QUESTION: 1

Which THREE of the following would typically indicate a finance lease?

An asset with a useful life of ten years is being leased for ten years.
The lessor is responsible for the annual maintenance of the asset.
The lessee has the option to buy the asset at the end of the lease for $1.
The lease contract for an asset includes an upgrade to the asset every two years.
A leased asset has been specifically modified for the lessee's use.

Answer(s): A,C,E

LM is a car dealer that is supplied inventory by car manufacturer SQ. Trading between LM and SQ is subject to a contractual agreement. This agreement states the following:

- Legal title of the cars remains with SQ until they are sold by LM to a third party.
- Upon notification of sale to a third party by LM, SQ raises an invoice at the price agreed at the original date of delivery to LM.
- LM has the right to return any car at any time without incurring a penalty.
- LM is responsible for insuring all of the cars on its property.

When considering how these cars should be accounted for, which THREE of the following statements are true?

The most significant risks attached to the cars are held by LM.
The most significant risks attached to the cars are held by SQ.
SQ should recognise the cars as inventory in their financial statements.
LM should recognise the cars as inventory in their financial statements.
SQ should recognise revenue when the cars are delivered to LM.
When LM sells a car to a third party, SQ should recognise the revenue associated with that sale.

Answer(s): B,C,F

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QUESTION: 3

In the year ended 31 December 20X7, FG leased a piece of machinery. The accountant of FG had prepared the financial statements for the year to 31 December 20X7 on the basis of the lease being an operating lease.
However, following the end of year audit it has been agreed that the machinery is in fact held under a finance lease and therefore the financial statements need to be corrected. The correction will have which THREE of the following affects on the financial statements?

Non-current assets will increase.
Finance costs will increase.
Current liabilities will increase.
Non-current liabilities will decrease.
Depreciation costs will decrease.
Non-current assets will decrease.

Answer(s): A,B,C

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QUESTION: 4

On 1 September 20X3, GH purchased 200,000 $1 equity shares in QR for $1.20 each and classified this investment as held for trading.
GH paid a 1% transaction fee to its broker on this transaction. QR's equity shares had a fair value of $1.35 each on 31 December 20X3.
Which of the following journals records the subsequent measurement of this financial instrument at 31 December 20X3?

Option A
Option B
Option C
Option D

Answer(s): A

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