the year
ended 31 December 20X8.
Select one:
a. $350,000
b. $750,000
c. $560,000
d. $472,500
Question 7
Materiality is used in all of the following situations of providing financial information, except:
Select one:
a. where an amount is of relative large size and importance.
b. where it would impact the judgment of a reasonable person.
c. where it would not make a difference in the actions of decision maker.
d. where omission of the information would result in bias.
Question 8
Which of the following statements about the valuation of inventory are correct, according to IAS 2
Inventories?
1. Inventory items are normally to be valued at the higher of cost and net realizable value.
2. The cost of goods manufactured by an entity will include materials and labor only. Overhead
costs cannot be included.
3. LIFO (last in, first out) cannot be used to value inventory.
4. Selling price less estimated profit margin may be used to arrive at cost if this gives a reasonable
approximation to actual cost.
Select one:
a. None of the statements are correct
b. 1, 3 and 4 only
c. 1 and 2 only
d. 3 and 4 only
Question 9
An impairment loss occurs when:
Select one:
a. the carrying amount of an asset exceeds the recoverable amount;
b. the recoverable amount of an asset exceeds the carrying amount;
c. the recoverable amount of an asset exceeds its initial cost.
d. the asset has a zero residual value;
Question 10
Which of the following statements is NOT correct?
Select one:
a. amortization of an intangible with an indefinite life does not cease when the asset is retired from active
use.
b. gains or losses on disposal are calculated as the difference between the proceeds on disposal and the
carrying amount at point of sale, with amortization calculated up to the point of sale.
c. amortization of an intangible with a finite useful life does not cease when the asset becomes
temporarily idle.
d. intangible assets are to be derecognized when there are no expected future benefits from the asset.
Question 11
Which of the following is not a basic assumption underlying the financial accounting structure?
Select one:
a. Economic entity assumption.
b. Going concern assumption.
c. Periodicity assumption.
d. Historical cost assumption.
Question 12
Which of the following is not a condition that must be satisfied before interest capitalization can begin on
a qualifying asset?
Select one:
a. Expenditures for the assets have been made.
b. Activities that are necessary to get the asset ready for its intended use are in progress.
c. The interest rate is equal to or greater than the company's cost of capital.
d. Interest cost is being incurred.
Question 13
Computers For You is a retailer specializing in selling computers and related equipment. Which of the
following would not be reported in the merchandise inventory account reported on the statement of
financial position for Computers For You at December 31, 2022?
Select one:
a. All of the choices are included in the merchandise inventory account at December 31, 2022.
b. Computer purchased for resale during November 2022.
c. Freight costs related to the computers purchased in November.
d. Shelving materials purchased during December 2022.
Question 14
Risers Inc. reported total assets of £1,600,000 and net income of £85,000 for the current year. Risers
determined that inventory was understated by £23,000 at the beginning of the year and £10,000 at the end
of the year. What is the corrected amount for total assets and net income for the year?
Select one:
a. £1,590,000 and £98,000.
b. £1,600,000 and £85,000.
c. £1,610,000 and £95,000.
d. £1,610,000 and £72,000.
Question 15
What is the objective of general-purpose financial reporting?
Select one:
a. to provide users with financial information that implies total freedom from error.
b. to provide a metric for financial information used to determine when the boundary between two or
more entities should be disregarded and the entities considered to be a licensing arrangement.
c. to provide financial information about the reporting entity that is useful to present and potential equity
investors, lenders, and other creditors in making decisions in their capacity as capital providers.
d. to provide companies with the option to select information that favors one set of interested parties over
another.
Question 16
Malrom Manufacturing Company acquired a patent on a manufacturing process on January 1, 2018 for
€4,000,000. It was expected to have a 10 year life and no residual value. Malrom uses straight-line
amortization for patents. On December 31, 2019, the recoverable amount of the patent was estimated to
be €2,720,000. At what amount should the patent be carried on the December 31, 2019 statement of
financial position?
Select one:
a. €2,720,000
b. €3,200,000
Oc. €3,600,000
d. €4,000,000
Question 17
Under IAS 36 Impairment of Assets: impairment of an asset, and the accounting treatment using the cost
model, are as follows:
Select one:
a. Impairment: Carrying amount of an asset is less than its recoverable amount; Accounting treatment: No
change to the asset value
b. Impairment: Carrying amount of an asset is less than its recoverable amount; Accounting treatment:
Asset is written up to its recoverable amount
c. Impairment: Carrying amount of an asset is greater than its recoverable amount; Accounting treatment:
Asset is written down to its recoverable amount
d. Impairment: Carrying amount of an asset is greater than its recoverable amount; Accounting treatment:
No change to the asset value
Question 18
Kerr Co.'s accounts payable balance at December 31, 2021 was €1,500,000 before considering the
following transactions:
Goods were in transit from a vendor to Kerr on December 31, 2021. The invoice price was €70,000, and
the goods were shipped f.o.b. shipping point on December 29, 2021. The goods were received on January
4, 2022.
Goods shipped to Kerr, f.o.b. shipping point on December 20, 2021, from a vendor were lost in transit.
The invoice price was €50,000. On January 5, 2022, Kerr filed a €50,000 claim against the common
carrier.
In its December 31, 2021 statement of financial position, Kerr should report accounts payable of
Select one:
a. €1,550,000.
b. €1,620,000.
c. €1,570,000.
d. €1,500,000.
Question 19
On January 1, 2021, Fredo Inc. purchased equipment with a cost of €2,550,000, a useful life of 15 years
and no salvage value. The company uses straight-line depreciation. At December 31, 2021, an
independent appraiser determines that the fair value of the equipment is €2,500,000. Fredo prepares
financial statements using IFRS and elects to revalue the asset. The 2022 (second year) income statement
will report depreciation expense for the equipment of
Select one:
a. €166,667.
b. cannot be determined from the information given.
c. €170,000.
d. €178,571.
