ABC Plc. decided to operate a new amusement park that will cost GHS1 million to build in the year 2005. Its financial year-end is December 31, 2005. ABC Plc. has applied for a letter of guarantee for GHS700,000. The letter of guarantee was issued on March 31, 2006. The audited financial statements have been authorized to be issued on April 18, 2006. The adjustment required to be made to the financial statement for the year ended December 31, 2005, should be

(a) Booking a GHS700,000 long-term payable.

(b) Disclosing GHS700,000 as a contingent liability in 2005 financial statement. (c) Increasing the contingency reserve by GHS700,000.

(d) Do nothing.

22. A new drug named EEE was introduced by Genius Inc. in the market on December 1, 2005. Genius Inc.s financial year ends on December 31,2005. It was the only company that was permitted to manufacture this patented drug. The drug is used by patients suffering from an irregular heartbeat. On March 31, 2006, after the drug was introduced, more than 1,000 patients died. After a series of investigations, authorities discovered that when this drug was simultaneously used with BBB, a drug used to regulate hypertension, the patients blood would clot and the patient suffered a stroke. A lawsuit for GHS100,000,000 has been filed against Genius Inc. The financial statements were authorized for issuance on April 30, 2006. Which of the following options is the appropriate accounting treatment for this post statement of financial position event under IAS 10?

(a) The entity should provide GHS100,000,000 because this is an adjusting event and the financial statements were authorized to be issued after the accident.

(b) The entity should disclose GHS100,000,000 as a contingent liability because it is an adjusting event.

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(c) The entity should disclose GHS100,000,000 as a contingent liability because it is a present obligation with an improbable outflow.

(d) Assuming the probability of the lawsuit being decided against Genius Inc. is remote, the entity should disclose it in the footnotes, because it is a non-adjusting material event.

23. At the statement of financial position date, December 31, 2021, ABC Inc. carried a receivable from XYZ, a major customer, at GHS10 million. The authorization date of the financial statements is on February 16, 2022. XYZ declared bankruptcy on Valentines Day (February 14, 2022). ABC Inc. will (a) Disclose the fact that XYZ has declared bankruptcy in the footnotes.

(b) Make a provision for this poststatement of financial position event in its financial statements (as opposed to disclosure in footnotes).

(c) Ignore the event and wait for the outcome of the bankruptcy because the event took place after the year-end.

(d) Reverse the sale pertaining to this receivable in the comparatives for the prior period and treat this as an error under IAS 8.

24. Excellent Plc. built a new factory building during 2021 at a cost of GHS20 million. At December 31, 2021,the net book value of the building was GHS19 million. Subsequent to year-end, on March 15, 2022, the building was destroyed by fire and the claim against the insurance company proved futile because the cause of the fire was negligence on the part of the caretaker of the building. If the date of authorization of the financial statements for the year ended December 31, 2021, was March 31, 2022, Excellent Plc. should

(a) Write off the net book value to its scrap value because the insurance claim would not fetch any compensation.

(b) Make a provision for one-half of the net book value of the building.

(c) Make a provision for three-fourths of the net book value of the building based on prudence.

(d) Disclose this non-adjusting event in the footnotes.

25. International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign currency transactions. Subsequent to the statement of financial position date, and before the date of authorization of the issuance of the financial statements, there were abnormal fluctuations in foreign currency rates. International Inc. should

(a) Adjust the foreign exchange year-end balances to reflect the abnormal adverse fluctuations in foreign exchange rates.

(b) Adjust the foreign exchange year-end balances to reflect all the abnormal fluctuations in foreign exchange rates (and not just adverse movements).

(c) Disclose the poststatement of financial position event in footnotes as a non-adjusting event. (d) Ignore the poststatement of financial position event.

26 Bill and hold sales, in which delivery is delayed at the buyers request but the buyer assumes title and accepts invoicing, should be recognized when

(a) The buyer makes an order.

(b) The seller starts manufacturing the goods.

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(c) The title has been transferred but the goods are kept on the sellers premises.

(d) It is probable that the delivery will be made, payment terms have been established, and the buyer has acknowledged the delivery instructions.

27. ABC Inc. is a large manufacturer of machines. XYZ Plc., a major customer of ABC Inc., has placed an order for a special machine for which it has given a deposit of 112,500 to ABC Inc. The parties have agreed on a price for the machine of 150,000. As per the terms of the sales agreement, it is an FOB (free on board) contract and the title passes to the buyer when goods are loaded onto the ship at the port. When should the revenue be recognized by ABC Inc.?

