FA: Recording transactions

Answer: A. Output VAT (on sales) = £60,000 × 20% = £12,000. Input VAT (on purchases) = £40,000 × 20% = £8,000. Net VAT payable = Output − Input = £12,000 − £8,000 = £4,000. VAT is a tax on value added, not total revenue. The business collects output VAT from customers and recovers input VAT on its purchases — only the net amount is paid to HMRC. Option B is output VAT only. Option C is input VAT only. Option D is the difference in revenue and purchases without applying the VAT rate.

Answer: B. Total employer cost = Gross wages + Employer's national insurance = £50,000 + £5,200 = £55,200. Income tax and employee NI are deductions from employees' gross pay — they are already included in the £50,000 gross wages figure (paid to HMRC on behalf of employees, but not an additional cost to the employer). The employer's NI is an additional cost on top of gross wages. Option A ignores employer NI. Option C adds all deductions (double-counting). Option D deducts the employee deductions.

Answer: C. Under IAS 16, the cost of an asset includes purchase price plus directly attributable costs to bring it to its intended location and condition: delivery £2,500 + installation and testing £4,000 = £6,500. Total capitalised = £120,000 + £6,500 = £126,500. Staff training (£3,500) is not directly attributable to the asset — it benefits employees and is expensed. The maintenance contract (£1,800) is ongoing revenue expenditure, not capital. Option A capitalises everything. Option B capitalises the staff training but excludes the maintenance contract. Option D includes only the purchase price.

Answer: D. Depreciable amount = Cost − Residual value = £84,000 − £12,000 = £72,000. Annual charge = £72,000 ÷ 6 = £12,000. Carrying amount after 2 years = £84,000 − (2 × £12,000) = £84,000 − £24,000 = £60,000. Option A uses cost ÷ 6 (ignoring residual value). Option B shows carrying amount after only 1 year. Option C shows cost without deducting any depreciation.

Answer: A. Year 1: Depreciation = £50,000 × 40% = £20,000. Carrying amount = £50,000 − £20,000 = £30,000. Year 2: Depreciation = £30,000 × 40% = £12,000. Carrying amount = £30,000 − £12,000 = £18,000. The reducing balance method applies the percentage to the carrying amount each year, not the original cost. Option B (£10,000) applies 40% to the original cost in both years, which is the straight-line method (£50,000 − £40,000). Option C is the carrying amount at the end of year 1. Option D is the year 1 depreciation charge, not a carrying amount.

Answer: B. Carrying amount at disposal = £30,000 − £22,000 = £8,000. Proceeds = £9,500. Profit on disposal = £9,500 − £8,000 = £1,500. This appears in the income statement — typically as other income within operating results. The examiner specifically notes that disposal proceeds must appear under investing activities in the cash flow statement, not operating — but the profit/loss on disposal is an income statement item. Option A has wrong direction. Options C and D use incorrect bases.

Answer: C. Under IAS 16, an upward revaluation gain is recognised in other comprehensive income and accumulates in the revaluation surplus (part of equity). It does not pass through profit or loss (B). It is not retained earnings (A) — it is a separate reserve. It is not a liability (D) — the revaluation increases equity. If the same asset had previously been written down through profit or loss, the reversal would go through profit or loss to that extent, but for a first-time revaluation gain, OCI is correct.

Answer: D. IAS 38 requires research costs to be expensed as incurred — research creates knowledge but cannot reliably be measured as an asset generating future economic benefits. Development costs may be capitalised when strict criteria are met (technical feasibility, intention to complete, ability to use or sell, probable future benefits, adequate resources, and ability to measure reliably). When all criteria are met, development costs must be capitalised. Option A capitalises research — not permitted. Options B and C misapply the rules.

Answer: A. Under IAS 36, the recoverable amount is the higher of value in use (£155,000) and fair value less costs to sell (£162,000). Recoverable amount = £162,000. Impairment loss = Carrying amount − Recoverable amount = £180,000 − £162,000 = £18,000. The recoverable amount uses the HIGHER of the two measures — the asset can be recovered through either use or sale. Option B uses value in use (the lower of the two). Option C incorrectly concludes no impairment. Option D confuses the recoverable amount with the loss.

