1. An entity opens a new factory in which a completely new type of product will be produced. When constructing the factory, the entity purchases a machine for the new assembly line. Which of the following expenditures are included in the cost of the machine?

A: delivery costs

B: costs for assembly of machine

C: raw material necessary to test the quality of the products produced by the machine

D: engineering fees charged for the design of foundations for the machine

E: all of the above

F: A and B

2. What accounting treatment should be used if an entity has incurred expenditure that is unlikely to generate future economic benefits for the entity?

A: recognition as a deferred asset

B: amortisation over a period of no more than two operating cycles

C: recognition as an expense

D: recognition as unearned revenues

E: none of the above

F: A and B

3. An entity purchases a machine for a direct cost of $100,000. In addition, the entity pays $15,000 for assembly of the machine and $5,000 for modifications which are necessary to use the machine as intended by the entity. The machine has a useful life of 6 years and a residual value of $10,000 at the end of this period. What is the amount (rounded to the closest full $ amount) by which the asset is depreciated in the SECOND year of the assets useful life, using the sum-of-digits method?

A: $13,750

B: $21,380

C: $24,444

D: $26,190

E: $37,940

F: none of the above

4. An entity records a revaluation increment for a block of land, using the following journal entry.

23 June 201x

Dr Land 3,000

Cr Revaluation Surplus 3,000

To record revaluation of land

4 years later, the entity sells the block of land to a competitor. How does this sale affect the Revaluation Surplus account?

A: the sale does not influence the Revaluation Surplus account because the previously recorded revaluation increment must be depreciated over a period of five years

B: the amount previously recorded in the Revaluation Surplus account must be transferred to retained earnings at the date of the sale

C: no changes to the Revaluation Surplus account are recorded because accounting standards prohibit the removal of revaluation increments that have previously been recorded in this account

D: the amount previously recorded in the Revaluation Surplus account is transferred to income and used to increase the profit (or decrease the loss) of the sales transaction

E: the entity may transfer the amount previously recorded in the Revaluation Surplus account to retained earnings, but this transfer is optional

F: none of the above

5. Which of the following procedures must be used to determine the recoverable amount of a machine which is included in the Machinery/Equipment account of an entity?

A: determine the higher of the present value of the future cash flows that the item will generate for the entity and the price for which the item could be sold, less any costs to sell

B: determine the price for which the item could be sold, less any selling costs

C: determine the present value of the future cash flows that the item will generate for the entity, plus all accumulated depreciation of the machine

D: determine the lower of the items net selling price and its value in use

E: determine how much the entity would have to pay to purchase the item today

F: none of the above

6. An entity purchases a machine on the 1 July 20x1 for $40,000. It is expected that the machine has a useful life of 8 years and straight line depreciation is used to depreciate the machine. On the 30 June 20x3, the machine is re-valued to its fair value of $45,000. Which of the following journal entries records the revaluation of the machine correctly?

A: Dr Machinery/Equipment 32,000

Cr Acc. Dep. Machinery/Equipment 12,000

Cr Revaluation Surplus 20,000

To record revaluation of the machine

B: Dr Acc. Dep. Machinery/Equipment 10,000

Cr Machinery/Equipment 10,000

To record transfer of accumulated depreciation to asset account

Dr Machinery/Equipment 15,000

Cr Revaluation Surplus 15,000

To record revaluation of the machine

C: Dr Acc. Dep. Machinery/Equipment 15,000

Cr Machinery/Equipment 15,000

To record transfer of accumulated depreciation to asset account

Dr Machinery/Equipment 20,000

Cr Revaluation Surplus 20,000

To record revaluation of the machine

D: Dr Machinery/Equipment 5,000

Cr Revaluation Surplus 5,000

To record revaluation of the machine

E: Dr Machinery/Equipment 5,000

Dr Acc. Dep. Machinery/Equipment 15,000

Cr Revaluation Surplus 20,000

To record revaluation of the machine

F: none of the above

7. The inventory of an entity consists of:

A: cash in cash registers used to provide change to customers

B: assets held for sale in the ordinary course of an entitys business

C: assets that are used over a long period of time to deliver a service to multiple customers

D: items currently undergoing the production process which will be sold once they are completed

E: B and D

F: B, C and D

8. Borrowing costs which are directly attributable to a qualifying item of inventory are included in the cost of that item. A qualifying item of inventory is an item:

A: for which the entity has elected to apply the regulations pertaining to qualifying assets

B: produced by the entity whose completion is delayed for more than 12 months due to circumstances outside the entitys control

C: that is produced by the entity and necessarily takes more than 12 months to complete

D: which is designed and produced to the exact specifications of the customer

E: for which the entity has received a government grant

F: none of the above

9. Cost flow assumptions are an important aspect of inventory valuation. Which of the following statements is most correct?

