Intermediate Accounting
Exam Answer Key
Course Introduction
Intermediate Accounting builds on foundational accounting principles and expands students understanding of financial reporting, focusing on the recognition, measurement, and disclosure of assets, liabilities, equity, revenues, and expenses according to generally accepted accounting principles (GAAP). The course delves into complex accounting topics such as revenue recognition, inventory valuation, investments, income taxes, long-term liabilities, and leases, offering students hands-on experience in preparing and analyzing financial statements. Emphasis is placed on ethical considerations, interpretation of accounting standards, and their application in real-world business scenarios to provide a comprehensive understanding of the role of accounting in decision-making and financial communication.
Recommended Textbook
Understanding Australian Accounting Standards 1st Edition by Janice Loftus
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Chapter 1: Accounting Regulation and the Conceptual Framework
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Q1) Which measurement base uses the discounted future net cash inflows or net cash savings that are expected to arise in the normal course of business in measuring the value of an asset?
A) Historical cost
B) Current cost
C) Present value
D) Realisable value
Answer: C
Q2) Members of the IASB are appointed by:
A) the Monitoring Board.
B) the IFRS Advisory Council.
C) the IFRS Foundation Trustees.
D) the IFRS Interpretations Committee.
Answer: C
Q3) Information is considered material if:
A) it has predictive value.
B) its omission or misstatement could influence users' decision-making.
C) it includes all information necessary for faithful representation.
D) it is free from errors.
Answer: B
Page 3
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Chapter 2: Application of Accounting Theory
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Q1) Normative theories:
A) prescribe what should be the case based on a specific objective.
B) are based on what is happening in the world.
C) explain why people behave in certain ways.
D) predicts unobserved phenomena.
Answer: A
Q2) Which of the following contractual relationships is not the focus of positive accounting theory?
A) Shareholder - manager relationships
B) Manager - lender relationships
C) Shareholder - lender relationships
D) Political relationships
Answer: C
Q3) The problem of 'underinvestment' arises when managers are reluctant to undertaken projects with positive net present value because:
A) managers prefer less risk than do lenders.
B) the projects lead to increased funds available to lenders.
C) it would adversely affect managers' bonus payments.
D) managers prefer to maintain a greater level of funds within the entity.
Answer: B
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Chapter 3: Shareholders Equity: Share Capital and Reserves
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Q1) In relation to share capital, AASB 101 does not require disclosure in the financial report of:
A) the number of shares on issue at the end of the year
B) the amount of any over or under subscription of new share issues during the year
C) restrictions on dividends payable to certain classes of shareholders
D) the total dollar value of share capital at the end of the year
Answer: B
Q2) The balance in the retained earnings account is affected by the transfer to that account of:
I Issued share capital
II dividends paid or provided for
III Transfers to or from other reserve accounts
IV Changes in accounting policies and errors
A) II and III only
B) I, II and III only
C) II, III and IV only
D) I, II, III and IV
Answer: C
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Chapter 4: Fair Value Measurement
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Q1) Which of the following is not one of the key reasons given by the IASB for issuing a standard on fair value measurement?
A) to establish a single source of guidance for all fair value measurements required or permitted by IFRSs to reduce complexity and improve consistency in their application;
B) to clarify the definition of fair value and related guidance in order to communicate the measurement objective more clearly;
C) to require the use of fair value when accounting for all non-financial assets
D) to enhance disclosures about fair value to enable users of financial statements to assess the extent to which fair value is used and to inform them about the inputs used to derive those fair values.
Q2) Trademarks would be measured primarily using which type of inputs?
A) Level 1 inputs
B) Level 2 inputs
C) Level 3 inputs
D) Level 4 inputs
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Chapter 5: Revenue
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Q1) The revenue that would be recorded by TelCo at the inception of the agreement is:
A) $166
B) $833
C) $1500
D) $3000
Q2) Which of the following are excluded from the scope of AASB 118?
