ACCA Financial Accounting 5 — Questions and Answers
Question 1: A company revalues a property upward by $120,000. The deferred tax rate is 25%. Where is the net revaluation gain reported?
- Profit or loss — $120,000
- Other comprehensive income — $120,000
- Other comprehensive income — $90,000 (Correct answer)
- Profit or loss — $90,000
Correct answer: Other comprehensive income — $90,000
Revaluation gains are recognised in other comprehensive income net of the related deferred tax: $120,000 × (1 − 0.25) = $90,000.
Question 2: Under IFRS for SMEs, how is goodwill arising on a business combination treated if its useful life cannot be estimated reliably?
- Goodwill is expensed immediately in profit or loss
- Goodwill is amortised over 10 years (Correct answer)
- Goodwill is held at cost and tested annually for impairment
- Goodwill is revalued to fair value each reporting period
Correct answer: Goodwill is amortised over 10 years
Under IFRS for SMEs, when the useful life of goodwill cannot be estimated reliably, it is amortised over the default maximum period of 10 years.
Question 3: Which of the following correctly describes a finance lease under IFRS 16 from the lessee's perspective?
- The lease payments are expensed on a straight-line basis
- A right-of-use asset and lease liability are recognised at commencement (Correct answer)
- Only the interest element of payments is recognised in the income statement
- The asset remains off-balance sheet throughout the lease term
Correct answer: A right-of-use asset and lease liability are recognised at commencement
IFRS 16 requires lessees to recognise a right-of-use asset and corresponding lease liability at the commencement date for virtually all leases.
Question 4: When preparing consolidated financial statements, an intragroup sale of inventory at a profit means the group must:
- Add back the profit to the consolidated income statement
- Eliminate the unrealised profit from consolidated inventory and retained earnings (Correct answer)
- Recognise the profit only when the inventory is sold to external parties and the cash is received
- Disclose the intragroup transaction as a related party note only
Correct answer: Eliminate the unrealised profit from consolidated inventory and retained earnings
Unrealised intragroup profits must be eliminated on consolidation so that inventory is carried at the group's original cost until sold to a third party.
Question 5: A company issues 1,000 shares at $5 nominal value for $8 each. Which journal entry correctly records the share premium?
- Dr Bank $8,000; Cr Share Capital $8,000
- Dr Bank $8,000; Cr Share Capital $5,000; Cr Share Premium $3,000 (Correct answer)
- Dr Share Premium $3,000; Cr Share Capital $3,000
- Dr Bank $5,000; Cr Share Premium $3,000
Correct answer: Dr Bank $8,000; Cr Share Capital $5,000; Cr Share Premium $3,000
The nominal value ($5 × 1,000 = $5,000) goes to share capital and the excess ($3 × 1,000 = $3,000) is credited to the share premium account.
Question 6: The current ratio of a business is 2.5:1 and working capital is $90,000. What are the current liabilities?
- $225,000
- $36,000
- $60,000 (Correct answer)
- $90,000
Correct answer: $60,000
Working capital = Current assets − Current liabilities = $90,000; with ratio 2.5, Current assets = 2.5 × CL, so 2.5CL − CL = $90,000, giving CL = $60,000.
Question 7: Under IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, a change in accounting policy is applied:
- Prospectively from the date of the change
- Retrospectively, restating comparative periods as if the new policy had always applied (Correct answer)
- From the beginning of the next accounting period only
- At management's discretion — either retrospectively or prospectively
Correct answer: Retrospectively, restating comparative periods as if the new policy had always applied
IAS 8 requires retrospective application of a change in accounting policy so that all periods presented reflect the new policy, ensuring comparability.
ACCA Financial Accounting 5
A company revalues a property upward by $120,000.
The deferred tax rate is 25%.
Where is the net revaluation gain reported?