A: the use of the first-in-first-out cost flow assumption is not permissible under Australian Accounting Standards

B: the weighted average cost flow assumption can be based on either continuous weighted-average-costs or periodic weighted-average-cost

C: cost flow assumptions are necessary because the specific identification of an items costs is often impractical

D: the last-in-first-out assumption is the most widely used cost flow assumption in Australian general purpose financial statements

E: all of the above

F: B and C

10. Assuming that no deferred tax assets or liabilities exist, and assuming that the entity has not prepaid any income taxes during the year, the amount of income tax that an entity must pay to the Australian Taxation Office at the end of the year will be shown in which of the following accounts?

A: Taxes Payable

B: Deferred Tax Assets

C: Interest Payable

D: Accounts Receivable

E: Deferred Tax Liability

F: none of the above

11. Cash flow statements:

A: provide detailed information about all individuals that have made payments to, or received payments from the entity

B: include a section titled "financing activities" which provides information about how the entity invests its cash and cash equivalents

C: do not provide information about the source and use of the entitys cash and cash equivalents

D: are period based, not accruals based

E: all of the above

F: C and D

12. An entity enters into a lease agreement with the following conditions:

Duration of lease 10 years

Useful life of leased asset 12 years

Annual lease payment $8,000 (payable at the end of each year in the lease term)

The lease cannot be cancelled by the lessee without the lessors permission, and the interest rate implicit in the lease is 10%. Determine whether the lease is an operating lease or a finance lease and calculate the fair value of the leased asset at date of lease inception (rounded to the next full dollar amount). Which of the following answer is most correct?

A: finance lease, $53,012

B: operating lease, $51,157

C: finance lease, $55,012

D: operating lease, $55,012

E: finance lease $49,157

F: none of the above

13. Cash flow statements are concerned with the flow of cash and cash equivalents. Which of the following items are cash equivalents?

A: shares

B: prepaid expenses

C: land owned by the entity

D: 10 day term deposits with a fixed interest rate

E: C and D

F: none of the above

14. An entity is in the process of completing its financial reports for the period ended 30 June 201x. When the entitys accountant checks the net realisable value of inventory at the reporting date, it becomes obvious that a number of items are recognised at a cost greater than their net realisable value and these overstatements have a material effect on the accounts. Which of the following treatments is required in Australia?

A: adjustment of the value of inventory in the financial statements to reflect the lower net realisable value

B: disclosure of the overstatement in the directors declaration, including an explanation how this issue will be dealt with in the following period

C: disclosure of the overstatement in the notes, including an explanation how the issue will be dealt with in the following period

D: no action is required

E: disclosure of overstatement in the directors declaration without any additional explanation

F: none of the above

Part B

2) An asset is likely to be a current asset if:

A: it is primarily held for the purpose of trading

B: the asset will be consumed within twelve months of the reporting date

C: it is sold within the entities normal operating cycle

D: the asset in question is a short term (1 month) bank deposit

E: all of the above

F: A and C

3) An entity has constructed a new building on a leased block of land. The lease contract states that any improvements to the land must be removed when the lease expires. The construction project has the following characteristics:

The building was financed and will be paid off in 18 years

The entity estimates that the building can be used for 25 years

The entity plans to move its operations to a different location after 6 years of occupying the building

The lease of the land on which the building is constructed will expire in 2 years and the owners have indicated that the lease will not be renewed

What period of time should be used as the buildings useful life when depreciation is calculated?

A: 6 years

B: 25 years

C: 2 years

D: 18 years

E: 20 years

F: none of the above

4) On 1 July 20x0 an entity purchases a machine for its factory for $90,000. It is estimated that the machine has a useful life of 8 years, a residual value of zero, and straight-line depreciation is used to depreciate the machine. On 1 July 20x2, the entity receives an unexpected offer to exchange the machine for a truck which originally cost $70,000 and has a current market value of $20,000. Which of the following journal entries is most appropriate when accounting for the sale of the machine and the receipt of the truck as payment?