I the initial recognition of agricultural produce
II insurance contracts within the scope of AASB 4
III the extraction of mineral ores
IV lease agreements
A) I, II only
B) II, III and IV only
C) I, III and IV only
D) I, II, III and IV
Q3) The two elements of performance referred to in the Conceptual Framework are:
A) assets and liabilities
B) revenue and expenses
C) liabilities and equity
D) expenses and income
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Page 7
Chapter 6: Provisions, Contingent Liabilities and Contingent Assets
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Q1) Provisions in relation to which of the following balances are within the scope of AASB 137?
A) warranties
B) employee benefits
C) financial instruments
D) operating leases
Q2) Under AASB 137 Provisions, Contingent Liabilities and Contingent Assets, the appropriate accounting treatment for future operating losses is to:
A) determine a reasonable estimate of the cost and provide for the future liability;
B) determine the cost and charge it directly against retained earnings;
C) not recognise such items in the financial statements;
D) measure on the basis of estimated future cash flows.
Q3) Liabilities which fail the recognition criteria and where the possibility of an outflow is remote should:
A) be recognised as an accrual
B) be recognised as a provision
C) be recognised as a contingent liability
D) not be recognised in the financial statement at all
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Chapter 7: Income Taxes
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Q1) The following information was extracted from the financial records of Pamakari Limited: Equipment purchased on 1 July 2014 for $100 000 (accounting depreciation 10% straight line tax depreciation 20% straight line). If the company tax rate is 30%, the deferred tax item that will be recorded by Pamakari Limited at 30 June 2015 is:
A) debit Deferred tax asset $3000
B) credit Deferred tax asset $3000
C) debit Deferred tax liability $3000
D) credit Deferred tax liability $3000.
Q2) Current tax consequences of business operations give rise to:
A) a deferred liability for income tax payable
B) a current liability for income tax payable
C) a non-current liability for taxes payable
D) a contingent liability for taxes payable.
Q3) The deferred tax liability is:
A) $1500
B) $4500
C) $15 000
D) $34 500.
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Chapter 8: Financial Instruments
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Q1) The risk that one party to a financial instrument will fail to discharge an obligation and cause the other party to incur a financial loss is referred to as:
A) interest rate risk;
B) liquidity risk;
C) market risk;
D) credit risk.
Q2) The appropriate accounting treatment for incremental costs directly attributable to an equity transaction that would otherwise have been avoided is to:
A) deduct from equity, net of tax;
B) add to equity, net of tax;
C) expense in the period incurred;
D) defer as a contingent asset.
Q3) All of the following would be regarded as financial instruments except:
A) bank overdraft;
B) notes payable;
C) cash; D) equipment.
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Chapter 9: Share-Based Payments
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Q1) On 1 July 2014 Luca Ltd grants 200 options to each of its 75 employees conditional on the employee remaining in service over the next two years. The fair value of each option is estimated to be $7. Luca estimates that 8 employees will leave over the two year vesting period.
By 30 June 2015 four employees have left and the entity estimates that a further five employees will leave over the next year.
On 30 June 2015 Luca decided to reprice its share options, due to a fall in its share price over the last 12 months. The repriced share options will vest on 30 June 2016. At the date of repricing Luca estimates that the fair value of each original option is $1.50 and the fair value of each repriced option is $3.
During the year ended 30 June 2016 four employees left.
The remuneration expense for the year ended 30 June 2015 is:
A) $34 650
B) $35 175
C) $46 200
D) $46 900
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Chapter 10: Translation of the Financial Statements of Foreign Entities
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Q1) When translating into the functional currency foreign currency denominated non-monetary items measured using historical cost must be translated using the:
A) rate current at end of reporting period;
B) average rate for the reporting period;
C) exchange rate at the date of the transaction;
D) rate prevailing at the end of the last financial year.