Answer: B. IFRS 16 requires lessees to recognise both a right-of-use (ROU) asset (representing the right to use the leased asset) and a lease liability (representing the obligation to make future payments), measured at the present value of lease payments. This reflects the economic substance — the lessee has obtained an asset and incurred a liability. Option A omits the asset. Option C applies old operating lease treatment (no longer permitted for qualifying leases). Option D does not discount the payments.

Answer: C. Under IAS 37: a provision is recognised when (1) there is a present obligation from a past event, (2) it is probable (>50%) that an outflow will be required, and (3) a reliable estimate can be made. A 75% probability is 'probable' — a provision must be recognised. Option A (disclosure only) is appropriate for contingent liabilities where the probability is possible but not probable. Option B applies the wrong threshold — 50%+ is the threshold, not 90%. Option D ignores both recognition and disclosure.

Answer: D. IFRS 15 requires revenue to be allocated to each performance obligation based on its standalone selling price. Licence: recognised at point of delivery (year 1) = £60,000. Support: recognised over 2 years = £10,000 per year. Year 1 total = £70,000. Year 2 = £10,000. Option A recognises all revenue immediately — ignores the support obligation. Option B spreads all revenue equally, ignoring that the licence is a point-in-time obligation. Option C recognises only the licence, ignoring year 1 support revenue.

Answer: A. NRV = Estimated selling price − Estimated costs to complete and sell = £55 − £14 = £41. Since NRV (£41) < Cost (£45), inventory must be written down to NRV of £41. IAS 2 requires the lower of cost and NRV — this ensures assets are not overstated. Option B incorrectly states inventory should not be written down. Option C uses selling price (ignores selling costs). Option D incorrectly states NRV is always used — it is only used when lower than cost.

Answer: B. IAS 40 permits two models for investment property: cost model (same as IAS 16) and fair value model. Under the fair value model, gains and losses from changes in fair value go directly to the income statement — unlike property held for own use under IAS 16 (where revaluation gains go to OCI). This is an important distinction the examiner tests. Option A describes IAS 16 treatment. Option C defers the gain inappropriately. Option D is incorrect — the fair value model is specifically permitted.

Answer: C. Under IFRS 9, equity investments are normally measured at fair value through profit or loss (FVTPL). However, an entity may make an irrevocable election at initial recognition to present fair value changes in other comprehensive income (the FVOCI option). As that election has been made here, the £12,000 gain is recognised in other comprehensive income and is not reported in profit or loss — and uniquely for equity investments, it never recycles to profit or loss, even on disposal. Option C is therefore correct. Option A describes the default FVTPL treatment, which does not apply once the FVOCI election is made. Option B is wrong because the gain goes through OCI, not as a direct movement in retained earnings. Option D invents a deferred liability that has no basis under IFRS 9.

Answer: D. A non-current asset register provides detailed records of each asset — description, serial number, location, cost, acquisition date, depreciation method, accumulated depreciation, and carrying amount. It supports financial statement accuracy, assists with insurance, helps with asset safeguarding, and reconciles to the ledger balances. It records existing assets (A is too narrow). The auditor may use it (B) but that is not its purpose. It complements depreciation calculations, not replaces them (C).

Answer: A. IFRS 16 (effective from 2019) eliminated the distinction between finance and operating leases for lessees — all qualifying leases require recognition of a right-of-use asset and lease liability. The two exemptions are: short-term leases (12 months or less) and low-value asset leases. Options B and C describe the old IAS 17 treatment which is no longer applicable. Option D introduces a duration threshold that does not exist in the standard.

Answer: A. Share capital = Number of shares × Nominal value = 500,000 × £0.50 = £250,000. Share premium = Number of shares × (Issue price − Nominal value) = 500,000 × £1.30 = £650,000. Total proceeds = £900,000. The share premium account records the excess above nominal value. Option B credits everything to share capital (wrong — premium above nominal must be separately identified). Option C uses the full issue price as premium. Option D reverses the two figures.