A: 1 July 20x2

Dr Motor Vehicles 70,000

Dr Acc. Dep. Machinery/Equipment 22,500

Cr Gain on Sale 2,500

Cr Machinery/Equipment 90,000

To record purchase of the truck

B: 1 July 20x2

Dr Motor Vehicles 22,500

Dr Loss on Sale 67,500

Cr Machinery/Equipment 90,000

To record purchase of the truck

C: 1 July 20x2

Dr Motor Vehicles 70,000

Cr Gain on Sale 2,500

Cr Machinery/Equipment 67,500

To record purchase of the truck

D: 1 July 20x2

Dr Motor Vehicles 20,000

Dr Loss on Sale 47,500

Dr Acc. Dep. Motor Vehicles 22,500

Cr Machinery/Equipment 90,000

To record purchase of the truck

E: 1 July 20x2

Dr Motor Vehicles 70,000

Dr Acc. Dep. Motor Vehicles 33,750

Cr Gain on Sale 13,750

Cr Machinery/Equipment 90,000

To record purchase of the truck

F: none of the above

5) When choosing a depreciation method for a newly acquired asset, managers:

A: are free to choose any depreciation method they like because there are no legal requirements that limit their choices

B: are required to choose the depreciation method that best reflects the pattern in which the assets future economic benefits are expected to be consumed by the entity

C: must be careful when making their decision because the method of depreciation for an individual item cannot be changed after the first depreciation charge is recorded

D: are required to select the depreciation method which best serves their own interests

E: A and B

F: none of the above

6) When determining the cost of inventory, which of the following must be included in the cost assessment?

A: early payment discounts

B: storage costs of items purchased for trading purposes

C: selling costs

D: penalties for late payment

E: all of the above

F: none of the above

7) Borrowing costs which are directly attributable to a qualifying item of inventory are included in the cost of that item. A qualifying item of inventory is an item:

A: for which the entity has elected to apply the regulations pertaining to qualifying assets

B: produced by the entity whose completion is delayed for more than 12 months due to circumstances outside the entitys control

C: that is produced by the entity and necessarily takes more than 12 months to complete

D: which is designed and produced to the exact specifications of the customer

E: for which the entity has received a government grant

F: none of the above

8) Cash flow statements:

A: provide detailed information about all individuals that have made payments to, or received payments from the entity

B: include a section titled "financing activities" which provides information about how the entity invests its cash and cash equivalents

C: provide information about the source and use of the entitys cash and cash equivalents

D: are period based, not accruals based

E: all of the above

F: C and D

9) Which of the following transactions are included in the investing section of a cash flow statement?

A: payment of electricity bills

B: re-payment of bank loans

C: purchase of new company cars

D: all of the above

E: A and C

F: B and C

10) An entity is in the process of completing its financial reports for the period ended 30 June 20x1. When the entitys accountant checks the net realisable value of inventory at the reporting date, it becomes obvious that a number of items are recognised at a cost greater than their net realisable value and these overstatements have a material effect on the accounts. Which of the following treatments is required in Australia?

A: disclosure of the overstatement in the directors declaration, including an explanation of how this issue will be dealt with in the following period

B: adjustment of the value of inventory in the financial statements to reflect the lower net realisable value

C: disclosure of the overstatement in the notes, including an explanation of how this issue will be dealt with in the following period

D: no action is required

E: disclosure of the overstatement in the directors declaration without any additional explanation

F: none of the above

11) An entity enters into a lease agreement with the following conditions:

Duration of lease 10 years

Useful life of leased asset 12 years

Annual lease payment $ 8,000 (payable at the end of each year in the lease term)

The lease cannot be cancelled by the lessee without the lessors permission, and the interest rate implicit in the lease is 10%. Determine whether the lease is an operating lease or a finance lease and calculate the fair value of the leased asset at the date the lease contract is signed (rounded to the next full dollar amount). Which of the following answers is most correct?

A: finance lease, $ 53,012

B: operating lease, $ 51,157

C: finance lease, $ 55,012

D: operating lease, $ 55,012

E: finance lease $ 49,157

F: none of the above

12) The existence of a finance lease requires that the risks and rewards of ownership of an item have been transferred from the lessor to the lessee. Which of the following items would provide an indication that risks and rewards have been transferred to the lessee?

A: the lease term is for a major part of the items economic life

B: the lease cannot be cancelled by the lessee

C: a substantial part of the lease payments are classified as contingent rent

D: the lease agreement includes a bargain purchase option

E: all of the above

F: A, B and D

13) Assuming that no deferred tax assets or liabilities exist, and assuming that the entity has not prepaid any income taxes during the year, the amount of income tax that an entity must pay to the Australian Taxation Office at the end of the year will be shown in which of the following accounts?

A: income tax payable

B: deferred tax assets

C: deferred income tax

D: accounts receivable

E: deferred tax liability

F: none of the above

14) The inventory of an entity consists of:

A: cash in cash registers used to provide change to customers

B: assets held for sale in the ordinary course of an entitys business

C: assets that are used over a long period of time to deliver a service to multiple customers

D: items currently undergoing the production process which will be sold once they are completed

E: B and D

F: B, C and D