Q2) By applying the definition provided in AASB 121 The Effects of Changes in Foreign Exchange Rates, the following items will be regarded as a monetary item:
A) property, plant and equipment;
B) land and buildings;
C) inventory;
D) accounts receivable.
Q3) When translating into the functional currency monetary liabilities are translated using the:
A) exchange rate current at the date the item was first recorded;
B) exchange rate prevailing at the end of the last reporting period;
C) closing exchange rate;
D) exchange rate current at end of reporting period.
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Chapter 11: Employee Benefits
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Q1) An increase in the present value of a defined benefit obligation resulting from employee service in the current period is referred to as:
A) the current service cost
B) the past service cost
C) the interest cost
D) an actuarial gain or loss
Q2) AASB 119 requires an entity to record a liability for long service leave:
A) once the employee becomes presently entitled to the leave
B) as the employee provides service to the entity
C) when the leave is taken by the employee
D) in a consistent manner from year to year
Q3) Which of the following types of employee benefits are required to be measured at their nominal value?
A) long service leave
B) defined benefit post-employment benefits
C) accumulating non-vesting sick leave
D) defined contribution employment benefits
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Chapter 12: Inventories
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Q1) Duo Ltd uses a periodic inventory system and rounds the average unit cost to the nearest dollar. The following data relates to Duo Ltd for the year ended 30 June 2013:
Opening inventory 15 units @ average cost of $25 each
January purchases 10 units @ $24 each
July purchases 25 units @ $26 each
October purchases 20 units @ $24 each
Ending inventory 20 units
The cost of ending inventory using the weighted average cost method (rounded to the nearest dollar) is:
A) $459
B) $465
C) $499
D) $483
Q2) The measurement rule for inventories, mandated by AASB 102 Inventories, is:
A) lower of fair value and selling price;
B) lower of cost and net realisable value;
C) higher of initial cost and realisable value;
D) higher of completion costs and replacement costs.
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Chapter 13: Property, Plant and Equipment
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Q1) The cost of an item of property, plant and equipment is only recognised if the cost of the item can be reliably measured and if:
A) it is not directly attributable to the asset;
B) it has been paid for in cash;
C) the item has been received by the acquirer; D) it is probable that future economic benefits associated with the item will flow to the entity.
Q2) Replicator Limited acquired an item of Plant with an expected useful life of 5 years. Expected total production output over this period was: Year 1, 35 000 units; Year 2, 35 000 units; Year 3, 18 000 units; Year 4, 12 000 units. The asset cost $ 100 000 and associated installation costs amounted to $20 000 and residual value is $5000. The amount of depreciation charged in the first year is:
A) $40 250
B) $42 000
C) $35 000
D) $33 250.
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Chapter 14: Leases
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Q1) If a sale and leaseback transaction results in a finance lease, AASB 117 Leases, provides the following accounting treatment for any excess of sales proceeds over the carrying amount:
A) recognise directly in retained earnings of the seller-lessee
B) immediately recognise as income by the seller-lessee
C) defer and amortise over the lease term
D) include in the capitalised amount of the leased asset.
Q2) Nelson Ltd manufactures specialised machinery for both sale and lease. On 1 July 2013, Nelson leased a machine to Poggi Ltd. The machine cost Nelson Ltd
$195 000 to manufacture, and its fair value at the inception of the lease was $212 515. The interest rate implicit in the lease is 10%, which is in line with current market rates. Under the terms of the lease, Poggi Ltd has guaranteed $25 000 of the asset's expected residual value of $37 000 at the end of the 5-year lease term. The debit to the sales revenue account in Nelson's books is:
A) $187 548
B) $195 000
C) $205 063
D) $212 515
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Page 16
Chapter 15: Understanding Australian Accounting Standards
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Q1) Unless acquired under a business combination, intangible assets must be initially measured using which of the following measurement approaches?
A) discounted cash flows
B) fair value
C) net present value
D) cost.
