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Wiley lFRS:
Practical Implementation
Guide and Workbook
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–
ing decided against Genius Inc. is remote,
the entity should disclose it in the footnotes,
because it is a nonadju sting material event.
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).
(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)