IFRS PRACTICAL IMPLEMENTATION GUIDE AND WORKBOOK

Wiley lFRS: Practical Implementation Guide and Workbook

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(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 lAS 8. Answer: (b) 4. Excellent Inc. built a new factory building during 2005 at a cost of $20 million. At December 31, 2005 , the net book value of the building was $19 million. Subsequent to year-end, on March 15, 2006, the bUil~ing was destroyed by fire and the claim against the Insurance company prove d 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 De– cember 31, 2005, was March 3 1, 2006, Excellent Inc. should (a) Write off the net book value to its scrap value because the insurance claim would not fetch any compen sation. (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 nonadjusting event in the footnotes. Answer: (d) 5. International Inc. deals extensively with foreign entities, and its financial statements reflect these foreign currency transactions. Subsequent to the bal– ance sheet date, and before the "date of authorization" of the issuance of the financial statements, there were abnormal fluctuatio ns in foreign currency rates. International Inc. should (a) Adjust the foreig n exchange year-end bal– ances to reflect the abnormal adverse fluc– tuations in foreign exchange rates. (b) Adjust the foreign exchange year-end bal– ances to reflect all the abnormal fluctuations in foreign exchange rates (and not ju st adverse movements). (c) Disclose the post-balance sheet event In footnotes as a nonadju sting event. (d) Ignore the post- ba lance sheet event. Answer: (e)

MULTlPLE·CHOICE QUESTIONS 1. ABC Ltd. decided to operate a new amusement park that will cost $ 1 million to build in the year 2005. Its financial year-end is December 3 1, 2005. ABC Ltd. has applied for a letter of guarantee for $700 ,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 adj ustment required to be made to the financial statement for the year ended December 31, 2005, should be (a) Booking a $700,000 long-term payable. (b) Disclosing $700,000 as a contingent liability in 2005 financial statement. (c) Increasing the contingency reserve by $700,000. (d) Do nothing. Answer: (d) 2. A new drug named "EEE" was introduced by Genius Inc. in the market on December I, 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 patient s suffering from an irregular heartbe at. On March 31, 2006, after the drug was introduced, more than 1,000 patients died. After a series of investiga– tion s, authorities discovered that when this drug was simultaneously used with "BBB," a drug used to regulate hypertension, the patient' s blood would clot and the patient suffered a stroke. A lawsuit for $100,000,000 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– balance sheet even t under lAS IO? (a) The entity should provide $100 ,000,000 be– cause this is an "adjusting event" and the financial statements were authorized to be issued after the accident. (b) The entity should disclose $100,000,000 as a contingent liability because it is an "ad– justing event." (c) The entity should disclose $ 100,000,000 as a "contingent liability" because it is a present obligation with an improbabl e outflow. (d) Assuming the probability of the lawsuit be– Answer: (e) 3. At the balance sheet date, Decembe r 3 1, 2005, ABC Inc. carried a receivable from XYZ, a major customer, at $ 10 million. The "auth orization date" of the financial statements is on Februa ry 16, 2006. XYZ declared bankruptcy on Valentine's Day (Feb– ruary 14, 2006). ABC Inc. will (a) Disclose the fact that XYZ has declared bankruptcy in the footnotes. (b) Make a provision for this post-balance sheet event in its financial statements (as opposed to disclosure in footnotes). ing decided against Genius Inc. is remote, the entity should disclose it in the footnotes, because it is a nonadju sting material event.