Q2) Under AASB 138 Intangibles, goodwill may only be recognised as an asset if it:
A) arises as a result of creating new assets within the normal business operations
B) does not exceed its internally recorded cost
C) is internally generated
D) is acquired as part of a business combination.
Q3) AASB 138 Intangibles, requires that the following items in relation to intangibles, each be disclosed separately:
A) the opening balance of each intangible
B) the closing balance of each intangible
C) any impairment losses reversed in profit or loss during the period
D) all amounts of intangibles acquired during the period.
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Chapter 16: Impairment of Assets
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Q1) According to AASB 136 Impairment of Assets, the recoverable amount test requires an entity to compare the fair value an asset less costs to sell, with:
A) the amount obtainable from the sale of the asset
B) the costs directly attributable to the liquidation of the asset
C) its disposal value
D) its value in use.
Q2) When an asset is measured using the revaluation model, any impairment loss is treated as:
A) a revaluation decrement
B) a revaluation increment
C) a set-off against depreciation expense
D) an addition to depreciation expense.
Q3) If an entity does not expect to recover the carrying amount of an asset, the entity has incurred:
A) an impairment loss
B) a depreciation expense
C) an amortisation cost
D) a loss on disposal
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18
Chapter 17: Accounting for Mineral Resources
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Q1) Which of the following methods tends to be restricted to small mining companies in South Africa?
A) the area of interest method
B) the successful efforts method
C) the appropriation method
D) the full cost method
Q2) Which of the following is NOT within the scope of the IASB extractive activities project?
A) the definition of reserves and resources
B) whether to expense or capitalize costs recognised after recognition of reserves and resources as assets
C) measurement of reserves and resources on initial recognition as an asset
D) disclosure requirements for reserves and resources
Q3) Which of the following methods is inconsistent with historical cost accounting?
A) the area of interest method
B) the successful efforts method
C) the appropriation method
D) the full cost method
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19
Chapter 18: Agriculture
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Q1) Fishy Co operates a fish farm. AASB 141 requires live immature fish to be valued at:
A) cost due to the absence of an active market for such fish
B) the fair value less costs to sell based on prices of slaughtered immature fish
C) either cost or fair value less estimated costs to sell
D) fair value determined by applying a discount factor to the fair value of live mature fish.
Q2) Which of the following meets the definition of agricultural produce?
A) Dairy cattle
B) Milk
C) Cheese
D) Yoghurt
Q3) Which of the following is an agricultural product?
A) tea
B) milk
C) coffee
D) fruit juice
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Page 20
Chapter 19: Financial Statement Presentation
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Q1) If a liability satisfies the following criterion it will be classified as non-current:
A) due to be settled within twelve months of the balance date
B) expected to be settled in the entity's normal operating cycle
C) due to be settled more than twelve months after the statement of financial position date
D) it is held primarily for the purpose of being traded.
Q2) According to AASB 101, a required format for the presentation of a statement of financial position is:
A) not prescribed and no guidance is provided in the standard
B) not prescribed but guidance is provided in the standard for a suitable format
C) prescribed by the standard
D) not prescribed by the standard but details are found in the Corporations Act.
Q3) Which of the following items, if it exists, must be presented as a line item in the statement of financial position?
A) Trade and other receivables
B) Revenue
C) Cost of sales
D) Share of profit of associates.
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Chapter 20: Statement of Cash Flows
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Q1) The Statement of Cash Flows presentation method that separates gross cash inflows from cash outflows is known as the:
A) equity method
B) direct method
C) set-off method
D) net method.
Q2) For cash flow reporting purposes, operating activities include:
A) buying and selling of non-current assets
B) incurring and extinguishing equity and debt
C) acquisition and disposal of investments
D) activities not otherwise classified as financing and investing.
Q3) According to AASB 107 Statement of Cash Flows, which of the following items does NOT fall within the definition of cash?