(a) When the customer orders the machine.

(b) When the deposit is received.

(c) When the machine is loaded on the port.

(d) When the machine has been received by the customer.

28. Revenue from an artistic performance is recognized once (a) The audience register for the event online.

(b) The tickets for the concert are sold.

(c) Cash has been received from the ticket sales.

(d) The event takes place.

29. X Plc., a large manufacturer of cosmetics, sells merchandise to Y Plc., a retailer, which in turn sells the goods to the public at large through its chain of retail outlets. Y Plc. purchases merchandise from X Plc. under a consignment contract. When should revenue from the sale of merchandise to Y Plc be recognized by X Plc.?

(a) When goods are delivered to Y Plc.

(b) When goods are sold by Y Plc.

(c) It will depend on the terms of delivery of the merchandise by X Plc. to Y Plc. (i.e., CIF [cost, insurance, and freight] or FOB).

(d) It will depend on the terms of payment between Y Plc. and X Plc. (i.e., cash or credit).

30. M Plc, a new company manufacturing and selling consumable products, has come out with an offer to refund the cost of purchase within one month of sale if the customer is not satisfied with the product. When should M Plc. recognize the revenue?

(a) When goods are sold to the customers.

(b) After one month of sale.

(c) Only if goods are not returned by the customers after the period of one month.

(d) At the time of sale along with an offset to revenue of the liability of the same amount for the possibility of the return.

31. When can a provision be recognized in accordance with IAS 37?

(a) When there is a legal obligation arising from a past (obligating) event, the probability of the outflow of resources is more than remote (but less than probable), and a reliable estimate can be made of the amount of the obligation.

(b) When there is a constructive obligation as a result of a past (obligating) event, the outflow of resources is probable, and a reliable estimate can be made of the amount of the obligation.

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(c) When there is a possible obligation arising from a past event, the outflow of resources is probable, and an approximate amount can be set aside toward the obligation.

(d) When management decides that it is essential that a provision be made for unforeseen circumstances and keeping in mind this year the profits were enough but next year there may be losses.

32. Amazon Plc. has been served a legal notice on December 15, 20X1, by the local environmental protection agency (EPA) to fit smoke detectors in its factory on or before June 30, 20X2 (before June 30 of the following year). The cost of fitting smoke detectors in its factory is estimated at GHS250,000. How should Amazon Inc. treat this in its financial statements for the year ended December 31, 20X1? (a) Recognize a provision for GHS250,000 in the financial statements for the year ended December 31, 20X1.

(b) Recognize a provision for GHS125,000 in the financial statements for the year ended December 31, 20X1, because the other 50% of the estimated amount will be recognized next year in the financial statement for thear ended December 31, 20X2.

(c) Because Amazon Inc. can avoid the future expenditure by changing the method of operations and thus there is no present obligation for the future expenditure, no provision is required at December 31, 20X1, but as

there is a possible obligation, this warrants disclosure in footnotes to the financial statements for the year ended December 31, 20X1.

(d) Ignore this for the purposes of the financial statements for the year ended December 31, 20X1, and neither disclose nor provide the estimated amount of GHS250,000.

33. A competitor has sued an entity for unauthorized use of its patented technology. The amount that the entity may be required to pay to the competitor if the competitor succeeds in the lawsuit is determinable with reliability, and according to the legal counsel it is less than probable (but more than remote) that an outflow of the resources would be needed to meet the obligation. The entity that was sued should at yearend:

(a) Recognize a provision for this possible obligation.

(b) Make a disclosure of the possible obligation in footnotes to the financial statements.

(c) Make no provision or disclosure and wait until the lawsuit is finally decided and then expense the amount paid on settlement, if any.

(d) Set aside, as an appropriation, a contingency reserve, an amount based on the best estimate of the possible liability.

34. A factory owned by XYZ Plc. was destroyed by fire. XYZ Plc. lodged an insurance claim for the value of the factory building, plant, and an amount equal to one years net profit. During the year there were a number of meetings with the representatives of the insurance company. Finally, before year-end, it was decided that XYZ Plc. would receive compensation for 90% of its claim. XYZ Plc. received a letter that the settlement check for that amount had been mailed, but it was not received before year-end. How should XYZ Plc. treat this in its financial statements?

(a) Disclose the contingent asset in the footnotes.

(b) Wait until next year when the settlement check is actually received and not recognize or disclose this receivable at all since at year-end it is a contingent asset.