Question 20
On February 1, 2022, Nelson Corporation purchased a parcel of land as a factory site for €200,000. An
old building on the property was demolished, and construction began on a new building which was
completed on November 1, 2022. Costs incurred during this period are listed below:
Demolition of old building € 20,000
Architect's fees 35,000
Legal fees for title investigation and purchase contract 5,000
Construction costs 1,090,000
Nelson should record the cost of the land and new building, respectively, as
Select one:
a. €210,000 and €1,125,000.
b. €215,000 and €1,115,000.
c. €210,000 and €1,130,000.
d. €225,000 and €1,125,000.
Question 21
A company is constructing an asset for its own use. Construction began in 2018. The asset is being
financed entirely with a specific new borrowing. Construction expenditures were made in 2018 and 2019
at the end of each quarter. The total amount of interest cost capitalized in 2019 should be determined by
applying the interest rate on the specific new borrowing to the
Select one:
a. average expenditures for the asset in 2019.
b. total accumulated expenditures for the asset in 2018 and 2019.
O c. average accumulated expenditures for the asset in 2018 and 2019. Od. total expenditures for the asset
in 2019.
Question 22
In preparing its financial statements for the current year, a company's closing inventory was understated
by $300,000. What will be the effect of this error if it remains uncorrected?
Select one:
a. The current year's profit will be understated but there will be no effect on next year's profit.
b. The current year's profit will be overstated and next year's profit will be understated.
c. The current year's profit will be understated and next year's profit will be overstated.
d. The current year's profit will be overstated but there will be no effect on next year's profit.
Question 23
Which of the following statements is NOT correct?
Select one:
a. Intangible assets are to be derecognized when there are no expected future benefits from the asset
b. Amortization of an intangible with a finite useful life does not cease when the asset becomes
temporarily idle
c. Gains or losses on disposal are calculated as the difference between the proceeds on disposal and the
carrying amount at point of sale, with amortization calculated up to the point of sale
d. Amortization of an intangible with an indefinite life does not cease when the asset is retired from active
use
Question 24
Dempsey's year end is 30 September 20X4. Dempsey commenced the development stage of a project to
produce a new pharmaceutical drug on 1 January 20X4. Expenditure of $40,000 per month was incurred
until the project was completed on 30 June 20X4 when the drug went into immediate production. The
directors became confident of the project's success on 1 March 20X4. The drug has an estimated life span
of five years; time apportionment is used by Dempsey where applicable. What amount will Dempsey
charge to profit or loss for development costs, including any amortization, for the year ended 30
September 20X4?
Select one:
a. $88,000
b. $8,000
c. $160,000
d. $80,000
Question 25
On January 1, 2021, Edmondton Inc. purchased equipment with a cost of €4,500,000, a useful life of 12
years and no salvage value. The Company uses straight-line depreciation. At December 31, 2018, the
company determines that impairment indicators are present. The fair value less cost to sell the asset is
estimated to be €3,850,000. The asset's value-in-use is estimated to be €3,500,000. There is no change in
the asset's useful life or salvage value. The 2022 (second year) income statement will report depreciation
expense for the equipment of
Select one:
a. €385,000.
b. €375,000.
c. €320,833.
d. €350,000.
Question 26
Which of the following is NOT an indicator of impairment under IAS 36 Impairment of Assets?
Select one:
a. An increase in interest rates which increases the discount rate an entity uses.
b. Unexpected advances in the technological environment in which an asset is employed have an adverse
impact on its future use.
c. 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.
d. The estimated net realizable value of inventory has been reduced due to fire damage although this value
is greater than its carrying amount.
Question 27
A company had $20 million of capitalized development expenditure at cost brought forward at 1 October
20X7 in respect of products currently in production and a new project began on the same date. The
research stage of the new project lasted until 31 December 20X7 and incurred $1.4 million of costs. From
that date the project incurred development costs of $800,000 per month. On 1 April 20X8 the directors of
Assoria Co became confident that the project would be successful and yield a profit well in excess of
costs. The project was still in development at 30 September 20X8. Capitalized development expenditure
is amortized at 20% per annum using the straight-line method. What amount will be charged to profit or
loss for the year ended 30 September 20X8 in respect of research and development costs?
Select one:
a. $3,800,000
b. $7,800,000
c. $6,880,000
d. $8,280,000
Question 28
S sells three products - Basic, Super and Luxury. The following information was available at the year end.
Basic per unit Super $ per unit Luxury $ per unit
Original Cost 6 9 18
Estimated selling price 9 12 15
Selling and distribution costs 1 4 5
units units units
Units of inventory 200 250 150
What is the value of inventory at the year end?
Select one:
a. $4,700
b. $6,150
c. $4,200
d. $5,700
Question 29
Technique Co. has equipment with a carrying amount of €800,000. The equipment's fair value less costs
to sell is €780,000, and its value-in-use is €815,000. The equipment is expected to be used in operations
in the future. What amount (if any) should Technique report as an impairment to its equipment?
Select one:
a. €20,000
b. No impairment should be reported.
c. €15,000
d. €35,000
Question 30
A cash-generating unit comprises the following assets:
$'000
Building 700
Plant and equipment 200
Goodwill 90
Current assets 20
1,010
One of the machines, carried at $40,000, is damaged and will have to be scrapped. The recoverable
amount of the cash-generating unit is estimated at $750,000. What will be the carrying amount of the
building when the impairment loss has been recognized? (to the nearest $'000)
Select one:
a. $594,000
b. $597,000
c. $577,000
d. $548,000