Accrued and deferred Income. 5 / 5

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MC Question 28

Mighty IT Co provides hardware, software and IT services to small business customers.

Mighty IT Co has developed an accounting software package.

The company offers a supply and installation service for $1,000 and a separate two-year technical support service for $500.

Alternatively, it also offers a combined goods and services contract which includes both of these elements for $1,200.

Payment for the combined contract is due one month after the date of installation.

In December 20X5, Mighty IT Co revalued its corporate headquarters.

Prior to the revaluation, the carrying amount of the building was $2m and it was revalued to $2·5m.

Mighty IT Co also revalued a sales office on the same date.

The office had been purchased for $500,000 earlier in the year, but subsequent discovery of defects reduced its value to $400,000.

No depreciation had been charged on the sales office and any impairment loss is allowable for tax purposes.

Mighty It Co’s income tax rate is 30%.

Mighty IT Co sells a combined contract on 1 January 20X6, the first day of its financial year.

In accordance with IFRS 15, what is the total amount for deferred income which will be reported in Mighty IT
Co’s statement of financial position as at 31 December 20X6?

A     $400
B     $250
C     $313
D    $200

Specimen
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MC Question 29

The following scenario relates to questions 26–30.

Speculate Co is preparing its financial statements for the year ended 30 September 20X3.

The following issues are relevant:

1.     Financial assets

Shareholding A – a long-term investment in 10,000 of the equity shares of another company. These shares were acquired on 1 October 20X2 at a cost of $3·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $4·50 each.

Shareholding B – a short-term speculative investment in 2,000 of the equity shares of another company. These shares were acquired on 1 December 20X2 at a cost of $2·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $3·00 each.

Where possible, Speculate Co makes an irrevocable election for the fair value movements on financial assets to be reported in other comprehensive income.

2.     Taxation

The existing debit balance on the current tax account of $2·4m represents the over/under provision of the tax liability for the year ended 30 September 20X2. A provision of $28m is required for income tax for the year ended 30 September 20X3. The existing credit balance on the deferred tax account is $2·5m and the provision required at 30 September 20X3 is $4·4m.

3.     Revenue

On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.

What is the amount of deferred income which Speculate Co should recognise in its statement of financial position
as at 30 September 20X3 relating to the contract for the supply and servicing of products?

A     $1·2 million
B     $1·6 million
C     $0·6 million
D     $1·5 million

Specimen
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MC Question 30

The following scenario relates to questions 26–30.

Speculate Co is preparing its financial statements for the year ended 30 September 20X3.

The following issues are relevant:

1.     Financial assets

Shareholding A – a long-term investment in 10,000 of the equity shares of another company. These shares were acquired on 1 October 20X2 at a cost of $3·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $4·50 each.

Shareholding B – a short-term speculative investment in 2,000 of the equity shares of another company. These shares were acquired on 1 December 20X2 at a cost of $2·50 each. Transaction costs of 1% of the purchase price were incurred. On 30 September 20X3 the fair value of these shares is $3·00 each.

Where possible, Speculate Co makes an irrevocable election for the fair value movements on financial assets to be reported in other comprehensive income.

2.     Taxation

The existing debit balance on the current tax account of $2·4m represents the over/under provision of the tax liability for the year ended 30 September 20X2. A provision of $28m is required for income tax for the year ended 30 September 20X3. The existing credit balance on the deferred tax account is $2·5m and the provision required at 30 September 20X3 is $4·4m.

3.     Revenue

On 1 October 20X2, Speculate Co sold one of its products for $10 million. As part of the sale agreement, Speculate Co is committed to the ongoing servicing of the product until 30 September 20X5 (i.e. three years after the sale). The sale value of this service has been included in the selling price of $10 million. The estimated cost to Speculate Co of the servicing is $600,000 per annum and Speculate Co’s gross profit margin on this type of servicing is 25%. Ignore discounting.

Which of the following are TRUE in respect of the income which Speculate Co has deferred at 30 September
20X3?

(1)

The deferred income will be split evenly between the current and non-current liabilities in Speculate Co’s statement of financial position as at 30 September 20X3

(2)

The costs associated with the deferred income of Speculate Co should be recognised in the statement of profit or loss at the same time as the revenue is recognised

(3)

The deferred income can only be recognised as revenue by Speculate Co when there is a signed written contract of service with its customer

(4)

When recognising the revenue associated with the service contract of Speculate Co, the stage of its completion is irrelevant

A     1 and 2
B     3 and 4
C     2 and 3
D     1 and 4

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MC Question 19

Hindberg is a car retailer.

On 1 April 2014, Hindberg sold a car to Latterly on the following terms:
The selling price of the car was $25,300.

Latterly paid $12,650 (half of the cost) on 1 April 2014 and would pay the remaining $12,650 on 31 March 2016 (two years after the sale).

Hindberg’s cost of capital is 10% per annum.

What is the total amount which Hindberg should credit to profit or loss in respect of this transaction in the year
ended 31 March 2015?

A     $23,105
B     $23,000
C     $20,909
D     $24,150

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