(c) Because the settlement of the claim was conveyed by a letter from the insurance

company that also stated that the settlement check was in the mail for 90% of the claim, record 90% of the claim as a receivable as it is virtually certain that the contingent asset will be received.

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(d) Because the settlement of the claim was conveyed by a letter from the insurance company that also stated that the settlement check was in the mail for 90% of the claim, record 100% of the claim as a receivable at

year-end as it is virtually certain that the contingent asset will be received, and adjust the 10% next year when the settlement check is actually received.

35. The board of directors of ABC Plc. decided on December 15, 2021, to wind up international operations in the Far East and move them to Australia. The decision was based on a detailed formal plan of restructuring as required by IAS 37. This decision was conveyed to all workers and management personnel at the headquarters in Europe. The cost of restructuring the operations in the Far East as per this detailed plan was GHS2 million. How should ABC Plc treat this restructuring in its financial statements for the year-end December 31, 2021?

(a) Because ABC Plc. has not announced the restructuring to those affected by the decision and thus has not raised an expectation that ABC Plc. will actually carry out the restructuring (and as no constructive obligation

has arisen), only disclose the restructuring decision and the cost of restructuring of GHS2 million in footnotes to the financial statements.

(b) Recognize a provision for restructuring since the board of directors has approved it and it has been announced in the headquarters of ABC Plc in Europe.

(c) Mention the decision to restructure and the cost involved in the chairmans statement in the annual report since it a decision of the board of directors.

(d) Because the restructuring has not commenced before year-end, based on prudence, wait until next year and do nothing in this years financial statements.

36. An entity purchases a building and the seller accepts payment partly in equity shares and partly in debentures of the entity. This transaction should be treated in the cash flow statement as follows:

(a) The purchase of the building should be investing cash outflow and the issuance of shares and the debentures financing cash outflows.

(b) The purchase of the building should be investing cash outflow and the issuance of debentures financing cash outflows while the issuance of shares investing cash outflow.

(c) This does not belong in a cash flow statement and should be disclosed only in the footnotes to the financial statements.

(d) Ignore the transaction totally since it is a noncash transaction. No mention is required in either the cash flow statement or anywhere else in the financial statements.

37 An entity (other than a financial institution) receives dividends from its investment in shares. How should it disclose the dividends received in the cash flow statement prepared under IAS 7?

(a) Operating cash inflow.

(b) Either as operating cash inflow or as investing cash inflow.

(c) Either as operating cash inflow or as financing cash inflow.

(d) As an adjustment in the operating activities section of the cash flow because it is included in the net income for the year and as a cash inflow in the financing activities section of the cash flow statement.

38. How should gain on sale of an office building owned by the entity be presented in a cash flow statement?

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(a) As an inflow in the investing activities section of the cash flow because it pertains to a long-term asset.

(b) As an inflow in the financing activities section of the cash flow statement because the building was constructed with a long-term loan from a bank that needs to be repaid from the sale proceeds.

(c) As an adjustment to the net income in the operating activities section of the cash flow statement prepared under the indirect method.

(d) Added to the sale proceeds and presented in the investing activities section of the cash flow statement.

39 How should an unrealized gain on foreign currency translation be presented in a cash flow statement? (a) As an inflow in the financing activities section of the cash flow statement because it arises from a foreign currency translation.

(b) It should be ignored for the purposes of the cash flow statement as it is an unrealized gain.

(c) It should be ignored for the purposes of the cash flow statement as it is an unrealized gain but it should be disclosed in the footnotes to the financial statements by way of abundant precaution.

(d) As an adjustment to the net income in the operating activities section of the statement of cash flows.

40 How should repayment of a long-term loan comprising repayment of the principal amount and interest due to date on the loan be treated in a cash flow statement?

(a) The repayment of the principal portion of the loan is a cash flow belonging in the investing activities section; the interest payment belongs either in the operating activities section or the financing activities section.

(b) The repayment of the principal portion of the loan is a cash flow belonging in the investing activities section; the interest payment belongs either in the operating activities section or the investing activities section.

(c) The repayment of the principal portion of the loan is a cash flow belonging in the investing activities section; the interest payment belongs in the operating activities section (because IAS 7 does not permit any alternatives in case of interest payments).

(d) The repayment of the principal portion of the loan is a cash flow belonging in the investing activities section; the interest payment should be netted against interest received on bank deposits, and the net amount of interest should be disclosed in the operating activities section.

41. A subsidiary has sold goods costing GHS1.2 million to its parent for GHS1.4 million. All of the