A) Bank notes and coins
B) Non-bank bills that are readily convertible to cash
C) Deposits on the short-term money market with a term of less than 3 months
D) Accounts receivable
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Chapter 21: Earnings Per Share
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Q1) If all of the dilutive securities were converted into ordinary shares, the diluted earnings per share ratio:
A) may include an adjustment to increase the weighted average number of ordinary shares that would be outstanding
B) must include an adjustment to decrease the weighted average number of ordinary shares that would be outstanding
C) must include an adjustment to increase the number of ordinary shares that would be outstanding
D) must include an adjustment to increase the weighted average number of ordinary shares that would be outstanding
Q2) The profit or loss that is used in the calculation of basic earnings per share is calculated as:
A) Profit before tax expense
B) Profit before tax expense - tax expense
C) Profit before tax expense - tax expense - ordinary dividends
D) Profit before tax expense - tax expense - preference dividends
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Chapter 22: Operating Segments
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Q1) Cherry Group has operating segments in three different locations. Total assets for each segment are as follows:
Melbourne $400 000
Sydney $80 000
Adelaide $20 000
Which operating segment(s) should be disclosed as reportable segment(s) of Cherry Group?
A) All segments are reportable segments;
B) Melbourne and Sydney are the only reportable segments;
C) Sydney and Adelaide are the only reportable segments;
D) Melbourne is the only reportable segment.
Q2) Under AASB 8, entities are required to provide reconciliations on the followings, except for:
A) the total of the reportable segment's measures of profit and loss to the entity's profit or loss;
B) the total of the reportable segment's equity to the entity's equity;
C) the total of the reportable segment's revenue to the entity's revenue;
D) the total of the reportable segment's liabilities to the entity's liabilities;
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Page 24
Chapter 23: Operating Segments
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Q1) The contractually agreed sharing of control over an economic entity is known as:
A) significant influence;
B) significant control;
C) joint control;
D) joint venture.
Q2) Aladdin is the owner and founder of Genie Limited. Aladdin's wife, Jasmine, has a controlling investment in Jafar Limited. Which of the followings describes the relationship between Genie Limited and Jafar Limited?
A) Genie Limited and Jafar Limited are not related parties.
B) No disclosure about transactions with Jafar Limited is required in the financial statements of Genie Limited.
C) Genie Limited is a related party of Jafar Limited.
D) Genie Limited has control over Jafar Limited.
Q3) Metro Limited is a subsidiary of Matrix Limited. Which of the followings is not a related party to Metro Limited?
A) A pension scheme that offers benefits to employees of Metro Limited.
B) The Managing Director of Matrix Limited.
C) An associate of Metro Limited.
D) A distributor of Metro Limited's products.
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Page 25
Chapter 24: Business Combinations
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Q1) Bolton Limited acquires the net assets of Pamelia Limited for a cash consideration of $100 000. One half is to be paid on acquisition date and one half is payable in one year's time. The appropriate discount rate is 10% p.a. The present value of the cash outflow in one year's time is:
A) $45 454
B) $50 000
C) $54 545
D) $55 000
Q2) The consideration transferred in a business combination is measured as the fair value of the:
A) net assets acquired
B) costs directly attributable to the combination
C) consideration given only
D) consideration given plus directly attributable costs.
Q3) Under AASB 3 the method of accounting for a business combination is the:
A) joint venture method
B) purchase method
C) market value method
D) acquisition method
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Page 26
Chapter 25: Consolidation: Principles and Accounting Requirements
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Q1) Which of the following statements is correct about the above business combination?
A) There is gain on bargain purchase of $45 000 to be recognised.
B) There is goodwill of $45 000 to be recognised.
C) There is gain on bargain purchase of $3000 to be recognised.
D) There is goodwill of $3000 to be recognised.
Q2) Truong Limited acquired 60% of the shares of Quang Limited through the Australian Securities Exchange. The share acquisition cost Truong Limited $500 000. As a result of the share acquisition, Truong Limited gained control over Quang Limited. In its accounting records, Truong will recognise:
A) an investment at a cost of $500 000
B) an investment with a market value of $300 000
C) an increase in share capital of $500 000
D) an increase in share capital of $300 000.