Answer: A. Under IFRS 15, revenue is recognised based on stage of completion. Stage = 25%. Revenue recognised = 25% × £900,000 = £225,000. Costs recognised = 25% × £720,000 = £180,000 (equals actual costs incurred — confirming 25% is consistent). Profit = £225,000 − £180,000 = £45,000. Option B uses a completed contract approach (not permitted under IFRS 15). Option C uses a different stage of completion. Option D incorrectly treats full revenue as profit.

Answer: B. IAS 16 requires component depreciation when parts of an asset have significant cost and different useful lives. For example, an aircraft's engines have different lives from the fuselage — they should be depreciated separately. The test is significance and different lives, not physical removability (A) or a monetary threshold (C). It is not optional when the criteria are met (D) — the standard requires it.

Answer: A. Inventory is measured at the lower of cost and net realisable value (NRV). NRV per unit = selling price £18 − selling costs £2 = £16, which is below the cost of £22, so inventory is valued at NRV. Inventory value = 400 × £16 = £6,400. The write-down from cost is (£22 − £16) × 400 units = £6 × 400 = £2,400. Option B (£8,800 = 400 × £22) values inventory at cost and ignores NRV entirely. Option C (£7,200 = 400 × £18) uses the selling price itself as NRV, forgetting to deduct the £2 selling costs. Option D gets the inventory value right but understates the write-down as 400 × (£22 − £18) = £1,600, again omitting selling costs from the calculation. NRV is always net of costs necessary to complete and sell the inventory.

Answer: D. IAS 37 treats contingent assets very conservatively — even a probable contingent asset (>50% probability) should not be recognised in the financial statements (to avoid recognising income that may not materialise). Instead, it is disclosed in the notes when an inflow is probable. Recognition only occurs when the asset is virtually certain (close to 100%). This asymmetry (provisions recognised when probable; contingent assets only when virtually certain) reflects prudence. Option A recognises it at full value. Option B uses expected value approach. Option C ignores disclosable items.

Answer: D. Research: must be expensed = £120,000. Development meeting criteria: capitalised (not expensed) = £0. Development not meeting criteria: expensed = £30,000. Total income statement charge = £120,000 + £30,000 = £150,000. Option A expenses everything. Option B capitalises only the qualifying development and expenses the rest but miscalculates. Option C expenses only research.

Answer: B. Under IAS 32, compound instruments with both liability and equity features are split at initial recognition. The liability component = present value of future cash flows (interest and principal) discounted at the market rate for equivalent non-convertible debt (7%). The equity component = total proceeds minus the liability component. This split ensures the liability is not understated by the conversion feature, while the equity element (the option value) is appropriately recognised. Option A ignores the liability element. Option C ignores the equity element. Option D mischaracterises the classification.

Answer: D. Under IAS 16, the cost of a property includes: purchase price + directly attributable costs to bring the asset to its intended condition and location. Surveyor's fee (£5,000) ✓, legal costs (£8,000) ✓, SDLT (£15,000) ✓ are all directly attributable. Internal management time (£12,000) is not a directly attributable cost under IAS 16 — it would be expensed. Total = £500,000 + £5,000 + £8,000 + £15,000 = £528,000. Option A includes management time. Option B excludes SDLT. Option C excludes legal costs.

Answer: B. Under substance over form, the substance of an HP agreement is that the company controls the asset from inception (with all risks and rewards). The asset is recognised at the cash equivalent price (£40,000). The total HP payments less the asset cost = finance charges (£12,000), which are recognised as finance costs over the HP period using the effective interest method. Option A overstates the asset. Option C applies the old operating lease treatment incorrectly. Option D immediately writes off finance charges rather than spreading them.

Answer: A. Under IAS 19, a defined contribution scheme charges the contributions payable for the period to the income statement. The charge = cash paid + year-end accrual = £112,000 + £8,000 = £120,000. The outstanding £8,000 is shown as a current liability. Option B only charges cash paid. Option C includes next period's costs. Option D describes defined benefit pension accounting (which involves actuarial assumptions) — not defined contribution.