Q3) Which of the followings is not the reason of preparing consolidated statements?
A) To show parent entity's accountability in managing the group's assets
B) To provide investors with relevant information
C) To provide investors with useful information for comparisons between entities
D) To achieve efficiency by producing only one set of financial statements for the whole group.
Page 27
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Chapter 26: Consolidation: Intragroup Transactions
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Q1) A parent entity made an advance of $50 000 to its subsidiary. The parent charges interest of $3000 on this advance. The consolidation adjustment to eliminate the advance is:
A) DR Interest revenue \(\quad\$ 53000\)
CR Interest expense \(\quad\$ 53000\)
B) DR Interest expense \(\quad\) \(\$ 53,000\)
\(\quad\)CR Interest revenue \(\quad\)\(\$ 53,000\)
C) DR Advance to subsidiary \(\quad\)\(\$ 50,000\)
\(\quad\)CR Advance from parent \(\quad\) \(\$ 50,000\)
D)DR Advance from parent \(\quad\) \(\$ 50,000\)
\(\quad\)CR Advance to subsidiary \(\quad\)\(\$ 50,000\)
Q2) When a subsidiary declares a final dividend payable to a parent who has a 100% interest in the subsidiary, the parent recognises a dividend receivable and the subsidiary recognises a dividend payable. In addition to the elimination of these two items on consolidation, the following items must also be eliminated:
A) Dividend declared and Retained earnings.
B) Dividend declared and Dividend revenue.
C) Dividend revenue and Cash.
D) Dividend declared and Cash.
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Chapter 27: Consolidation: Non Controlling Interest
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Q1) The non-controlling interest columns on a consolidation worksheet are used to:
A) adjust the amounts that have been recorded for intragroup revenue transactions
B) adjust the amounts that have been recorded for intragroup services
C) eliminate the recorded amounts of the non-controlling investment in the subsidiary
D) compile the amounts of non-controlling interest and parent share of particular line items.
Q2) According to AASB 10 Consolidated Financial Statements, the term 'non-controlling interest' means:
A) the total equity of the combined group
B) the equity in the parent entity other than the portion owned by the subsidiary entity
C) the equity in the economic entity other than that which can be attributed to the subsidiary entity
D) equity in a subsidiary not attributable, directly or indirectly, to a parent.
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Chapter 29: Joint Arrangements
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Q1) The value of inventory distributed to Abel Ltd by the joint venture and subsequently sold by 30 June 20X1 is:
A) $425 000;
B) $850 000;
C) $900 000;
D) $1 700 000.
Q2) Company A Limited and Company B Limited formed a joint operation and share in the output of the joint operation 60:40. The joint operation paid a management fee of $20 000 to Company A Limited during the current period. The cost to Company A Limited of supplying the management service was $14 000. The amount of profit that Company A Limited will recognise in relation to the provision of the management fee to the joint operation is:
A) NIL
B) $2 400
C) $3 600
D) $6 000
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Chapter 30: Associates and Joint Ventures
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Sample Questions
Q1) Which of the following statements is correct?
A) All joint arrangements are accounted for under AASB 128.
B) Joint arrangements classified as joint ventures are accounted for under AASB 11.
C) Joint arrangements classified as joint ventures are accounted for under AASB 128.
D) Joint arrangements classified as joint operations are accounted for under AASB 128.
Q2) Where an investor has discontinued the use of the equity method because the associate has incurred losses it must disclose the:
A) unrecognised share of current period and cumulative losses of the associate;
B) reason why it has discontinued the method;
C) accounting policy it has adopted in place of the equity method;
D) effect on the statement of changes in equity if it had continued to use the method.
Q3) At 30 June 20X8 the equity accounted balance of the investment in Leo was:
A) NIL
B) $1500
C) $5000
D) $20 000
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